For borrowers interested in refinancing a mortgage or purchasing a new home, now may be the time.
As the ongoing distribution of COVID-19 vaccines and the likelihood of a larger stimulus package provide a much-needed boost to the U.S. economy, mortgage rates are up and likely to rise further.
That’s because the positive outlook is already sending the 10-Treasury yield higher and mortgage rates usually move in concert with the Treasury.
The yield on the 10-year Treasury note has been at 1.37% for the past two days and climbed above 1.4% today. That’s the highest it has been since late-February 2020, before the pandemic sent the economy into a tailspin. (By early-March, the 10-year hit a record low yield of 0.38%.)
Typically, the spread between interest rates and the Treasury yield is about 1.8 percentage points, which would put rates at 3.17%.
“The recent measurable rise in the 10-year Treasury yield means that the absolute lows in mortgage rates are already past,” said Lawrence Yun, chief economist for the National Association of Realtors. “Still, the upcoming rise in mortgage rates should not be alarming, few decimal points uptick.”
What does the Fed have to say about rates?
The latest increase follows Federal Reserve Chair Jerome Powell's first day of testimony before Congress Tuesday. (He is appearing again Wednesday.)
“It’s very important to ask, 'why are rates moving up?'" said Powell in response to a question about the Treasury yield.
Adding, "If you look at why they’re moving up, it has to do with expectations of a return to more normal levels. In a way, it’s a statement of confidence on the part of the markets that we will have a robust and ultimately complete recovery.”
Powell also addressed concerns that growth could lead to inflation and cause the Fed to raise short-term borrowing rates, which would push mortgage rates up further. Powell reiterated that the Fed does not plan to significantly alter policies ensuring liquidity any time soon. He characterized the risk of inflation as “soft,” noting that prices are not rising significantly.
How is the mortgage market reacting?
However, the homebuyers and refinancers have already started to feel the effects of rising yields.
Last week, Freddie Mac’s benchmark average for a 30-year fixed-rate mortgage rose to 2.81%. Mortgage rates hit an all-time low of 2.65% on January 7 and have been steadily rising since. (Freddie Mac is set to release its latest weekly average rate tomorrow.)
While Freddie Mac’s rates are the benchmark for the mortgage industry, they represent rates for the best-qualified buyers. Money’s survey of lenders across the country shows that rates for borrowers with good, but not great, credit increased from 3.188% last Wednesday to 3.383% today.
In part as a result of rising interest rates, the volume of mortgage applications has slowed over the last two weeks, according to the Mortgage Bankers Association.
The overall number of applications decreased by around 11% last week after a 5% decrease the prior week. (Last week’s large decline also reflects a sudden 40% drop-off in mortgage applications in Texas, as the state was largely shut down due to the winter storm and power outages.)
Even though applications are down, there is still plenty of homebuyer interest in the market. While applications declined week-over-week, purchase applications were still 7% higher than the same week last year and refis were 50% higher.
While rates are rising, most experts believe rates will stay close to historic lows during the first half of the year. Whether that holds true will remain to be seen.