Mortgage rates are rising
...but they are still very low historically.
As the Federal Reserve Board meets today and tomorrow to discuss interest rates, you might think that if they hold rates steady as they have for the past many months, mortgage interest rates should stay the same. The problem with that is that the Fed is setting the rate for very short term interest rates while mortgage interest rates reflect borrowing for the long term.
The Fed Funds Rate (FFR) doesn’t control mortgage rates because it is a short term (overnight) interest rate vs. the rate for 30 year mortgage. Inflation, however, is influencing both rates right now. The bond market which is focused on the 10 year Treasury Bond is convinced that inflation is seeping back into the economy which does cause mortgage interest rates to go up.
Let’s go back a few years to when the FFR was at an historic low of 1%. Mortgage money was cheap. Not quite 1% but you could certainly get a 30 year fixed rate loan for 5% or a little less. Five year Adjustable Rate Mortgages (ARM’s) were available for 4%, three years for even less. Of course, there was the simultaneous introduction of exotic mortgage products including the famous (or now infamous) 0 down, 0 interest, pay option ARM which did nothing more than bring buyers including speculators into the housing market who likely shouldn’t have bought homes because they didn’t understand that the interest rate and the payment was going to change, and change for the higher.
In my opinion, some of the problems in housing today stems from these borrowers who were able to make a payment or two but now face significantly rising payments and flat to declining values depending on location. Putting the house on the market was possibly their only option to avoid foreclosure and bankruptcy and that is why inventory has gone up significantly putting even more pressure on home values.
With short term rates even higher than long term rates, what is referred to as an inverted yield curve, the advantage of an ARM has greatly diminished today. The spread between an ARM and a fixed rate mortgage is approximately .25 to .375 of a point compared to 1+ several years ago and even though most people do not live in their homes for the full 30 term of a mortgage, the sleep at night factor certainly works in their favor for a slightly higher monthly payment. After all, we’re talking about 30 year mortgage rates at only 6.5% or so. They are still historically low, it’s just that we’re greedy from the amazing rates available in the past few years.
Noah Rosenblatt at Urban Digs has a wonderful post on rising rates with some outstanding links to additional information including a very interesting article on a website that does a wonderful job of explaining why mortgage rates move up and down. Please visit HSH Associates Financial Publishers to learn more on rates.