June 17, 2013…In keeping with the desire to keep these blogs short and sweet:
Interest rates are rising, and the buzz revolves around the Fed’s desire to “taper” its immense buying of Treasuries and mortgage-backed securities. It seems clear that we have reached the peak of the Fed’s capacity to manipulate long-term interest rates any further, and the likelihood of a significant move in rates is higher, not lower.
But the situation in mortgages is more grave. Mortgage interest rates do not track Treasury yields as closely as people like to think. For many reasons, investors require a “spread” of mortgage interest rates above the comparable Treasury yield. This is generally stated as “basis points over the 10-year Treasury”, a basis point being .01 % (100 basis points is a full percent in yield). In the past few weeks, investor skittishness over the future of Fed support for the mortgage-backed securities’ markets has caused the basic spread over Treasuries for conventional mortgage securities to spike to around 250 basis points above 10-year Treasuries versus 150 above last month.
What this means in simple arithmetic is as follows: Mortgages are rising not only because market interest rates are rising, but rising further due to investor skittishness causing a need to receive more “interest rate spread” over Treasury yields. Buyers on the fence should consider this and not wait for a return to lower interest rate levels before buying. Sellers who have been on the fence and witnessing higher prices before listing, I ask you this question, “What are you waiting for?” There is a risk that continued higher rates will reduce the borrowing capacity of many would-be buyers.