Mortgage interest rates are rising. In the week ending May 30, the 30-year fixed rate mortgage clocked 3.81%, its highest level in a year, according to Freddie Mac. That’s 15% higher than the 3.31% record low set in November of 2012 and almost 14% higher than the 3.35% rate logged in the beginning of May. The 15-year fixed rate jumped as well to 2.98%.
The increase from the start of May through the month’s final week translates into an extra $20 per month for every $100,000 of debt accrued. If rates continue their upward march, mortgages will become more expensive.
Since cheap financing has been a notable driver of the housing recovery, could those rising rates derail the momentum? To answer that question, let’s first take a look at what low interest rates have done for housing and why they’re increasing now.
Compared to decades past, today’s rates (even at 3.81%) are unprecedentedly — and artificially — low. They’re the direct result of a Federal Reserve-funded fiscal stimulus plan, better known as the third round of quantitative easing or QE3, aimed at hastening the recovery in housing and the economy as a whole. Through the program the Fed has been buying $85 billion worth of Treasury bonds and mortgage-backed securities per month, a process that has tamped down interest rates, making mortgages more attractive to prospective consumers.
The low rates have enabled qualified home buyers (and owners looking to refinance) to access cheap financing, adding to already-record-high levels of home affordability. It’s helped bolster a surge in both home sales and price increases (since lower rates help make larger principals possible).
Rates are climbing now due to both stronger economic data and to speculation: recently Fed chairman Ben Bernanke suggested that the central bank may start slowing its bond buying within the next several months. The news has caused bond investors to begin selling out of their 10-year Treasury positions, driving yields for these bonds above 2%. Since mortgage rates correlate closely with Treasury yields, they have followed suit, rising about a quarter of a percentage point in just a week.
How Rising Mortgage Rates Could Affect The Housing Recovery – Forbes.