Why Mortgage Rates Are Going Up

1. Mortgage bonds have been trading negatively which causes rates to rise

Understanding what determines mortgage rates is quite simple. Mortgage rates are traded everyday as mortgage bonds (MBS) just like stocks. They either go up or down in price on a daily basis. Here is a picture of a mortgage bond trading chart below. When bonds (green line) are trading lower mortgage rates (red) are higher and when bonds are trading higher mortgage rates are lower. Mortgage bonds have been trading lower recently which is driving rates up.

 

When bonds trade lower (green), lenders raise their rates and distribute “Reprices for the Worse” (see chart below) and republish these higher rates to the public. This trading of bonds directly correlates to the mortgage rates we see everyday from lenders.

When Bonds Trade Lower Mortgage Rates Increase

 

What economic events force rates to go up or down?

 
So what causes mortgage rates to go up or down and mortgage bonds to trade higher or lower? These are tied to some fundamental economic activities that take place everyday in our markets, by understanding these you will now be able to determine what direction rates will probably go for your clients.

2. A rising stock market causes rates to rise

Mortgage bonds compete everyday for investors dollars in the open markets. Stocks pay a higher rate of return so they are more risky, bonds have a lower return so they are seen as more stable and less risky. Remember: When there is weak economic news (higher unemployment etc), this normally causes money to flow out of Stocks and into more stable Bonds helping Bonds and home loan rates improve. When there is better economic news (lower unemployment, more homes sold etc) this normally has the opposite result, so investors will put their money into more risky stocks, thus causing mortgage rates to increase. Economic data has been improving recently so this is why rates have been rising. It is an interesting dynamic that generally worse economic news is good for mortgage rates!

3. Rising Inflation is causing rates to rise

is going to be a problem soon because of all this money that is being printed to pay for Government spending. So how will this affect mortgage rates? The bottom line is that as inflation increases, home loan rates will rise too. That’s because lenders know that a rise in inflation actually diminishes the value of the money they receive over the life of a loan, as the money they receive for payment simply won’t go as far. So when they see changes in inflation or even anticipate a rise, they increase their interest rates to make up for the loss in future buying power that will happen as a result of inflation. 

4. The 800 pound gorilla in the room..growing US debt is causing rates to rise

As ths US continues to add to its already burgeoning $1.5 Trillion dollar deficit, investors around the world who lend the US money by way of buying treasuires and bonds are going to demand a higher rate of return for the financing of US government spending. Because the larger the US debt level grows the higher the chances of a default sometime in the future, and so investors will price this accordingly. Just 3 months ago the 10 year bond rate (the 30 year fixed mortgage rate follows this) was at 2.5%, today it is at 3.75%..you can thank The Fed and Ben Bernanke for this, as they have been adding to the US debt load by way of printing money via their ”QE” Quantitative Easing programs, so investors are now demanding a higher return on their investment. So until the US gets its fiscal house in order and tackles the deficit, long term rates will continue to rise. 

Rising rates affect buyer budgets and loan approvals  

It is also very important to show buyers that rising interest rates will eat away any savings they could get from waiting for prices to dip again. Eventually a buyer needs to make a decision about what is most important, either their monthly payment or “finding the bottom of the market in terms of price”. Higher interest rates are going to affect buyers budgets dramatically too, while also affecting any current offers or loan approvals they may have. Lenders have tightened qualifying ratios recently, so make sure any increase in payments will still get approved.