Why the Election drove Mortgage Rates up
30 year Fixed Rate Mortgage (FRN) rates are tied to the yield on the US Treasury 10 year note (10T). The spread – the difference between the two rates – has averaged 1.71% since the beginning of 2013, as shown in this chart (the sharp drop at the end reflects the first couple of days after the Election):
Now let’s look at what has happened in the month since the Election – after the initial drop the spread has returned to its 4 year average:
Why was there a lag in mortgage rates?
Freddie Mac’s weekly survey is published each Thursday and reflects mortgage rates Monday-Wednesday. The Election was on Tuesday with one day’s trading in bond markets before the Freddie Mac survey was published.
Bond markets reacted immediately, with the yield on 10T jumping from 1.75% to 2.15%, and so the spread dropped sharply to just 1.42% – but that was reflecting pre-Election mortgage rates.
By the week after the Election, the spread had returned to 1.65% as mortgage rates increased, and we are now at 1.73%, very close to the average of the last 4 years.
Where are mortgage rates headed?
The answer is – follow the yield on 10T. Kiplinger’s interest rate forecast is for the yield to reach 2.7% by the end of 2017 and mortgage rates to rise to 4.5%. Still cheap by historical standards but a sharp jump from the sub 4% of most of the last 4 years.
The reason for a higher yield on 10T is the expectation of higher than previously forecast economic growth and inflation, both of which should be good for real estate markets.
No doubt some buyers who were pre-approved for loans before the Election are suffering sticker shock, but it is important to remember that the reason for such low interest rates in the last few years has been the need to try to stimulate the economy through lower interest rates in the absence of fiscal policy initiatives from a fractious and fractured Congress.
We will see if the Republican control of Congress and the White House will indeed lead to the passage of legislation that increases economic growth – but that is what markets are telling us will happen.
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Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty. Each Office Is Independently Owned and Operated