Subscribe to this BlogBeware a mortgage-rate spike this spring
A looming shift in Federal Reserve policy could send the 30-year fixed mortgage to 6% or higher, up from Monday’s rock-bottom rate of 5.02%. For all the hullaballoo about the stimulative impact of last week’s decision to extend the $8,000 First-Time Home Buyer Tax Credit and create a $6,500 credit for current homeowners, a sharp rise in the bellwether mortgage rate could muck up a housing recovery.
For the past year the Federal Reserve’s voracious $1.25-trillion purchase program of mortgage-backed securities has effectively pushed the 30-year conforming fixed-rate mortgage lower than it would normally be. Typically the conforming FRM is about 25 basis points lower than the rate on a jumbo mortgage. According to Bankrate's latest weekly survey, the difference is more than one percentage point (6.24% vs. 5.19% as of Nov. 10).
But the Federal Reserve has signaled that it intends to wind down its purchase program by the end of the first quarter of 2010. Analyst Meredith Whitney recently dubbed the Fed’s “Great Exit” the biggest risk for banks and the markets over the next four months. And consumers.
Absent another big buyer (or set of buyers) stepping up and taking the Fed’s place, rates would likely rise. If the jumbo/conforming spread reverts to its historic norm, we’re looking at a 30-year fixed rate mortgage closer to 6% based on today's levels. That could translate into a decline of 10% or so in home buyers' purchasing power. A $300,000 mortgage at 5.02%, for example, works out to about $1,614 a month. At 6% you’d need to drop the mortgage amount to less than $270,000 to keep the monthly payment at $1,614. As Amanda Gengler points out in her 2010 Housing Outlook, prospective buyers and refinancers should look to lock in a rate sooner rather than later.
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HERE'S ONE FOR YOU, WHY IS IT THAT OUR
\HOUSE PAYMENT IS 96% INTEREST?
SHOULDN'T IT BE THE OTHER WAY AROUND?
I'M TIRED OF THESE MORTGAGE CHEATS STEALING FROM US HOME OWNERS. IN THE
PAST 10 YEARS I'VE PAID ONLY LESS THAN
7% OF MY HOME VALUE OFF, AND THERE CRYING ABOUT A FEW REPOSESIONS. WHAT IS IT GOING TO AFFECT THERE HUGE BONUSES?
Obama lied! Get that through your heads. His mortgage loan modificatioon program can never work with the unemployment rate increasing 500000 people a month.
It is no longer about sub prime rates but all about this administration's total failure to adddress the job crisis.
A 5% mortgage doesn't help anyone who does not have a job.
Bottom line foreclosures are up 14% since Obama took office.
In Long Island, New York homeowners in areas where foreclosures are not a problem have experienced a 20% decline in the value of their homes. We have not experienced a 20% decline in our property and school taxes. We are still paying $12,000 to $15,000 a year in property and school taxes.
The good news in Long Island is the entrenched democrat incumbents were swept out of office on election day. The democrats had raised property and school taxes 42.9% in the last 6 years. But guess what the democrat candidates are saying about being voted out? "We are victims of the property and school taxes." No you were the perpetrators!
while the FED's purchase of MBS and the 1st Time Tax Credit are both somewhat relevant they are miniscule in comparison to the FED's purchase of Treasuries and the collusion of the world's central banks to keep interest rates low. there are many dopes on here commenting on what influences mortgage rates and RE prices. however, right now there is little room for rates to drop and there is little reason for prices to increase. An increase in rates in the near term would cause a lot of problems through out the economy. I wouldn't anticipate more than a 50 bp increase in rates over the next 6 mths- and that's a ceiling.
I recently called to inquire on a 15 year refi rate and was told that I don't owe enough on my house to take advantage of the "no closing cost refi." I would have to take out at least $15,000 equity to qualify for the lowest rate. well, that was certainly interesting.
It is about time mortgage rates increased. Naturally home prices will decline if rates increase. After doubling over the past 8 years or so, home prices here in MA should come down. The government should mind its own business and leave the housing market alone.
Gary,
I 30 yr. mortgages tend to follow movement of a 10yr Treasury because, statistically speaking, 30 yr. mortgages remain outstanding for only 10 years before the average homeowner refinances or sells the house. So while the amortization life is 30 years, an investor can look at a pool of 30 yr. fixed almost the same way as a 10 yr Treasury with an added premium for risk.
