For those new to the mortgage realm, the number five might feel a little foreign. You see, for the past seven years or even longer, the popular 30-year fixed mortgage has always been in the 3-4% range.
Today though, mortgage rates hit yet another setback, a good jobs report. With the economy in full swing and the Fed doing their best to tame inflation concerns, interest rates are taking a beating.
And as such, those who buy a home today or tomorrow will be saddled with higher monthly mortgage payments.
How high depends on the loan amount, but the 30-year fixed just crossed over into the 5% range on many lenders’ ratesheets.
The news comes at a pretty bad time considering home prices have also risen to new all-time highs, at least on a nominal basis. That one-two punch is a tough one to bear, especially as inventory remains really poor.
Why Are Mortgage Rates Going Up?
- They way it works is pretty straightforward
- When the economy is firing on all cylinders
- Inflation becomes a concern
- That in turn leads to higher interest rates to control the money supply
I’ve said it once and I’ll say it again; good economic news leads to higher interest rates, including mortgage rates.
The general theory is a stronger economy leads to more inflation worries, which leads to higher interest rates to control the flow of money.
As a result, we get stuck with higher borrowing rates when we need money for things like an auto loan or home loan.
The flip side to that is a higher yield in our savings account, which while a positive, doesn’t tend to mean very much when you consider the relatively small amount of money in such bank accounts compared to the mega mortgage balance most of us carry.
As mentioned, the jobs report released today was good for the economy and the stock market, but bad for bonds, which run inverse to stocks.
Since bonds are a safe haven when things aren’t going well, investors pile into them when the economy isn’t at its best. When things perk up and they leave bonds, the associated yield has to go up to entice new bond buyers.
That yield is basically similar to an interest rate we pay for our mortgage. And so it goes up too.
Will Mortgage Rates Reverse Course Anytime Soon?
- It seems pretty clear that the trend is up, up, up
- But that doesn’t mean there won’t be pullbacks along the way
- Often major movements are met with a relief rally
- So it’s certainly possible rates can reverse course in the near-term
It’s the million-dollar question for which no one really has an answer to. Sure, there might be a lot of guesses, and educated ones at that, but that’s all they are.
The one thing I can say is that a lot of rate movement in a short period of time is often met with a pullback, though it could be a temporary one before the ascent continues.
In other words, if mortgage rates jump into the 5% space for the first time in nearly a decade, they may not stay there for very long, at least initially.
But the long-term trend could still be upward and onward, so the relief, if it even materializes, might be short-lived at best.
A 5% Rate May Look Pretty Good Once Rates Are 6%…
- While a 5% mortgage rate sounds absolutely dreadful
- It’s all relative to what we were used to seeing before
- If rates rise to the 6% range in the next few years
- We might wish we had that low 5% mortgage rate back
As noted, there could be a small window to secure a lower fixed mortgage rate in the near future. At the same time, 5% won’t look so bad if the next stop in 6%.
Speaking of, the last time the 30-year fixed was 6% was back in 2008. It’s been about a decade since consumers were used to such mortgage rates, though who had a 30-year fixed back then?
Everyone and their mother had an option arm, or at least a hybrid adjustable-rate mortgage.
That brings up a good point though. If fixed mortgage rates keep marching higher, and eventually land in the 6% range, might it be a tipping point for homeowners to consider an ARM instead of a fixed mortgage?
At the moment, ARMs are grabbing a measly 5-7% share of the mortgage market, but if and when fixed rates climb to 6% or higher, borrowers may decide to move into a product like the 5/1 ARM instead.
While variable, they still provide several years of fixed-rate security, which makes them nothing like the toxic stuff we saw in 2006.
Read more: 2018 Mortgage Rate Forecast