17 December 2010

Swift Rise in Yields Pushes Up Mortgage Rates

The average 30-year fixed-rate mortgage hit a six-month high of 5.09% on Thursday, according to a survey by data tracker HSH Associates. A separate survey by Freddie Mac showed rates averaged 4.83% for the week ending Thursday, up from a record low 4.17% just one month ago.
"I've been doing this 15 years, and I've never seen rates rise this fast," said Wade Douroux, president and CEO of Resource Financial Services, a mortgage banking firm in Columbia, S.C.
Rising mortgage rates are one immediate consequence of the unusually large jump in Treasury yields in recent weeks. The yield on the 10-year note, which directly affects mortgage rates, closed Thursday at 3.473%, up from its October low of 2.382%.
The jump in Treasury yields, one of the swiftest in decades, has caught economists, investors and borrowers off guard.
Rising Treasury rates have roiled other markets, too. Yields on municipal bonds have also risen, increasing borrowing costs for state and local governments and punishing muni bondholders.
"By itself, it's not devastating," said Thomas Lawler, an independent housing economist in Leesburg, Va. "But if you don't see improvement in the jobs market, this is bad."
Many see rates moving higher still. And the Freddie Mac survey in particular probably understates the recent rise because it takes an average over the week. Much of the gain has happened in the past couple of days.The 0.66 percentage-point-rise in mortgage rates, which would add about $150 to monthly payments on a $400,000 mortgage, could be easily absorbed by some buyers. But it will squeeze others at the margins, especially first-time buyers already grappling with higher fees and bigger down payments required by lenders.
Even with rates hovering at historically low levels, any rise is likely to weaken housing demand, putting more pressure on sellers to cut their asking prices. And it has already slammed the door on a refinancing boomlet that began earlier this year when rates were lower.
Even with historically low rates, buyer demand has been weak ever since home-buyer tax credits expired in May.
A general rule of thumb holds that every one-percentage-point increase in rates effectively raises home prices for buyers by roughly 10%.
Christine Collins applied last month to refinance the 30-year mortgage, which has a 5.5% fixed rate, on her West Hartford, Conn., home when rates were hovering at 4.25%.
Even though she has paid hundreds of dollars for an appraisal, she's decided it no longer makes sense to refinance with rates nearing 4.9%.
"You're watching the rates thinking, 'We really should do that,"' said Ms. Collins, 39. "But the kids start school, you're busy, and by the time you get around to it, you miss the boat."
For full article, visit the Wall Street Journal Online

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