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Interest Rates a Week after the Fed’s Exit

As the Fed was planning to exit the mortgage market at the end of last month, more and more experts were calling for the exit to be uneventful. Their belief was that there was ample demand sitting on the sideline ready to replace the Fed’s role. Well it is now a week later and let’s examine the situation.

What actually did happen?


The Mortgage Bankers Association’s (MBA) Weekly Rate Survey reported:

The average contract interest rate for 30-year fixed-rate mortgages increased to 5.31 percent from 5.04 percent … for 80 percent loan-to-value (LTV) ratio loans. This is the highest 30-year rate recorded in the survey since the first week of August 2009.

I am sure that there are plenty of economists that will explain that there were other factors besides the Fed exit that caused the jump and that may be true. However, Michael Fratantoni, MBA’s Vice President of Research and Economics mentioned the Fed’s exit in the press release:

“Mortgage rates jumped last week as the Federal Reserve completed their purchases of mortgage-backed securities.”

How high might rates go?

The million dollar question is what will happen to rates throughout the year. Housing Wire in an article Wednesday suggested that rates might continue upward throughout the year:

A number of investors involved on the potential buy side of these deals suggest there remain concerns that the first real private RMBS deal may be a dud … mortgages need to be originated at roughly 6% at least to get any sort of capital flow; this was the case in previous securitization efforts, and it’s likely true now as well.

In an article the same day, MSNBC said:

Many analysts forecast rates will rise as high as 6 percent by early next year.

What will this do to the housing recovery?

Let’s look at how the purchaser’s buying power is impacted by a rise in rates. From the MSNBC article:

For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.

And it dramatically affects the buyers whom it doesn’t eliminate:

Taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.

What does this mean to you?

If you are buying, buy now before rates go any higher. If you are selling, take advantage of the fact that buyers are coming to the market now. Don’t wait until higher rates diminish the buyer pool.

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