Those who
didn't take advantage of record-low rates have missed the boat -- at least for
now. Here are three reasons why.
The Fed is
going to stop bolstering the housing market. The Fed has kept rates at
rock-bottom levels by buying up to $85 billion a month of Treasury bonds and
mortgage-backed securities. That has enabled lenders to sell mortgage loans at
low interest rates and recoup their money immediately -- plus profits. "Up until recently, expectations were that the Fed would begin to taper purchases of mortgage-backed securities (MBS) and Treasury bonds late in 2013, but that timeframe appears to have moved to September, possibly sooner," said Keith Gumbinger, vice president of HSH.com, a mortgage information company.
If the Fed
stops purchasing the securities, private investors will have to pick up the
slack. For investors to do that, the loans will have offer a better payoff. And
that would mean raising rates for borrowers, said Duncan.
The economy
is no longer reeling. During the recession, the Fed lowered its short-term
interest rate to near zero in order to stimulate the economy. But now
conditions have improved considerably since the
economy emerged from recession four years ago. As the economic revival
gains traction, it is creating a tailwind for interest rate increases,
according to Gumbinger.
Low rates
happen when the economy is in distress. But now, the market believes the
economy is getting stronger, said Wendy Cutrefelli, a vice president in the
Mortgage Banking Division of Bank of the West. Job gains have picked up lately,
averaging about 202,000 a month over the past six months.
That hiring
is advancing rather than retreating is good news for the economy and any
positive future reports are expected to push rates higher, according to
Gumbinger. Even mediocre news might not cause any meaningful decline in rates.
3.3% rates
are unprecedented. "The 30-year [mortgage rate] hit a 37-year low in 2003
at 5.23%," said Gumbinger. "That was the previous low-watermark prior
to this financial crisis and it's likely we will move closer to that mark as we
grind forward."
Any return
to normal conditions, therefore, will likely be accompanied by higher mortgage
rates.
Even if
they go up a percentage point or two, however, mortgages will still be
relatively low. Historically, 30-year loans are usually 5.5% or higher.
For clues
to the direction of mortgage rates, look at the daily movements in 10-year
Treasury bond yields. Mortgage rates track Treasury yields with the difference
between them holding fairly constant.
These days,
Treasury bonds have been on a jumpy uphill climb, with the 10-year hitting
2.21% on May 31, its highest closing since April 2012. On Thursday, the yield
was about 2.10%. Since the interest rate on a 30-year is usually 1.7 to 2
percentage points higher, it indicates that mortgages should be at between
3.82% and 4.12% this week.
