Why Are Mortgage Rates Going Up?

Why Are Mortgage Rates Going Up?

Spring and summer is also buying season for real estate and can bring with it slightly higher mortgage rates. Typically the spring and summer pop is small and has to do with more demand for mortgages, which means banks can get a higher yield and as a result you as the consumer pay a slightly higher rate. We’re definitely seeing rates pop early this year, but I think we’re seeing this trend for a different reason.

This year we are seeing rates rise off their all-time lows of around 3.25% and approaching 3.75% (30 year fixed) for a couple of reasons, each of which have the potential to send rates higher before the end of the year. Here are the risks to low interest rates as I see them:
1.Improving economy and stock market- We first must understand who buys mortgages in order to understand why they move as they do. Pools of Mortgages are purchased in the form of Mortgage Backed Securities (MBS) by investors who are looking for a fixed rate of return. MBS are purchased by investors like insurance companies, retirement and pension funds, foreign governments, hedge funds and even high net worth individual investors. When the economy is bad and there is a lot of perceived risk, especially in other asset classes like the stock market or real estate, then there is lots of investors who prefer the relatively safe investment into mortgages (keep in mind today’s default rates for loan generated between 2010 and 2012 is less than 2%).
2.Now that the stock market is approaching 5 year highs and real estate prices have reversed and are headed higher in virtually every market in the country, there are less investors who want the low return of a mortgage loan. In order to get those investment dollars into MBS, rates have to go up to lure investors and meet the demand needs of the mortgage market.
3.Inflation- Thus far the inflation numbers have been relatively low, but the amount of government spending and stimulus (trillions printed out of thin air and spent or invested in an attempt to spur the economy) has investors worried. If an investor buys a 30 year 3.75% mortgage today and then inflation rises to 5%, the investor is actually losing on their investment. As the economy picks up and the velocity of money increases, inflation will show and rates will continue to rise.
4.End of the Federal Reserve’s Quantitative Easing (QE I, II &III)- The Fed has been buying $85Billion a month of mortgage backed securities and US Treasuries to keep long term interest rates low. This has worked very well, but we’re starting to hear rumors that the money printing and MBS purchasing will end, some say as soon as fall of 2013. This would remove the artificial buyer of mortgages (the Fed) from the market and leave the market of real investors to set mortgage rates. Market supply and demand would return and rates would inevitably rise.

My gut tells me we will likely be looking at 30 year fixed rates in the 4% plus range by the end of the year. Where we go from there is hard to forecast. It really depends on how strong the economy is and what the upcoming inflation reports show. Plus, I seem to be better at reporting what has happened, than I am with predicting what will happen (LOL)…

Today we are still within .50% of the lowest rates in the history of our country and prices are well off their high of 2006/2007. As the real estate market continues to improve and rates rise, the decision of buying will be less attractive and more risky (higher price, higher rate and higher payment). If you’ve been pondering buying a new home, I think the sooner you do so, the better your investment will be. by Josh Mettle


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