This was inevitable: Just when you got comfortable in the low-rate hot tub, somebody strolled by and dropped in a toaster.
Rates have spiked by .375% – .5% since the market it a new all time low on about November 4th.
That’s a pretty big move in a short period of time by normal standards, but some perspective is useful I think.
Here’s a few different ways to look at it, if we assume a $150,000, 30 year fixed rate home loan:
- It will cost an additional $3750 (in the form of points) to get the same rate today that was available on November 4th (with no points.)
- The .5% increase in rate will cost an additional $15,800 over the full term.
- You’ll pay an additional $44.00 per month, or $526.00 per year for your home loan.
- If you had an opportunity to lock-in a rate, but didn’t, you are probably kicking yourself.
So depending on your point of view, this move was either a disaster, or just unlucky. After all, 30 year rates are still well below 5%, which is very good by any historical measure.
But either way, if you are locking in a mortgage rate today, there is no doubt that you are going to pay more for your mortgage than you would have just two weeks (or even two days) ago.
Are Mortgage Rates on the Rise for Good? (If I really knew the answer to this question, I’d retire…)
The main driver of the runup in rates is the Fed’s most recent “QE2″ announcement, in which they unveiled a plan to buy some 600 Billion in Treasury bonds to – stay with me here - drive rates lower.
Instead, they went up. Why? Because the markets have taken this “money printing” by the Fed as a sign of future inflation. Possibly.
When markets expect inflation, money then flows out of safe-haven, low return investments (like Treasury Bonds, and Mortgage Bonds, or even savings accounts) to seek a higher rate of return that stands a better chance of outrunning inflation.
This by the way, has a useful economic side effect: By flushing money out of safe-havens, it is hoped that the money will be put to more productive uses by our capital-allocation systems – growing businesses, putting people to work, elevating stock prices, etc. etc. etc.
That in a nutshell, is what QE, or “Quantitative Easing” is all about: The Fed has already moved their primary instruments of monetary policy (the Federal Funds Rate, and the Discount Rate,) as low as they can go – at or near zero - so they’ll push other rates lower indirectly, by buying treasury bonds; and if that is not enough to get the economy moving, well then they’ve also just made those safe-havens riskier by introducing the prospect of return-eating inflation. Possibly.
All this to flush the money back into more productive ends and stimulate the economy.
But anyway, back to mortgage rates: This money-flow out of safe-haven’s like treasury and mortgage bonds causes prices to fall (more sellers) and rates to rise (enticing new buyers) – so it’s mostly just a supply and demand thing – there are more sellers than buyers in the mortgage market right now, which has put rates on an uptrend over the last two weeks.
Careful readers will note in the above that we are talking about inflation expectations, not actual inflation. QE2 has been announced, but not fully enacted (the $600 billion of buying has hardly begun) so it is still too early to tell how this will play out – hopefully the buying will go better than the announcement and rates will ease, if even for a short period of time.
Whether rates are on the rise for good will largely depend on whether QE2 works. If it does, and we get a growing economy, without any truly nasty side effects like runaway inflation – The Fed is confident they can soak this “extra” money in the system back up if that happens - Nov 4th may have marked a low point for mortgage rates that we won’t see again in a lifetime.
On the other hand, if the economy continues to sputter and pop, we could see rates run right back down to their lows – Nothing sends rates lower, quicker, than an aborted recovery, and we’ve already seen one head fake like this earlier this year.
UPDATE: Just today, Minneapolis Fed president Narayana Kocherlakota is trying to walk markets back from their inflation angst, saying inflation fears over bond-buying are misplaced.
Where Do We Go from Here?
If you were caught twisting in the wind while rates jumped, it is probably a decent strategy to lock in here, just to protect yourself against any further rise – this is especially true if you are purchasing a home that will close before the calendar rolls over on January first. If you are refinancing, and the numbers still work out despite the rise, the same advice holds true.
Fence sitters and everyone else should consider this a warning shot, and be prepared to act quickly and lock in a rate if we are so fortunate as to see rates drop again – they will eventually rise for good – that is a certainty.
Have a question? Not sure what to do? Need a rate quote? Drop me an email: email@example.com with a few details and I’ll get back to you quickly, usually within an hour or two if during business hours. Also, follow me on Twitter for frequent updates on what’s going on in the mortgage world: @alex_stenback