Mortgage Rates on the Rise?

After hitting a low of 4.43% four weeks ago, the 30-year fixed mortgage rate rose sharply to 4.74% in mid December. Following the path of yields on government bonds, mortgage rates have steadily risen since the past five weeks. Rates on 15-year loans have risen from 3.96% to 4.17% in one week. Mortgage lenders are predicting the average 30-year home loan rates to range between 4.75% and 5.25% in 2011.

The Federal Reserve’s efforts to boost the credit crunch and the economy by buying about $900 billion in Treasury bonds through next June doesn’t seem to be working because both Treasury yields and mortgage rates have been surging.

Government borrowing costs which have been rising incessantly have driven mortgage rates to their highest level in six months, challenging the still-shaky housing market and the Federal Reserve's efforts to boost the U.S. economy. The sudden rise in mortgage rates have put a lid on the refinancing boom which began at the beginning of 2010 and put billions of dollars into homeowners’ pockets.

Kevin Cavin, mortgage strategist at Sterne Agee in Chicago said that the rate increase has been so sudden and so sharp that it's almost too late for many borrowers to refinance. Home owners have been making applications for refinancing at their fastest rate since 2003. The 10-year Treasury yield is expected to continue rising in 2011 by an additional 20 basis points to reach 4.6%. In early October the rate was a low 2.38%. It had surged to 3.23% in mid-December. Bond yields and prices move in opposite directions.

Some areas of the economy seem to be slowly recovering. While factory output and consumer spending have shown some improvement lately, the housing slump continues unabated. Recent data on home sales, prices and foreclosures have been disappointing, and rising mortgage rates certainly won’t help. According to Sung Won Sohn, an economist at California State University, “housing is in the process of a double dip, and the rise in interest rates is certainly another nail in the coffin.”

The jump in mortgage costs may have made refi an unattractive prospect for more than five million borrowers, representing about $1trillion in outstanding mortgage debt. The worst part of this according to Sterne Agee is the fact that these were the most credit-worthy borrowers. According to the Mortgage Bankers Association (MBA), their index of refinancing activity fell to its lowest level in mid-December since early June. The MBA estimates that refinancing will fall to about $370 billion next year from $921 billion this year and $1.3 trillion in 2009.

Rising rates seem to have had less of an impact on home-purchase activity. New-mortgage originations rose in the first week of December, according to the MBA, and have been climbing slowly but steadily since summer. But mortgage originations are still down more than 12% from a year ago.