Mortgage rates are rising, the Fed is going to ease out of bond purchases and choke back on the reins. What does this mean for our real estate market, specifically, home mortgage rates?
I grabbed Guardian’s Marcus McCue fresh out of a meeting with the Mortgage Bankers Association. In fact, he wrote his response while in the air on the way back to Dallas from D.C….
CD: Mortgage rates have increased recently. What is the cause?
Marcus McCue: Rates have been extremely volatile over the past two weeks, with rates now nearly 0.625% higher than their lowest point in 2012. These increases mainly due to the comments in May from the Fed recent meeting minutes and Fed Chairman Bernanke’s comments in testimony before Congress where he mentioned the Fed options for “tapering” their asset purchasing as early as their June meeting. Comments like these cause knee-jerk reactions in the bond market, which includes assets like Treasuries and mortgage-backed securities (MBS) that dictate mortgage rates. The Fed has been keeping mortgage rates low using QE3, whereby the Fed is purchasing a significant amount of MBS and Treasuries. This purchasing creates the liquidity needed to keep rates low. If the Fed begins to “taper” (meaning slowly reduce this purchase activity), then rates will increase as there are not currently any investors with interest in buying these same Treasuries and MBS at these low interest rate levels.
CD: If the Fed has not begun to “taper” their purchasing yet, why are mortgage rates increasing now?
Marcus McCue: MBS are long term securities, since most mortgages have a “fixed” rate for a period of 10, 15, 20 or 30 years. These types of long term investments are affected by rumors and expectations of changes before they actually happen, since future changes will affect the interest (demand) for these investments with long durations. This means that Treasuries and MBS adjust in advance of some economic action – like the Fed reducing their purchase activity – before it actually happens.
CD: Is there a chance that rates may still drop in the future if a home buyer plans to purchase a home in the next couple of months?
Marcus McCue: There is a chance, but the likelihood is getting slim. There is growing optimism that the Fed may not begin to taper the purchase activity at the June meeting and as a result we have already seen mortgage rates drift a little lower late Thursday and Friday. However, there is not an expectation that rates will drop significantly, so the rates in the low to mid 3.00s on the 30-year Fixed Rate Mortgage are likely a thing of the past. Mortgage rates on that product are not likely to fall below 3.75% again.
CD: What about those people who may be contemplating a purchase in the longer term … say end of 2013 or in 2014.
Marcus McCue: Given recent volatility in the mortgage market and the unstable economic conditions, predicting mortgage rates is a foolish activity. However, the recent projections from the economists at the Mortgage Bankers Association has an expectation for mortgage rates to remain around 4.00% at the end of 2013, with an increase to around 4.50% in 2014. In general, good economic news will be bad mortgage rate news for those seeking lower rates. The stronger the economy becomes (especially with regard to unemployment) the more likely the Fed begins tapering purchase activity earlier rather than later.