Is this the end of ultra cheap mortgages?
The increase in bond market yields this week raises the question of whether the era of ultra cheap mortgages is coming to an end.
The yield on the 10 year Treasury Note (10T) jumped from 1.79% last Friday to 2.14%, an increase of 0.35%. The latest Freddie Mac 30 year Fixed Rate Mortgage (FRM) of 3.57%, however, reflects data collected only between Monday and Wednesday this week. Bankrate quoted the FRM at 3.74% on Friday.
The rate on the FRM is most closely tied to the yield on 10T. The spread – the difference between the two yields – indicates the extra return investors want when buying pools of mortgages rather than Treasury Notes.
Over the last 4 years the average spread has been 1.71%. Following the leap in yield on 10T the spread was only 1.42%, clearly suggesting that the rate on the FRM will jump next week, as already foreshadowed by the rates quoted on Bankrate.
Will interest rates continue to rise?
It is a brave person who makes economic forecasts before we know what policies will actually be enacted but let me offer a few comments.
First of all, interest rates have been rising worldwide since the summer’s lows, as shown in this chart:
For several years, the gridlock in Congress has prevented any significant fiscal policy implementation to encourage economic growth. This has left monetary policy in the form of record low interest rates and Quantitative Easing – the buying of Government and other securities by the Federal Reserve – as the only available tool.
To the extent that Congress passes measures that stimulate growth and/or reduce the stranglehold that some regulations produce, so the dependence on lower interest rates as the primary tool to stimulate the economy will be reduced. Increased economic growth should be reflected in higher yields on the 10T and hence in higher mortgage rates.
How high will interest rates go?
Jeffrey Gundlach of DoubleLine Capital, a respected bond investor, thinks the yield on 10T could reach 2.35% in the short term, while prominent technical strategist Tom DeMark has suggested that 2.15% may be the near-term peak.
Going forward, a lot will depend upon the outlook for economic growth and inflation, while any improvement in the sluggish rate of economic growth of recent years would put upward pressure on wage rates, a key indicator the Federal Reserve considers when setting interest rates.
Is now a good time to lock in my mortgage?
In my What the Fed’s rate increase means for mortgage rates post last year I explained that the the Federal Reserve directly influences only short-term interest rates, while mortgages are priced off the 10T where yields reflect broader economic considerations.
Whether higher rates come from a strengthening economy or higher inflation, a reasonable case can be made that the era of ultra low mortgage rates may be about to end. But current rates under 4% are still historically very low and attractive, especially as a stronger economy would likely boost the demand for housing in market where supply is tight.
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Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated