You may have seen ominous headlines lately, which read something like: “Mortgage rates are on the rise!”
While such a statement may be true, it’s clearly a lot less dramatic than the headlines let on, and no reason to hit the panic button.
But hey, if journalists focused on the details, it wouldn’t be worth clicking through to the article, now would it?
[See: Last chance to get a mortgage under 4% for more on that.]
Sure, mortgage rates have risen in recent weeks, but the rise has been pretty negligible.
If you look at Freddie Mac’s data, which serves as a benchmark for tracking rates, the 30-year fixed has only risen 11 basis points since hitting its all-time low during the week ending November 21, 2012.
That’s right – just two months ago the 30-year was at its lowest point ever, 3.31%, and now it stands at 3.42%. Hmm.
For most homeowners, it’s a detail they won’t even notice (or care about), and surely it wouldn’t sway one’s decision to purchase a home or refinance an existing mortgage.
Of course, it could make a savvy borrower think twice about locking vs. floating their rate, but that’s about it.
Why Do Mortgage Rates Rise?
Even though mortgage rates really haven’t risen much, and remain at historic lows, let’s explore why they do go up.
In a nutshell, mortgage rates tend to rise when the economy is doing well, or expected to do better.
Higher interest rates are intended to curb future inflationary concerns, which are a side effect of a growing money supply.
If the value of money is expected to drop, those who lend it will require a higher rate of return (interest rate) to ensure they don’t lose out on the transaction over time.
Inflation hasn’t been much of a concern yet, but if prices are projected to rise, the Fed will eventually need to reign in its recent easy money policies.
The Fed has done plenty to increase lending/spending and spark growth by slashing key interest rates ever since the housing crisis reared its ugly head.
And much of the recent news has been quite positive, finally. Home prices increased nearly 6% last year, while existing home sales rose nearly 10% year-over-year.
At the same time, unemployment continues to drop, with jobless claims now at a five-year low.
Good News = Bad News?
With all that good news flooding the airwaves, the Fed may decide to end its loose monetary policies by putting an end to its program to purchase mortgage-backed securities (MBS), which would certainly increase supply.
Assuming that happens, prices of MBS will drop as demand cools, and the corresponding yields would need to rise.
A higher yield on MBS would translate to a higher mortgage rate for the consumer in order to maintain a healthy primary-secondary spread.
Of course, nobody expects a knee-jerk reaction from the Fed as a result of a few positive headlines.
Some naysayers see this recent positive run as just another bubble, or a false recovery. The jobs picture is particularly hard to dissect.
So for the Fed to jump in and change things up now would be pretty reckless.
But if they wait too long, it could also be seen as irresponsible. In other words, the Fed may choose to slow purchases of mortgage-backed securities later in the year, while keeping the target range for the federal funds rate between 0 and 0.25 percent.
This could lead to slightly higher mortgage rates. Of course, there’s still plenty of uncertainty as to the direction of the economy, so it’d be hard to imagine significantly higher rates anytime soon.
The takeaway, I suppose, is that rates will probably display little movement this year, even if they do in fact rise somewhat. The Fed clearly doesn’t want all their hard work to disappear overnight.