MARKET RECAP
Perception Finally Becomes Reality
After the Federal Reserve announced tapering would commence in 2014, interest rates stood pat. They didn't move meaningfully higher, though they had moved meaningfully higher in anticipation of the announcement.
Now it appears rates are moving higher on the announcement itself.
We saw rates on most mortgage products move higher this past week. On a national level, Bankrate.com reports the average rate on the 30-year fixed-rate loan increased five basis points to 4.63% to hit a three-month high. Interestingly, the rate on the five-year ARM also moved meaningfully higher, rising 10 basis points to 3.43% on average.
Last week we noted that ARM rates should be muted. Fed officials have stated they will continue to support low short-term rates. Despite the Fed's stated support, though, it appears market participants are questioning the Fed's ability to actually maintain these rates. That said, rates on short-term Treasury securities continue to hold lows established earlier this year, which suggests that we could see a pullback in ARM rates this coming week.
As for the 30-year fixed-rate mortgage, we don't anticipate a pullback. When we're not following mortgage-backed security yields, we're following the yield on the 10-year Treasury note, which is a good proxy for where the 30-year fixed-rate mortgage is headed. As the 10-year note goes, so goes the 30-year fixed-rate mortgage.
Because so many homes are financed, rising rates obviously impact affordability. Freddie Mac recently delved into the relationship.
As to be expected, rising rates are hurting affordability. But it's not a universal phenomenon. Real estate markets, as we all know, are local markets. National numbers are frequently irrelevant to any particular market. That said, Freddie is finding more local markets are becoming unaffordable, though most of these markets are concentrated on the East Coast.
Freddie Mac is quick to note (as are we) that rising rates are offset by rising income. Fortunately, incomes are taking flight in many sectors of the economy. As long as incomes continue to rise, and as long as job growth continues to gain momentum, the impact of rising rates on the real estate market will be muted.
Low household debt is another mitigating factor to rising rates. After the 2008-2009 recession, many households reduced their debt. Average household debt is currently at a multi-year low. This means many households are in a position to support more debt and a higher monthly payment for big-ticket items like a house.
To be sure, mortgage rates are on the rise, but this shouldn't be feared as long as the trend in the mitigating factors – income growth and job growth, in particular – continue to trend in the right direction.
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