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Mortgage rates have been on the rise for weeks now, and impacting mortgage activity in a meaningful way. The release of the Federal Open Market Committee (FOMC) meeting minutes a week from this past Wednesday only served to strengthen that same trend. So there's a real risk that the Federal Reserve, if it is not careful in how it communicates and in what it does and at what moment it does it, could derail the very real estate recovery it has worked so hard to give life to.

I am certain Federal Reserve Chairman Bernanke has had some sleepless nights since the release of the FOMC meeting minutes and the curious questioning he received from Congress' Joint Economic Committee that same day after giving his prepared testimony. One or two market psychology insensitive Congressmen sought to pin down a date from Bernanke upon which the Fed might begin to end its extraordinary asset purchases and even raise interest rates. Those were precisely the wrong questions to ask in the public setting, given the dependence of securities markets on the synthetic support of the Fed since those dark days in early 2009. We are really still just getting our footing, and the rug is being pulled out from under us, and possibly the real estate recovery at the same time.

The Fed Chairman handled the questions well enough, indicating that one theorized future action would not mean that a series of tapering operations would follow. In other words, if the Fed were to stop its purchases in the treasury market, it might not mean it would do the same in the mortgage-backed securities market, and it certainly did not mean the Fed would be raising interest rates anytime soon. After all, deflation is the current issue of concern, not inflation. But the meeting minutes showed some discussion among the members about monetary policy, which is (surprisingly it seems to the market) what they discuss at these meetings. I suppose out of boredom or perhaps the duties of the job, somebody always has to bring up change and the prospect of raising rates. Woe, said the market; we do not want any of that! It drove turbulence in the performance of the broader indexes and the ETFs that mimic them, with the SPDR S&P 500 (NYSEARCA:SPY), SPDR Dow Jones Industrial Average (NYSEARCA:DIA) and the PowerShares QQQ (NASDAQ:QQQ) each turning downward since the May 22nd events.

Chart forSPDR S&P 500

Chart at Yahoo Finance

The evolution of interest rates in May has been distressing, to say the least. Treasury rates were on the rise in May, with long-term yields leading the way. That's bad news for the real estate market, because the cost of financing a home is increasing.


10-Year Treasury

30-Year Treasury

May 31, 2013



May 1, 2013



Freddie Mac data on mortgage commitments shows 30-year fixed rate mortgage rates increased to 3.54% on average in May, from 3.45% in April and 3.41% in January. Mortgage Bankers Association (MBA) data shows more disturbing change within the application activity.

Mortgage Loan

Week of May 24

May 17

May 10

30-Yr. Fixed Conforming




30-Yr. Fixed Jumbo




30-Yr. Fixed FHA Spons.




In an economy where some of us see 7.5 million unaccounted for unemployed Americans, and where GDP growth expectations for 2013 appear to be grossly overstated by some expert forecasts, we cannot yet afford such an increase in the cost of home ownership. Some are speculating, as have I, that rising rates could actually speed up activity over the very near-term. The counterintuitive reasoning here is that fear of missing low rates could push a sub-group of slow moving potential real estate buyers into action. Still, the more likely end result of rising rates is a drag on the real estate recovery, if not a stopper.

Let's look at the performance of several real estate relative securities to get an idea of how this issue is being perceived by investors.

Real Estate Security

Since May 21st


iShares Dow Jones US Real Estate (NYSEARCA:IYR)



Vanguard REIT Index (NYSEARCA:VNQ)



SPDR S&P Homebuilders (NYSEARCA:XHB)



Bank of America (NYSE:BAC)



Most real estate relative securities are down sharply since the FOMC minutes release. Bank of America , our nation's most important mortgage lender, is higher because of the better net interest margin it is likely to earn on a broader spectrum of loans it will offer at rising yields. Still, its business would also be negatively impacted if demand for mortgage loans drops sharply enough in this still stunted American economy.

In conclusion, I think it is clear that the Federal Reserve has some reparations to make regarding the expectations of the public. Obviously, the issue is perception more than transmission, but the last thing the Fed and our real estate recovery needs now is a frenzied market driving up interest rates prematurely. I am not on board with the popular opinion about economic recovery that I'm seeing expressed in business media and in the gains of the stock market. So rising rates are even more troubling to me. Otherwise, it would be a natural circumstance that would balance with and be absorbed by a better economy. Still, the abruptness of the transition and the sharpness of mortgage rate rise have been astounding. The impact on mortgage application activity has been meaningful, and I believe the reaction of real estate relative securities also shows this issue threatens to impact the real estate recovery.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.