Mortgage Rates Spiked Today. Will That Derail Homebuyers In An Already Hot Market?

 

Mortgage rates rose .125% today, which is a huge one-day spike that came after the Fed hinted it might soon slow bond buying they do to support lower rates. Here’s what all that means in simple terms.

– When the economy crashed in Winter 2008-2009, the Fed began buying mortgage bonds (in January 2009) to keep rates low, and they’ve been doing it since.

-A bond pays an investor a rate of return, and that rate is inversely tied to a bond’s price. If you pay less for a bond, the rate of return is higher. And if you pay more for a bond, the rate of return is lower.

– So the Fed started buying bonds to prop up bond prices, which then keeps rates low.

– They’ve tried to “taper” off their bond buying a couple times since 2009, and when they do, bond markets sell off.

– And when bond prices drop in a selloff, rates rise.

– That’s what happened today because the Fed indicated it might start tapering soon. Bond market participants think it could happen by year-end, but these folks always sell first and ask questions later.

– As a homebuyer, if you’re trying to stretch your budget to win a bidding war for a $400,000 home with 20% down, today’s rate spike adds $33 per month in interest cost (and makes your payment $23 per month higher).

– To some, this breaks budgets. To others, it’s not terrible, but it raises the question: is this the beginning of a trend toward higher rates as we enter the second half of 2021?

My friend Matt Graham is a bond and rate market analyst, and he’s got the answer for today below. More to come on this maybe-trend. Comment below or reach out directly with questions.