Mortgage Rates (Finally) Rise

My last update on mortgage rates was prophetically titled, “Mortgage Rates Remain Low, But for How Long?” and coincided almost perfectly with the trough in mortgage rates. Since then, rates have risen significantly.

According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 30-year fixed rate is now 4.86 %, a whopping 71 basis points above the low on November 11. What’s more- separate surveys by competing research companies have indicated that the average rate already exceed 5%! One lender seemed to speak for everyone when he intoned to the WSJ, “I’ve been doing this 15 years, and I’ve never seen rates rise this fast.” 15-year fixed rates and ARM variable rates, meanwhile, have also risen rapidly.

What’s driving this increase. In short, Treasury yields, or the interest rate that investors demand to lend to the US government. Mortgage rates have historically hovered around 1% above Treasury rates; as yields on Treasury securities have spiked, so have the rates on comparable mortgage securities. Explanations vary on what’s behind rising Treasury rates, ranging from concerns over the US government’s finances to fears about rising inflation to optimism in the US economy.

While economists offer different projections for the near-term, the consensus is nonetheless that the record low rates from this past fall are now firmly in the past. According to the Mortgage Bankers Association, the average 30-year fixed rate “will rise to 5.1% by the end of 2011 and 5.7% in 2012.” On the other hand, “Frank Nothaft, chief economist for Freddie Mac, says he expects long-term mortgage interest rates to hold below the 5 percent threshold throughout 2011.” Personally, I have concluded that forecasting mortgage rates is as futile as trying to pick winning lottery numbers; nonetheless, I tend to agree with the mainstream that rates will either remain flat or continue trending upward.

Already, the increase in rates have had an impact on mortgage lending.”Applications for refinance loans declined 25% last week from the previous week to the lowest level since April…Applications for purchase mortgages declined by a seasonally-adjusted 2.5% from the previous week.” This is to be expected, since a 1% increase in mortgage rates is tantamount to a 10% increase in home prices, or a 0+ increase in one’s monthly payment for a 0,000 mortgage.

On a practical level, that eliminates much of the incentive to refinance, and can significantly raise the income threshold necessary to qualify for a mortgage of a given size. The media is filled with stories about borrowers that waited to refinance and “lost” and about potential homebuyers that may get priced out of the market.

In short, the refinancing boom has ended. The only question is: Will a home-buying and purchase mortgage boom take its place?