Mortgage Rates Jump Up, Quelling Demand for Mortgages
Over the last month, mortgage rates have moved up rather quickly. In the last week alone, the average rate for a 30 year fixed-rate mortgage jumped by a staggering .5%, to 5.39%. Initially, some analysts speculated that the sudden jump was a fluke, but given that rates have now risen for several consecutive weeks and are now at the highest level in six months, it could be the case that higher rates are here to stay.
One the one hand, those that failed to lock in low rates for the purpose of buying a home or refinancing are probably kicking themselves. A 50 basis point difference in interest rates translates into tens of thousands of Dollars in added interest payments over the life of the mortgage. As a result, “mortgage applications…fell 16 percent last week, the Mortgage Bankers Association reported. Refinancing applications, which account for more than 60 percent of the total, fell 24 percent.”
Experts caution, however, that everything is relative. Rather than focus on the fact that rates are higher than last month, why not focus instead on the fact that rates are still around 5%, and near a 50-year low. For those looking to refinance, it might still be worthwhile, as long as you plan to stay in your home for at least a few years and your current mortgage rate is above 6%. Homebuyers (i.e. those thinking about an original mortgage), meanwhile, still have an opportunity to get a good deal, especially if home prices fall further in order to “equalize” the higher mortgage rates.
What’s the short-term prognosis for mortgages rates? To answer this question, it’s important to first understand the mechanics of the mortgage system. For those of you who aren’t familiar, consider that while rates are technically determined by your respective lender on a case-by-case basis, such lenders are ultimately guided by macro forces, specifically by investor demand for bundled mortgage securities. Demand for such securities (known as CMOs in industry parlance) had been artificially inflated (to the tune of $500 Billion) by the Federal Reserve Bank. This alone was largely responsible for the spring mortgage rate nadir.
However, the Fed may suspend its CMO program for fear of overstimulating the economy and stoking the fires of inflation. In other words, “Only if the Fed announces their intentions of buying lots more mortgage-backed securities and Treasury bonds, and lots of them,” will rates return to previous levels. Still, there is “a slight chance that rates could return to the mid-4 percent range, and I certainly hope they do. But most experts feel that the party is over and that we may be facing inflation in the near future.” In short, it’s near impossible to predict; my only advice is to not get caught trying to time the market…