Interest rates rise substantially

Mortgage interest rates for buying a home on the Palos Verdes Peninsula rose significantly this week. The following are excerpts from the newsletter on interest rates published by HSH Associates :

” It’s certainly hard to ignore the noise surrounding the biggest spike in mortgage rates since November 2013, let alone that the run up puts 30-year fixed-rates at more than seven year highs.

No one should be surprised that interest rates are rising, even though the speed or size of the move may have caught some off guard. Economic growth has been very strong for a while now, job growth continues apace, inflation has made its way back to the Fed’s desired levels, and the Fed itself is not only continuing on a path of raising rates and trimming its balance sheet but is no longer providing the kind of forward guidance it had been for years.

Interest rates moved higher because things are economically good; this week, concerns that ever-higher rates might diminish this economic goodness took its toll on stocks for a time, with multiple selloffs trimming more than 1,200 points off of the Dow Jones Industrial Average. Investors selling these relatively riskier holdings had cash in hand that needed to be put somewhere; the newly-higher yields on bonds looked attractive enough to pull in some of that cash, and this in turn chopped the top off of the rate spike. The yield on the 10-year Treasury peaked this week at an intraday value of 3.256%; by late Friday, it had shrank back to 3.158%.

Fixed mortgage rates do follow the yield on the 10-year Treasury, but it’s not exactly always a one-for-one move. The spread between the two often hovers around 160 basis points or so, but can certainly be more or less, depending upon investor demand for Treasuries relative to investor demand for Mortgage Backed Securities (MBS) and other forms of mortgage-related debt. As such, mortgage rates may move less (or more) than the Treasury note.

Mortgage rates around the 5% mark are still historically favorable, but this perspective is really little more than a conversation piece for older homeowners to kick around the backyard firepit. What matters now is the perspective of potential homebuyers. It’s unlikely that an 18-year old in high school back in 2008 cared much about mortgage rates, but a 28-year old wannabe homebuyer certainly cares now, and it may feel a little as though mortgage rates are the highest they can remember.

We won’t know for a couple of weeks if this week’s stock market rout and interest rate spike have affected consumer moods. However, the preliminary October University of Michigan survey of Consumer Sentiment did see as modest decline. The early review showed a 1.5-point decline in the overall indicator, which eased to a value of 99.0 so far this month; present conditions were judged slightly less favorably than they had been, with a 0.8-point decline to 114.4, and expectations for the future also dimmed just a bit shedding 1.4 points to slip to 89.1 so far this month.

Financial markets remain quite volatile and so even a short-term forecast for rates in the coming days must contain more than the usual level of caution. That said, the bulk of the spike in underlying rates took place more than a week ago now, was interrupted by a Monday market holiday but since then has been flagging, if in an ebb and flow pattern. We’re unlikely to quickly or easily return to start-of-October yields for the 10-year TCM, but do look to be starting next week at levels measurably below the recent peak. A busier week of data is on tap, including retail sales and some housing indicators, but it’s a fair bet that markets will be focused on the minutes from the last FOMC meeting, due out on Wednesday.

Based upon how financial markets closed this week, and with a grain or two of salt, we think there’s a good chance we’ll see perhaps a 5 basis point or so decline in the conforming 30-year FRM reported by Freddie Mac next Thursday.”

The following are interest rate quotes from John Alvin of American California Financial: