Why are mortgage rates rising?

As expected, the Federal Reserve (Fed) lowered its Fed Funds Rate (FF) this week by 0.25% to 2.0%.

What does this mean for mortgage rates and why are they rising?

Five charts explain the factors driving mortgage rates. In all cases the numbers are at the dates that the Fed has changed its FF over the last 4 years: 10 increases and more recently two decreases.

Fed Funds rate (FF)
The Fed Fund rate is the rate at which banks lend to each other overnight.
After increasing from 0% to 2.5% since late 2015, two recent cuts have lowered the rate to 2%.

30-year Fixed Rate Mortgage (FRM)
The FRM reached nearly 5% in late 2018 and declined to a low of 3.49% in early September, since when it has increased to 3.73%.

10-year Treasury yield (10T)
The yield on the 10T is influenced by two major factors: the outlook for the economy (expanding businesses invest creating demand for money) and geopolitical events – the US dollar and US Treasuries are seen as a safe haven during times of uncertainty.
After reaching 3.2% last November (which was the time of the peak in the FRM), the yield dropped under 1.5% in early September before recovering to 1.79%.

The spread, or difference, between FRM and FF
If there were a link between FF and FRM it would show up in this chart. In fact, the spread has dropped from 3.5% to 1.5%, demonstrating that there is no direct link between FF and FRM

The spread, or difference, between FRM and 10T
We see more consistency between FRM and 10T, where the spread has been in a much tighter range of 1.5% to 1.8%. Indeed, over the last several years the spread has been very stable averaging around 1.7%

Comment
The FF rate affects the lending rate for credit cards, auto loans, adjustable rate mortgages, all of which are impacted by banks’ Prime Rate, which moves with the FF rate. Fixed Rate Mortgages – the typical 30-year mortgage, have a longer life and their benchmark is the closest Treasury security, which is the 10T. Conventional mortgages are bundled and sold to investors, who require a risk premium – higher yield – over that offered by 10T.
As can be seen, that premium – spread – has been remarkable constant over recent years. It does fluctuate from time to time – the yield on 10T tends to move quickly at times – but in recent years has always comes back to that 1.7% level.
The reason that mortgage rates have been rising of late, therefore, is that the yield on 10T has been rising.
A simple guide to the FRM rate, therefore, is to follow the yield on 10T and add 1.7%.

Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®

Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]

Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated

Mortgage applications jump as rates rise

As so often happens, mortgage applications have jumped in the past week as rates have risen after falling for so long.

Freddie Mac’s weekly survey will be published tomorrow and the 30-year Fixed rate Mortgage will show an increase from last week. But the rates have already increased in the market and this has prompted buyers to move.

This CNBC article Mortgage demand jumps shows that demand for new purchases – as against refis – jumped 5% from the previous week and was 15% ahead of the same time last year, when rates were much higher.

In last week’s article Mortgage rates about to rise I wrote:
“The best outcome for both the US and the rest of the world would be an end to the tariff war, which would lead to renewed confidence, increased capital spending and continued economic growth. This, in turn, would increase the demand for money and lead to higher interest rates and higher mortgage rates. Higher rates would, in fact, be a positive sign for both the economy and the housing market.”
“Last week was a positive one and interest rates responded accordingly. As the 70th anniversary of the founding of the People’s Republic of China will be celebrated on October 1, it would be reasonable to expect only positive news between now and then. But the longer term issues remain to be resolved.”

The Federal Reserve is expected to cut interest rates today and I will write about that this weekend. But do remember that the Fed’s decision affects short-terms rates – credit cards, auto loans, adjustable rate mortgages, etc. – while fixed-rate mortgage rates are set by the market and priced in relation to the yield on the Us 10-year Treasury.

Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®

Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]

Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated

Mortgage Rates are about to rise

While the 30-year Fixed Rate Mortgage rate increased this week from 3.49% to 3.56%, the yield on the 10-year Treasury (10T), which tends to drive the rate on the 30-year Fixed Rate Mortgage (FRM), jumped sharply later in the week and this will likely lead to a sharper increase in the FRM reported by Freddie Mac next Thursday.

The FRM rate is a premium – or spread – to the yield on the US Government’s 10- year Treasury Note. That in turn is influenced by two major factors: the outlook for the economy (expanding businesses invest creating demand for money) and geopolitical events – the US dollar and US Treasuries are seen as a safe haven during times of uncertainty.

In general terms, the yield on 10T moves more quickly than does the FRM rate, so that when interest rates move sharply lower- often driven by geopolitical events – it takes a while before the spread returns to its normal level. But it always does.

Two weeks ago, I wrote: “Currently, the spread is 2.08%, or some 0.35% above the average of 1.73% since 2005. History suggests that either the yield on the 10T is going to rise or the FRM rate fall.” At that time the 10T yielded 1.50% and the FRM was 3.58%. By this Thursday’s date, the yield on 10T had jumped to 1.79% while the FRM was just slightly lower at 3.56% compared with 3.58%.  The spread has dropped from 2.08% to 1.77%.

Why have interest rates jumped?
In the words of HSH.com’s Market Trends, an excellent summary of the week’s economic and mortgage activity: “Reasonable economic date here in the U.S., rising optimism that some sort of trade deal between the U.S. and China will get at least worked on (if not necessarily worked out) and new or (or new and) expanded stimulus by central banks around the world are having predictable effect. While rates set by fiat (defined as a formal authorization, proposition or decree) are being cut by central banks (and the US Federal Funds rate will very probably be cut this week – AO) market interest rates are moving in the other direction.”

“Why would this be the case? Several reasons. First, perhaps the largest cause of the global economic slowdown has been the continued escalation of tariffs between the U.S. and China, which has disrupted supply chains and slowed economies that heavily depend on such trade for growth. If any sort of deal may get done, or even simply instituting delays and using softer rancor (as is the case at the moment) has seen investors shift some funds out of the safe haven of bonds and back into riskier (but potentially more profitable) equities. As such, these moves put upward pressure on yields.

Recently I wrote: “The best outcome for both the US and the rest of the world would be an end to the tariff war, which would lead to renewed confidence, increased capital spending and continued economic growth. This, in turn, would increase the demand for money and lead to higher interest rates and higher mortgage rates. Higher rates would, in fact, be a positive sign for both the economy and the housing market.”

Last week was a positive one and interest rates responded accordingly. As the 70th anniversary of the founding of the People’s Republic of China will be celebrated on October 1, it would be reasonable to expect only positive news between now and then. But the longer term issues remain to be resolved.

Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®

Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]

Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated

Mortgage rates drop to 3.5%

In last week’s Why aren’t mortgage rates even lower? I wrote: “History suggests that either the yield on the (US Treasury 10-year Note) 10T is going to rise or the (30-year Fixed rate Mortgage) FRM rate fall.”

Both occurred this week, with the yield on 10T increasing 7 basis points (0.07%) and the FRM rate dropped another 9 basis points (0.09%) to 3.49%.

In its weekly commentary Freddie Mac wrote: “Mortgage rates continued the summer swoon due to weaker economic data. While economic growth is clearly slowing due to rising manufacturing and trade headwinds, economic fundamentals are still solid for U.S. consumers. The unemployment rate is low, housing affordability is improving, homebuyer demand is rising, and home price growth is stable.”

Andrew Oliver
Market Analyst | Team Harborside | teamharborside.com
REALTOR®

Sagan Harborside Sotheby’s International Realty
One Essex Street | Marblehead, MA 01945
m 617.834.8205
www.OliverReports.com
www.TeamHarborside.com
[email protected]

Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty Affiliates LLC. Each Office Is Independently Owned and Operated