US mortgage rates rocket

From Bloomie:

Mortgage rates for 30-year U.S. loans surged to the highest level in almost two years, increasing borrowing costs at a time when the housing market is strengthening and prices are jumping.

The average rate for a 30-year fixed mortgage rose to 4.46 percent from 3.93 percent, the biggest one-week increase since 1987, McLean, Virginia-based Freddie Mac said in a statement. The rate was the highest since July 2011 and above 4 percent for the first time since March 2012. The average 15-year rate climbed to 3.5 percent from 3.04 percent.

Here’s the chart:


In short, the Fed has just tightened by five rate rises in two months. Why so fast? Well, as we know, central banks did blow a little bond bubble and deflating it is hard to control. For instance, foreign investors are fleeing the 30 year Treasuries that determine mortgage rates:


Still, the leap in rates is not as bad as it looks for the reason that most US mortgages are fixed-rate for the life of the loan. But it is a sore test for new lending which is showing its effects. From the MBA:

Mortgage applications decreased 3.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 21, 2013.

The Market Composite Index, a measure of mortgage loan application volume, decreased 3.0 percent on a seasonally adjusted basis from one week earlier to the lowest level since November 2011.  On an unadjusted basis, the Index decreased 3 percent compared with the previous week.  The Refinance Index decreased 5 percent from the previous week to the lowest level since November 2011.  The seasonally adjusted Purchase Index increased 2 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 16 percent higher than the same week one year ago.

“Interest rates moved up sharply following the Federal Reserve press conference last Wednesday where it was indicated that the Fed could begin tapering their asset purchases later this year,” said Mike Fratantoni, MBA’s Vice President of Research and Economics. “Mortgage rates increased by the most in a single week since 2011, and refinance application volume dropped to its lowest level in almost two years.  However, applications for conventional purchase loans picked up by more than 3 percent over the week, and total purchase applications were 16 percent higher than one year ago, indicating that homebuyers are not yet dissuaded by the increase in mortgage rates.  Government purchase applications dropped again, likely a function of the recent increase in FHA mortgage insurance premiums.”

Good to see applications holding up for now but refis point the way for house prices which will slow in the next few months. I’m sure the FOMC had in mind some easing in asset markets when it embarked on its “tapering” rhetoric. But in an economy growing under 2% in the first quarter, rhetoric is really all it can be for now. As stock markets have suddenly realised.

Houses and Holes
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  1. I wish Aus had some sort of market where you could get 30 year money to match the length of time of your project or debt.

    It’s perhaps a reflection of our short term approach to everything?

  2. “Still, the leap in rates is not as bad as it looks for the reason that most Us mortgages are fixed-rate for the life of the loan.”

    We keep getting lectured that our largely variable-rate mortgages are a good thing because rate cuts reduce many people’s interest payments immediately. We don’t hear so much about what rate rises will mean here.

    At least in the US you have the choice between sticking with your fixed rate or refinancing at a lower rate when interest rates drop (assuming you have sufficient equity of course).

  3. Yesterday we see that real incomes in the US are falling and now new money housing loan interest rates are rising fast.

    Let’s see how this US housing recovery looks in 6 months.

  4. Why our loans are not fixed the same way ?, for the life of the loan, it s that way also in France ( at 3% currently)

    • Why don’t you move back to France then 😉

      Or are spruiker jobs harder to come by over there?

  5. What a remarkable discovery !

    When the garbage guts Fed stops guzzling down under priced debt using printed dollars, real people using their own money decide they want a bit more reward for lending money for 30 years to someone to buy a house.

    borrowing money at a set rate for 30 years sounds great but imagine you are the otherside of the transaction and getting the 30 year bond.

    What fixed rate of interest would you want to make the risk worthwhile?

    Remember if interest rates rise further due to inflation the value of your 30 year bond will sag if you try and flog it.

    Hard to see how the Fed will be able to exit the home mortgage market without further significant rate rises that expose the ongoing weakness in the market and ‘recovery’.

    When govt try to stop printing and repressing savers they may find they are thin on the ground.

  6. “borrowing money at a set rate for 30 years sounds great but imagine you are the otherside of the transaction and getting the 30 year bond.”

    That’s why I want to be on the borrowing side!

    “What fixed rate of interest would you want to make the risk worthwhile?”
    OK I reckon 5% RAT. So 5% plus inflation of 5% (non-tradable) so that’s 10%. Let’s say we use 30% as the marginal tax rate so the rate I need is 14.3%
    That is essentially the real ‘NEUTRAL’ rate of interest.

    Further the risk to the upside on non-tradable inflation is rather large so I’d be looking for allowing for say 8% inflation. In that case the rate I’d need would be 18.6%

    It just shows how far from reality the BS monetary system is.

    • Agree with your sentiment.

      I think that the agreed IR on money reflects the relative value that the parties think a unit of the money has.

      ie. ZIRP, and close to, really means that people think the money is basically valueless (relatively speaking), and the money is “in trouble” as a reliable unit of account.

      IMHO, rising IRs, mean that people actually value their money far more than the rationistic CBs/govts do – and that is a big, big problem. Tension is inevitable.

      My 2c

  7. This is not going to make any difference to the housing boom in the US which is being driven by banks, hedge funds and the like. They can “sell/borrow/steal/create” at a far lesser rate than the man in the street.

    All that is going to happen is that the decrease in home ownership in the US is going to accelerate.