I AM concerned about the fast rising mortgage rates that seems to be headed only one direction which is higher but I see the other side of this rate hike, so let me explain first what is happening with mortgage rates.
Mortgage rates have increased more than 1 percentage point since early May, jumping half a percentage point since last week’s SellYourHome.com meeting, raising concerns that this rapid rise may derail the housing recovery and dim the outlook for the broader economy, especially in the context of generally tighter financial conditions. As Goldman notes, the rise in mortgage rates may impact the economy through two broad channels: (1) the direct impact on construction activity and home sales, which feed into the residential investment component of GDP, and (2) the indirect effects of lower home prices and less refinancing activity on consumption. Goldman estimates Housing Starts could plunge 11% in the coming quarters, total home sales could drop 7%, residential investment may fall 6 percentage points, could weigh on home prices, and pull up to 0.4 percentage points from real GDP growth – presenting a significant downside risk to their somewhat rosy current outlook. Quote for Goldman Sachs.
The upside I saw would be banks would start to ease up lending guidelines because now they can take higher risk with higher yield rates. Meaning, they will be willing to lend more due to higher rate of return on their portfolio.
In the largest spike in 26 years, mortgage rates jumped this week — from 3.98 percent to 4.46 percent — thanks to the Federal Reserve’s announcement last week that it could start reducing its purchases in the bond market.
Let’s break this down, my interpretation to a layman terms is that, when all these mortgages that banks, mortgage bankers, direct lender etc.. packages every month called ‘Mortgage-Backed Security (MBS)’ A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution. When rates that past year were really low and all these loan where packaged to the secondary market. The Feds were the main source of buyers because investors and bigger institutions wanted to buy them at a higher rates. So, when the government said they were going to slow down the purchases of these MBS tied to bonds, lenders have to spike the rate in order for other sources of buyers to come in and buy. Otherwise, the lending industry would hault lending due to money not going around.
Fixed-rate mortgages have increased by a half a percent since last week. The 30-year fixed-rate mortgage stands at 4.46 percent, up from last week’s 3.93 percent, reaching the highest rate in two years, according to Freddie Mac’s mortgage survey.
The rates on 15-year mortgages rose from 3.04 percent last week to 3.5 percent — the highest rates since August 2011.
The steep incline in interest rates appears to be a direct reaction to Fed Chairman Ben Bernanke’s remarks on June 19 that the Fed could slow down its bond purchases as early as this year and completely halt them by mid-2014.
The Fed’s $85 billion-a-month in bond purchases helped drive mortgage rates to their lowest point ever late in 2012, and it has helped keep mortgage rates hovering near record lows this year.
Homebuyers will be hurt by such huge leaps in interest rates. For example, a $165,000 30-year loan obtained with last week’s 3.93 rate will cost $786 per month. Under the new 4.46 percent rate, that jumps to $832 per month. That’s a $46 monthly increase — or a whopping $16,560 over the life of the loan.
For a $300,000 30-year loan, the rate increase comes to an extra $92 per month, or $33,120 extra over the life of the loan — that’s definitely not pocket change.
The increased rates could create a rush to buy homes, which would drive both housing prices and mortgage rates higher, said Rick Allen, senior vice president of Mortgagebot and a 25-year mortgage specialist.
“On the other hand, there are forces in place to keep things from getting out of hand,” he said. “People have learned that home prices can fall drastically, so they should be more inclined to be rational about not paying a price beyond their means.”
New lending standards also help to keep buyers purchasing within their means, but pose challenges for homebuyers who want to purchase but just can’t cut it under tightened standards.
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For buyers and sellers, this would be a time to evaluate your position before the rates get any higher. Please call Ken at 1st Innovative Finance at (562)697-7028 or write to [email protected].