Why are mortgage rates rising when market interest rates are plunging?
Homes may have become less affordable over the last month, as Mr. Haughey says, but they have become more affordable over the last year. 30-year mortgage rates are still lower than they were a year ago and housing prices have plummeted. The constraint on home purchases is not interest rates but lenders tightening standards for mortgages. Even then, the lending standards are merely returning to normal and, for that matter, housing prices are returning to normal after increasing nearly 150% in 10 years.
The problem for the construction industry isn’t volatile financial markets but the threat of a recession. A recession would certainly be burdensome to the construction market during the balance of 2008.
I fail to see the mystery that Mr. Haughey is trying to solve. Long-term interest rates always move independently of short-term rates. Short-term mortgage rates like the rate for adjustable rate mortgages have fallen in line with other short-term rates as you would expect. The divergence between long term mortgage rates and short-term rates can continue as long as the Fed keeps short-term rates artificially low and concerns about inflation keep long-term mortgage rates high. In fact, if the policies of the Fed are fueling fears of inflation, long-term rates will continue to rise. Mystery solved.
The rate for 30-year fixed rate mortgages jumped from 5.5% to 6.2% in February while 1-year Treasury bill rates fell from 2.3% to 2.1% and then dipped below 2.0% in early March.