Treasury Rates Trend Downward, but Don’t Expect Mortgage Rates to Follow

It is widely believed that the rate on the 30-year fixed rate mortgage tracks the 10-year Treasury bond. But with the latest downward trend in treasury and the mortgage rates not following the two rates may have become unhinged.

The typical homeowner with a 30 year note, lives in their home for 8 to 10 years hence why the two rates have been tied. However, when the Treasury rate falls, especially if the decline is rapid and sharp, the 30-year fixed rate mortgage seems to have trouble keeping up. The reason for its sluggishness is that investors face a greater risk of homeowners refinancing as rates plunge investors have to re-shuffle their portfolio..

Take away, if you are a buyer waiting to lock in your mortgage because you feel it will drop further. It may not be a wise decision.

This Month in Real Estate - July 2011

The U.S. housing market has shown increased stability in home sales during 2011 compared to the previous year. The trend has been an upward one since the expiration of the tax credit last summer. Home prices have softened, particularly earlier this year, due to a higher-than-normal number of distressed sales. However, both the percentage of distressed sales and the amount of time they spend on the market has decreased in recent months, a positive sign for the market moving forward. In fact, prices have steadily followed a positive monthly trend since February. Mortgage defaults have also declined lately.

While interest rates continue to break new record lows, the number of buyers who are able take advantage of these savings is restricted by tougher underwriting standards for mortgages. 40% of the banks surveyed by the Office of the Comptroller of the Currency tightened lending standards for mortgages within the past year. In his second press conference, Federal Reserve Chairman Ben Bernanke stated that a quicker foreclosure process and additional home price stabilization are key to boosting confidence in the market and bolstering a more robust recovery in the housing sector.

As the economy improves, stimulus efforts by the government and the Fed will most likely continue to wind down, which typically spurs rising interest rates to keep inflation in check. Although inflation has been the source of recent concern, the Fed appears confident it will remain in check for the near term. Meanwhile, buyers continue to benefit from historically favorable buying conditions, and sellers are encouraged by increased market stability.

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Austin Statistics: April 2011

In reviewing the month of April, it’s a mixed bag. Austin is continuing to see an upward pressure on closed sales transactions but the volume is off by 22%. There is much in the economy that gives buyers and seller’s pause, but a recent article I read on the Wall Street Journal (April 7, 2011) is something to consider. The housing industry has benefited for some time from historic lows in interest rates; I feel that consumers assume they will remain as such. Jeffery Lacker of the Federal Reserve recently stated that “inflation risks during the past six months have “picked up,” having increased “appreciably”. If the Fed has to tighten their monetary policy, interest rates may increase. If mortgage interest rates increase, buyers will lose buying power, hence putting new pressure to reduce the price of a home. We may be coming to an end of the historic low interest rate.

How Rising Interest Rates Will Impact Affordability

Buyers need to measure their decision choosing to wait until prices come down more. It is improbable that interest rates will remain this historically low, last time this low, President Eisenhower was in office. The following blog post has a chart showing what happens to your purchasing power if interest rates change by 1%.

How Rising Interest Rates Will Impact Affordability

Bond Market & Interest Rates

Added supply has been one of the main culprits behind the recent sell-off in Bonds and corresponding climb in home loan rates. So where is that supply coming from? First, all those refinances you've heard about lately are actually turned into Mortgage Backed Securities after they're closed, which adds more Bonds to the market. Plus, government spending plans have to be paid, therefore, record levels of Treasury Securities are being auctioned off these days. Although the Fed has a program to purchase some of these Mortgage Bonds, the number of new Bonds simply outweighs what the Fed is able to buy - therefore driving Bond prices lower and home loan rates higher.