Thursday, June 27, 2013
Mortgage rates spiked over the past week, causing some to believe the ultralow rates of recent years could be gone for good.
What’s more, rising rates could put a damper on the improving housing market.
The 30-year fixed-rate mortgage averaged 3.93% last week, according to Freddie Mac’s weekly survey of conforming mortgage rates. But the results to be released this Thursday could very well shock the average mortgage shopper, as the average rate for the 30-year mortgage could move closer to 4.5%—or maybe even higher than that, said Dan Green, loan officer with Waterstone Mortgage in Cincinnati.
“Since Wednesday morning [June 19], pricing is worse by roughly four points. This means that last week’s zero-point rate of 4.25% would require four discount points today,” Green said. A point is 1% of the mortgage amount, charged as prepaid interest.
“Since May 1, rising mortgage rates have reduced the purchasing power of U.S. home buyers by 18%,” he said.
Surveys by HSH.com pegged the conforming 30-year fixed-rate mortgage at 4.56% on Tuesday, said Keith Gumbinger, vice president of the consumer loan information firm. That’s up from 4.33% on Friday.
Mortgage rates started rising last week, after Federal Reserve Chairman Ben Bernanke spoke of the Fed’s intention later this year to scale back the stimulus program that kept rates low. Rates jumped again over the weekend, a reflection of the unsettled market.
Gumbinger said it’s likely the market overreacted and that mortgage rates could move downward. But it’s probable that very low rates are gone for good. “Do I think we’re going back to 3.5%? No. Do I think we should be closer to 4% than 4.5%? Probably,” he said.
Even if market did overreact, it doesn’t necessarily mean that rates will reverse, Green said. “Mortgage rates are trading on fear and sentiment, and right now those forces are pulling rates higher.”
What it means for housing
The rate spike reduces the number of people who could benefit from a refinance. When people save on their mortgage each month, that extra money in their pockets can be spent elsewhere, also helping the economy.
But the new concern, Gumbinger said, is how much rising rates will affect the housing market recovery.
Even assuming a 30-year mortgage with a 4.33% rate, the monthly payment on a median-priced existing home has risen by 11% from the low at the beginning of May, Gumbinger figured. That also assumes a 20% down payment. The median-priced existing home was $208,000 in May, according to the National Association of Realtors.
“Active home buyers, and there are a lot of them, are finding that their purchasing power has decreased,” Green said. “It’s not enough that there’s a race to beat rising home prices, but there’s a race to beat rising interest rates.” Prospective buyers may now need to make new choices between amenities, or in the size of house that they can afford, he said.
Borrowers on the cusp of affordability to begin with could become priced out of the market in a rising-rate environment, Gumbinger said.
The effect of higher mortgage rates may show up in housing statistics in the months ahead, Gumbinger said.
Recent housing news has shown a market clearly gaining steam, with existing-home sales and new-home sales on the rise and home prices up, but those statistics reflect what happened a month or more ago, Gumbinger said. The most recent S&P/Case-Shiller Home Price Indices, for example, reflect sales from April, when mortgage rates were declining, he said.
Rates still low
Still, those in the market for a mortgage need to keep the recent movement in rates in perspective.
“We haven’t seen rates spike like that in a long time,” said Rick Allen, chief executive of MortgageMarvel.com, a mortgage shopping website. But it could be much worse. If rates on the 30-year fixed-rate mortgage were to jump to 5% or 6%, the effects on the market would be much more pronounced, he added.
Rates in the mid-4% range aren't at all high by historical standards.
“The lowest average rate the market achieved on its own [without Fed intervention] was 5.24% in June 2003. It was a 37-year low at the time, and it was widely celebrated,” Gumbinger said.
“You tell someone [it’s] 5% today, and they freak out,” he added