In the mortgage market there has to be buyers (investors) and sellers (originators) as in any market for goods and services. Illiquidity, lack of investors, in the MBS market is the reason the fed had to step in. If there are no investors the money to lend on mortgages dries up, plain and simple. Investors measure risk to reward. Due to economic challenges risk related to current yields on traditional MBS's, Fixed Rates, are low by comparison to U.S. Treasuries that are fully guaranteed by the Federal Government. IMHO, liquidity will remain scarce until either the Yield Spread between MBS's and Treasuries widen and/or the delinquency/default rate on Mortgages begins to stabilize and/or decline and property values stabilize and begin to increase again. I would be on a rate increase. To many other factors ie: employment will continue to lag. If the fed drops out and yields go up we should see investors coming back into the MBS market. Throw the MBS track the 10 year model out the window. Again, just my humble opinion.
Chris in PA, you are sadly misinformed. Realtors are not the problem. They are the middlemen keeping a battered market alive. Commission rates are totally negotiable – so 6% is not the norm. Try selling a house right now without an agent – it won't work. We provide a valuable, and difficult service. We are also making much less money than in earlier times. Also, we work totally on commission – try working fulltime without a paycheck for 4 months.
Gary, Thanks for the shot about why I'm an x-insider, although I left many years before the implosion, albeit many years before you learned what an MBS was. You have no idea what your talking about. Interest rates change multiple times daily and MBS's are in the future. Meaning the secondary market securitzed the closed loan, with said pricing (market beared), pooled it with similar securities an sold it as an MBS. Meaning its well after the actual interest rate it closed at. So how could something in the future thats not even been facilitated, determine interest rates today, it can't. And ask any industry insider, 30yr FR move with the ten year treasury. I certainly hope you don't work in the pits in Chi-Town….
Higher mortgage rates? Bring’em on!
The higher the rates, the lower the prices. And only lower prices will produce a sustainable housing recovery.
People complain about higher prices for gas and food, but somehow think higher housing prices are good. Of course, the past few years have demonstrated why they think that: because higher prices allow people to borrow more money against their house.
Realtors are the problem. Everytime a home transfers it must be 6% higher due to realtor fees, historically pushing prices to unaffordable levels compared to median incomes. THAT is what caused the housing bubble!
x-mortgage insider writes "What an ignorant rant. This is article worthy? First off, 30 yr fixed rates are tied to the 10yr treasury". 30 yr FRM tied to the 10 yr Treasury? Really? Maybe that's why you are an x-mortgage insider!
The 10 yr is not tied in any way to the 30 yr FRM. Mortgage Backed Securities determine that rate. However, since the government switched to an explicit guarantee of Freddie and Fannie debt, the MBS's have behaved in a very similar fashion. Once the Fed stops the MBS (and Treasury) purchases, look out!
You cannot use the historical spread between the conforming rate and the jumbo rate to predict where rates might go in the spring. The spread between the two is wider because of the collapse of the secondary market for any non-conforming mortgage products that occurred August 2008. That is where the spike happened.
The Fed's purchase of MBS's certainly has helped keep mortgage rates low, but everything I've read concluded that it has lowered rates by .25-.50%. So, while it makes for a good headline, I don't see that there is anyway that rates in the spring hit higher than 5.5% or so.
well carla, i would LOVE to refinance. like most people reading the column who are upside down on homes, we ALL know that rates are going up. and i doubt ANYONE in that scenario has actually found a bank/credit union willing to do so. find me a bank willing to take my house and i will gladly refi. i have a good job, stable income, and great credit, but like many i bought at the wrong time. i am tired of hearing experts tell me this is the time to refi. I KNOW. I TRIED. don't tell me; i am just a powerless consumer. tell BofA, Citi, JPmorgan chase etc. thanks alot carla.
What an ignorant rant. This is article worthy? First off, 30 yr fixed rates are tied to the 10yr treasury. Not speculation of a opinion based spring time increases because a tax credit will be dissolved. You should not be a journalist, let alone someone speculating on the rise of interest rates. You are part of the reason the general public is misinformed…
The impending withdrawal of the Fed from the mortgage market is not scary; it is necessary. By holding mortgage rates artifically low, the Fed is encouraging people to over-borrow, and we need to get away from this. Too much personal income is wasted on interest payments that produce nothing.
To combat this, rather than rush out and buy something now, homebuyers need to bid lower, drive a harder bargain on the purchase, and haggle more over the loan rates and terms. There are still lower prices ahead, until the median home price gets down to $120k to $160k, which is 3x – 4x median income of $40k in this country.
Reducing debt and senseless payments of interest will free up income to be spent on productive economic activities. And, we all need this.
To Jgreg…. If you dont like paying interest then pay for your house cash….oh thats right.. you dont have the cash on hand needed to purchase a home. Soooo… you have had to use SOMEONE ELSE's money to do so. Well…. The fee you pay to borrow someone else's money is called interest. Again; you don't have to pay interest. However you will need to come up with a way to pay for your "assets" from your own resources.