Interest rates finally broke from the slumber last week, and we saw the largest single weekly reported gain in 30-year fixed-rate conventional loans since April 17, 1987. That’s more than 26 years. The 30-year rate is now at the highest level in almost two years. But it remains highly affordable at 4.46 percent—and that is what many homebuyers are realizing, given double-digit percentage rent increases in numerous markets. The week prior rates were 3.93 percent, and one-year ago 3.66 percent. The gain last week was 53 basis points (with a 1 percent increase equal to 100 basis points).
The following chart shows the 30-year rate as reported weekly by Freddie Mac for loan applications, from January 2000 to the present.
The first story in this rate increase is the speed at which rates jumped. The second story is how affordable rates remain in comparison to the last decade. The next graph shows the rapid climb since mid-November 2012. While rates escalated rapidly, there is no certainty that they will continue to escalate. Rates thus far this week (to be reported next Thursday by Freddie Mac) have already slipped somewhat.
So why did rates jump? Whenever discussing economics, we must invoke three powerful words: Supply, Demand and Expectations. Until last week, with the $85 billion of monthly quantitative easing (QE) from the Federal reserve, rates had been kept artificially low with a large supply of money, essentially flat demand, and the expectations for that to continue. But the discussion last week by Federal Reserve Chairman Bernanke to slow the steady supply of new money commencing this September, muted the expectations of future supply, and at the same time signaled to the market expectations of increased demand for capital from a growing economy. Hence the pop in interest rates. For a description of QE click here.
For some homeowners and many businesses – those with variable rate loans — their cost of borrowing is tied to the yields on U.S. Treasury instruments. The following graph shows the yield curve of U.S. Treasury bills, bonds and notes ranging from a duration of one month to 30-years. The blue line is the curve as of November 15, 2012 (a recent low-point for 10-year Treasury Bonds) versus rates as of June 27, 2013 on the red line. In the past seven months, the 5-, 7- and 10-year Treasurys have increased in yield 76, 89 and 91 basis points, respectively.
- So where do I expect rates to go from here? General direction upwards, but a slight decline in next Thursday’s report from Freddie Mac would not surprise me at all.
- Where will rates be a year from now? I believe in the 5.5 to 6.5 percent range for 30-year, fixed rate loans. And that would still be highly affordable—as I can remember 30-year rates in the early 1980s in the low 20-percent range. That’s when and why adjustable-rate loans were invented.
- What will be the impact on the housing market of rising rates? It will put a short-term impetus on prospective buyers to acquire a home today, but many will be trading off a higher-interest rate for a slightly smaller home than they anticipated, to counter for the increased monthly payment. In the long run, as long as the economy is growing (that means creating jobs) then higher interest rates will not likely mute housing demand. But it may arrest or buffer the double-digit percentage price increases we have in the past year.
- My advice to buyers? Get a fixed-rate loan, because nothing is certain except death and taxes.
It’s all about jobs.