The days of ultra-cheap mortgages may be ending, but economists say that’s unlikely to slow the housing market – and indeed reflects growing confidence that the recovery is real. Last week, the national average rate for a 30-year fixed mortgage jumped to 3.81 percent, mortgage giant Freddie Mac said in a news release. That’s the highest it has been in a year, and almost half a percentage point higher than the average of 3.35 percent at the beginning of May.
The uptick needs to be kept in perspective, Freddie Mac cautioned. Loan rates are still historically low, making homes more affordable and boosting sales and construction. Economists, mortgage brokers and real estate professionals interviewed by The Bee said they agreed with that assessment. Incremental increases are unlikely to derail the market recovery, which is being fueled by a thin supply of homes for sale and growing demand from buyers. Even during last decade’s housing boom, rates were around 6 percent, experts noted. They may be heading that way again in a few years.
Last week’s bump in mortgage rates happened after the Federal Reserve Board gave signs it was contemplating scaling back its economic stimulus measures sooner than expected based on improving job figures and rising home prices. The Fed has been aggressively buying up mortgage-backed securities and U.S. Treasury bonds as a way to boost housing and lower mortgage rates. During the downturn, skittish investors also snapped up U.S. Treasury bonds, despite meager returns, as one of the safest places in the world to park their money. Demand for those Treasury bonds drove up prices, which inversely drove down yields, the amount of interest paid to investors who buy the debt instruments.
Interest rates on Treasury bonds set the tone for the rest of the market, including mortgages. Thirty-year mortgage rates are typically 1 1/2 to two percentage points higher than the Treasury bond yield, according to Frank Nothaft, Freddie Mac’s chief economist. That’s why the rate on a 30-year fixed mortgage dropped to about 3.5 percent when Treasury yields dropped to 2 percent. Now the stock market is improving and demand for Treasuries is going down. Yields are going up. So are interest rates. If the Fed stops buying, yields and interest rates will rise even more.
Economist Chris Thornberg, head of Beacon Economics in Los Angeles, said homes are still relatively affordable at current prices and rates. He thinks interest rates will go up incrementally for the next year or two – rising with Treasury yields as investors stop fearing a double-dip recession and leave the safety of government bonds. But he doesn’t think rates will rise to a point where they undermine affordability.
“If you wanted interest rates to go to a point at which you would wipe out affordability in the market, you’d have to see rates get up to 8 percent,” he said.
Jeffrey Michael, head of the business forecasting center at University of the Pacific in Stockton, said rates haven’t been the main driver of the recovery – supply and demand have – so moderate increases shouldn’t have a major impact. But Michael said rising rates could eventually check rising home values. Many Sacramento households have experienced double-digit price appreciation in the past year.
“The increase in rates has been rapid,” Michael said, “and if they continue to rise, mortgage rates are one of the factors that should cause the pace of appreciation to slow down over the next year or two.”