Mortgage interest rates reversed course this week, rising as the U.S. Treasury began selling off mortgage-backed securities and investors' optimism about the U.S. economy overcame concerns about global events.
The Treasury announced Monday that it will begin selling its remaining $142 billion of mortgage-backed securities, bought as part of the government's efforts to stabilize the economy in 2008 and 2009. The plan calls for the Treasury to sell $10 billion of the securities each month, subject to market conditions, according to a statement.
The benchmark 30-year fixed-rate mortgage rose 5 basis points this week, to 4.96 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.41 discount and origination points. One year ago, the mortgage index was 5.11 percent; four weeks ago, it was 5.09 percent.
Weekly national mortgage survey
Results of Bankrate.com's March 23, 2011, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:
The benchmark 15-year fixed-rate mortgage rose 4 basis points, to 4.16 percent. The benchmark 5/1 adjustable-rate mortgage rose 4 basis points, to 3.78 percent, while the benchmark 30-year, fixed-rate jumbo fell 1 basis point, to 5.45 percent.
Rising bond supply
The prospect of more supply in the mortgage bond market sent rates higher, according to Rob McAllister, a mortgage broker at West Seattle Mortgage in Seattle.
"That initial announcement did kind of cause rates to go from a positive trend to a negative trend," he says.
The Federal Reserve intends to stop its quantitative easing program of buying U.S. Treasuries at the end of June, and the disasters in Japan might prompt that country to sell some of its U.S. debt to raise cash, McAllister says. Japan owned $886 billion of U.S. Treasury securities, the second largest sum after mainland China's $1.154 trillion, as of the end of January. Again, a rising supply of bonds augurs higher yields, unless demand increases as well.
The earthquake and tsunami in Japan and war in Libya interrupted an upswing in rates that started earlier this year. This week, the focus returned to fundamentals, McAllister says. Signs of inflation abroad are a particular concern, he adds, since producers operate in a global market and higher prices seem likely to get passed along sooner or later.
Borrowers who want a low rate should act now, suggests Ginny Ferguson, president of Heritage Valley Mortgage in Pleasanton, Calif.
"We don't know what's going to happen as a result of gasoline prices going up, food prices going up and with what's happening in Japan. We are getting some very wide swings in the stock market and that has an impact on the bonds and mortgage-backed securities, which in turn impacts interest rates," she says.
First-time homebuyers need to weigh the possibility of higher rates against the prospect of lower house prices. The trade-off can be difficult to analyze, especially for borrowers who mistakenly believe rates have always been low and always will remain so.
McAllister points to the historical record to make his point that today's rates are something of an aberration in the long-term trend line. The difference in a monthly house payment between an artificially low rate of, say, 5 percent and a more typical rate of, say, 7 percent comes, he says, as "a big surprise" to many borrowers.
Rates in the 7 percent range might or might not show up any time soon. The question for borrowers is whether they want to bet the house on that.
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