Mortgage Rates Shoot Up

Last week, mortgage rates surged, climbing in about a day from 5.03%(Source: HSH) for a 30 year conforming fixed to around 5.5%. (By Monday, the rate had dropped back slightly to 5.36%.) The rise is largely attributed to a surge in the yields on 10 year Treasury notes, which are seem as a benchmark indicator for mortgage rates.

The impact on home sales is likely to be mixed. On the negative side, higher mortgage rates (with higher monthly payments) reduce affordability, which could slow sales somewhat, but at 5.25% to 5.5%, they're still pretty low historically. We've had these half point surges before, and while they make headlines, I don't know that they have that much impact on most buyers who are in the process of buying a home.

There actually could be a positive impact, as well. Over the last six months there has been a lot of talk of the 30 year fixed dropping to 4.5%, or even as low as 4.2%. 4.5% has gathered almost magical status. I know some folks have been waiting for a 4.5% rate as a signal that bargain-time is here. The quick climb to 5.5% probably puts to bed the hope that they'll drop soon to 4.5%, so some of those folks waiting for lower rates may jump back in the market.

The bigger impact is likely on the refinancing side. There has been a surge of refinancing applications in the last two months, with rates hovering around 5%. At 5.5%, refinancing becomes less attractive to homeowners looking to refinance, so that business may slow a bit for the time being.

Comments

[Helen K]

China is buying only 2-year notes and no-body on earth accept the FED is buying 10-year or higher notes as the inflation genie is predicted to sneak out of the bottle in 2-3 years. Bernanke wants to double-down and buy 10 year treasuries to keep mortgage rates low but at the cost of the tumbling dollar. As the dollar tumbles, you can again expect to see $5-6 per gallon gas, more expensive imports and America becoming a banana republic.

We cannot have it all anymore as Americans: Either low long term rates and a worthless dollar or allow the rates to jump and have a stable dollar. Either way, it will be painful for America for years to come.