Recent Interest Rate Increases and the consequences!

The recent spike in interest rates reminds us that though rates generally gravitate lower slowly, they move upwards “quickly and dramatically”.  For months, we have been listening to prospective home purchasers say they want to wait because prices will continue to fall and rates aren’t going up.  Well, my friends, the horse may have already left the barn.

Home loan rates have risen about ¾% since early November.  Why?  The biggest reasons are the Fed’s move to Quantitative Easing and a seemingly strong holiday shopping season has bolstered the fragile confidence of the public.  When confident in an improving economy, that public buys stocks and sells bonds to get the cash to buy those stocks.  To attract money back to bonds, bond traders raise yields (i.e., higher mortgage rates).   

Let the volatility begin!

Now rates that were dipping below 4.5% are largely above 5%.  And because home buyers don’t really buy homes based on their sales price (they buy them based on the monthly payment associated with the home), this past six weeks has actually made it more difficult to buy a home.  In dollars and cents, it’s as if home prices went UP 6-8% to the buyer looking at their proposed monthly payment.  Buyers need to look in different neighborhoods now or compromise on doing some improvements because they need the cash they were going to use for that purpose to pay discount points to get the rate they need to qualify.

Conventional wisdom from the “experts” seems to believe that we have settled into a new range of rates.  Gone are the sub- 4.5% days, and welcome to a 4.75-5.25% market.  Now, let us not forget even that range of rates are LOW - historically speaking.  The primary uncertainty surrounds how long we will stay in this new range.  Some forecast this range will last through the spring, others don’t think we have that much time and even others believe we could stay here through 2011.  The real question is….Can you afford to gamble?

Just as home sellers who missed the peak in sales prices in 2006 regret their greed today, so, alas, will home purchasers of the future bemoan how they could have had a mortgage with a rate below 4.5% in 2010.  But, will they further curse themselves for missing rates at 5% too?  Only time will tell.

My advice to both consumers and loan officers is that if you have a rate you can live with….lock it.  There is a far greater risk of rates going up half a percent than a likelihood of them dropping back a quarter percent.