As the 10 year Treasury climbs, mortgage rates ride their back. Thirty year mortgage rates have jumped from the lows of around 4.75% to 5.57% this week. This may not seem like a large jump, and historically, current rates are still fantastic. But, the jump is having an impact on the housing market and bank profits.
Rates dropped below 5% when the Federal Reserve announced its plan to buy $1,000,000,000,000 in mortgage securities to prop up the housing market. To date, the Fed has purchased close to $507 Billion of that $1 Trillion amount. To do this, the Fed literally printed money out of thin air to purchase these bonds. Now, the bond markets are starting to wise up to the Fed’s action and the massive government deficits by requiring a higher interest rate to lure their money. This isn’t a huge jump in rates – about 1% – but this small effect is large.
For one, it means that it cuts the purchasing power of homebuyers by 10%. A family looking to buy a $250,000 home is looking at an additional $130 a month on the mortgage. In this economic environment, that is substantial. Secondly, this rise has undercut the refinance market, which was accounting for 80% of the recent mortgage activity. Most homeowners had already received a mortgage in the 5-6% range when rates dropped over the past couple years. When they dropped to 4.75%, it made sense to refi again. If the family with a $250,000 mortgage could save $130 per month, the savings outweighed the cost of refinancing by taking roughly 2 years to get past the break even mark.
This also has an impact on the banks. Many of the banks have rallied lately because they earned a great deal of revenue from writing mortgage loans. With refinances no longer making sense, this will have an impact on a sector already facing tough times.