If anybody is in the middle of the mortgage process now, either refinancing or purchasing a home, you are probably aware that the mortgage rates have increased dramatically (i.e. .25-.5%) since mid-April. If you are not aware, then you certainly are not working with me or anybody else who is watching out for your best interests. For everybody else, you will know soon since the newspapers are very good at writing stories about interest rates (either up or down) when it is already “Old News.”
The “new normal” is likely going to be interest rates in the low to mid 4s for the short term and probably upper 4s by the end of the year. Historically, these are certainly very low interest rates. As a result, the good news is that they should not have much of an impact, if any, on the rapidly improving housing market. The big question I hear now is “Why” have interest rates increased so dramatically?
The short answers are (i) because they cannot stay THAT low forever; (ii) they are tied to the yield of the 10-year Treasury which is up to 2.27 yesterday from 1.92 in April; and (iii) because I had the audacity to take a 10 day vacation overseas with little access to the internet and this happens every time I do this (which fortunately for interest rates I cannot afford to do all that often)! The longer answers which are fairly complicated and a lot less interesting than the shorter ones will follow. If you read enough about interest rates, please feel free to skip the rest of this email. Though I am going to summarize quickly, the next 3 paragraphs may feel like a Macroeconomics class and I fear your eyes will begin to glaze over. But, if you can handle it, the explanations are:
Like many of the problems we have had in our country over the years, the interest rate problems start in Europe. Specifically the early signs of inflation and positive economic growth coming out of Europe. Estimates on Europe’s growth are now 1.4% for 2015 up from 1.1% earlier this year. This was coupled with the bond buying by the European Central Bank which drove the bonds yields in Germany down to negative levels in April (i.e. you would have to PAY money to buy a bond)! That negative yield appeared to be a tipping point which quickly reversed itself and brought the yield up to .7%. This had a ripple effect on the bond yields in the United States.
The next problem was the increasing price of oil. Most of us have probably seen evidence of this at the gas station in the past month. When oil prices were low, bonds became the place that many went to for a better return. This resulted in bond yields, and correspondingly, mortgage rates decreasing. Now that oil prices have stabilized and even reversed themselves, the fear of inflation which increases bond yields, is returning. In Europe the rate of inflation stopped falling last month after the bond buying activity, increased growth and rising oil prices began to have their effect. Therefore, the threat of deflation has diminished taking with it the very low bond prices.
Finally (for those who are still awake), some of this is the result of repositioning of portfolios. Traders who were buying these European bonds began to sell them. This led to a herd mentality of extreme selling that caused the bond prices to decrease (i.e. since less people wanted them) and the bond yields to increase. So, there could be a bit of a reversal here, but even if there is, I do not expect it to bring us back to the April lows in mortgage rates.