Mortgage rates are rising….

The temperature’s rising….and so are mortgage rates, with the 30 Year Fixed Rate Mortgage (FRM) back to its level at the beginning of the year.

I published two reports earlier this year: Mortgage rates: How low can they go? on January 17 and Have mortgage rates bottomed?  on February 14. In them I set out some basic information about mortgage rates and the “spread” between the FRM and the yield on 10 year Treasuries*.

Here is the weekly data for this year, showing the FRM at 3.85%. The rate dropped by about 1/4% earlier in the year and has now reversed that drop:

Source: US Treasury, Freddie Mac

Source: US Treasury, Freddie Mac

Why did mortgage rates drop?
After years of dithering the European Central Bank finally embarked on a program of Quantitative Easing (buying Government securities) in March, but in anticipation of the start of the program investors worldwide went on a bond buying spree driving yields on Government securities to extremely low levels. The chart below shows yields in January (blue), the lows reached (orange), largely in February, and current yields (gray). Quite a ride!

Source: US Treasury, Tradingeconomics.com

Source: US Treasury, Tradingeconomics.com

And one final chart, showing the movement in exchange rates this year

Source: tradingeconomics.com

Source: tradingeconomics.com

Whence from here?

A lot of the strength of the US Dollar earlier this year was based on the assumption that interest rates would rise soon. As the economy has produced less than forecast growth, in part because of the winter weather and collapsing oil price, in part because of the strength of the dollar, so expectations of rising interest rates have been pushed out further.

The median and average spread in the table on mortgage rates and 10T yields above are 1.70 and 1.72. On Friday the yield on the 10T dropped to 2.14, meaning the spread was 1.71 based on a 3.85% FRM rate.

Late on Friday HSH.com published this comment: “Mortgage rates firmed a little bit more this week, cresting at the highest levels in six months, but it appears that the four-week rise in rates is over, at least for now. The global selloff in bonds — essentially, a repositioning by investors in light of changes in currencies and central bank programs — pushed mortgage rates up by a little more than a quarter percentage point from the 2015 lows of mid-April.”

Trying to time the mortgage market is a bit like trying to time the stock market. More to the point, mortgage rates below 4% are very attractive. The bigger challenge for buyers is finding a house at a time of widespread scarcity.

*The benchmark for the 30 year mortgage is the 10 year US Treasury yield. What does that mean? In general, banks sell the mortgages they issue to Fannie Mae or Freddie Mac who in turn package them into pools and sell them to investors. Because mortgages have higher risks than US Treasuries, investors demand a higher yield than they would accept from Treasuries. The difference in yield between mortgage securities and Treasuries is called the spread.

 If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.

Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated

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