WeeklyBasis 12/4: Why Rates Are Up .625%. What Now?

Three weeks ago, this report said “perhaps it’s early to ring alarm bells when rates are still in the 4s” but here’s an update: December 3 rates were .625% higher than they were October 8, which means a borrower pays $184 more per month on a $500,000 loan. Consider the alarm bell sounded. Here’s why…

Last week Ireland was rescued from its inability to pay its debt, U.S. home prices decreased 1.5% from a year earlier to settle at 2003 levels, China’s manufacturing and inflation began to boil over, and U.S. unemployment rose to 9.8% as only 50k private sector jobs were created vs. the 140k expected.

The Irish and broader European debt crisis, reversal of home prices, and poor jobs data are all events that would normally cause rates to drop since each event causes investors to shift into safe bets like mortgage bonds—so mortgage bond prices rise and rates drop. But Chinese inflation threats and an overall sentiment that bond prices are already too high have outweighed these other factors—so mortgage bonds have been selling off steadily causing this rate spike.

As a result, rates are creeping toward the 5s. Below you’ll see 30yr fixed single family home rates for loans up to $417k are 4.625% as of Friday, and rates on loans up to $729k are 4.875%. These rates are the same on a condo loan if borrower had 25% down or more. But if they only have 20% down on a condo, add .2% to the rates.

Next week is light on economic data so the central bond market themes above will continue, and it doesn’t help that we’ll have $66b of new Treasury bond supply being auctioned into markets as follows: $32b 3yr notes Tuesday, $21b 10yr notes Wednesday, $13b 30yr notes Thursday. Oversupply can further spook bond markets.

In this unprecedented post-crisis era, we can expect lots more rate volatility, which could mean rates come down again. But anyone holding their breath for a return to low 4s may very well turn blue. The more likely scenario is that we level off into a trading range that’s +/-.25% from current levels for the next 1-2 months.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.625% (4.73% APR)
FHA 30 Year: 4.625% (4.74% APR)
5/1 ARM: 3.25% (3.37% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.5% (4.62% APR)
5/1 ARM: 3.75% (3.87% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.25% (5.37% APR)
5/1 ARM: 3.875% (4.01% APR)