Now that the Fed has stopped buying agencies, mortgage rates have begun to climb. Please consider Mortgage Rates on 30-Year U.S. Loans Jump to 5.21%

U.S. mortgage rates jumped to the highest level in almost eight months, increasing borrowing costs for buyers and signaling a threat to the housing market’s recovery as government efforts to spur demand end.

Rates for 30-year fixed loans rose to 5.21 percent for the week ended today from 5.08 percent, mortgage finance company Freddie Mac said in a statement. That’s the highest rate since the week ended Aug. 13. The average 15-year rate was 4.52 percent, according to the McLean, Virginia-based company.

Loan rates are climbing from record lows last year as the economy shows signs of strengthening and after the Federal Reserve completed a program of buying about $1.25 trillion of securities backed by U.S. residential mortgages. Rising borrowing rates and the expiration of homebuyer tax credits this month may reduce demand for homes.

The Fed’s program of buying mortgage-backed securities, which ended last week, helped reduce rates to a record low of 4.71 percent in December. The average 30-year rate over the past decade is 6.2 percent, with a high of 8.64 percent in May 2000, Freddie Mac data show.

Mortgage Rates

Big Yellow Taxi

My friend Jeff Bell at Cobalt Mortgage writes:

“YOU DON’T KNOW WHAT YOU GOT UNTIL IT’S GONE – AND I FOUND OUT A LITTLE TOO LATE…” The words from Chicago’s hit song from the 80’s sums up the market’s sentiment on the ending of the Federal Reserve’s Mortgage Backed Security buying program. And the resulting volatility for home loan rates that has already begun.

The Fed did what they set out to do – purchasing $1.25 Trillion in Mortgage Backed Securities, and succeeding in their plan to lower home loan rates and help stabilize the housing sector. And even though they stretched out the length of the program slightly – in order to soften the impact of the end of the program – the training wheels are now off, the safety net is gone, and home loan rates have already moved higher. In fact – as the Fed will now gradually become a seller of their massive holdings of Mortgage Backed Securities – rates are very likely to continue to move higher still.

The line is from the song “Big Yellow Taxi” and was recorded in the 70’s by Joni Mitchell and later by the group “Neighborhood”.

They paved paradise
And put up a parking lot
With a pink hotel, a boutique
and a swinging hot spot
Don’t it always seem to go
That you don’t know what you’ve got
Till it’s gone
They paved paradise
And put up a parking lot

They took all the trees
And put them in a tree museum
And they charged all the people
A dollar and a half to see ’em
….

30-year mortgage rates at 4.75% are likely history. Moreover, if hawks like Kansas City Fed President Thomas Hoenig have their way, the Fed will start unloading it’s collection of $1.25 trillion in mortgages sooner rather than later.

What About Zero?

Please consider Federal Reserve Bank of Kansas City President Hoenig makes a case for raising interest rates

Tom Hoenig, president of the Federal Reserve Bank of Kansas City, in a Tuesday speech made his case for raising interest rates, advocating moving the federal funds rate from near zero closer to 1 percent.

“The risks of raising rates too soon are clear and compelling,” he said, according to a transcript of his speech, given in Santa Fe, N.M. “My comments, however, concern the risks of raising rates too late. Such risks also can be significant but all too often seem more distant and less compelling, and therefore hold great long-term danger for us all.”

When cash earns so little, Hoenig said, investors are encouraged to take on more risk, hoping to get higher returns. He’s heard anecdotal evidence from the 10th Federal Reserve District, which includes Kansas City, that suggests “operators and investors in the Midwest are buying farmland and bidding up the price.” That’s something that happened before the banking crisis of the 1980s.

For the full text of Hoenig’s speech, please see What About Zero?

Don’t expect action by the Fed with doves like Bernanke and Yellen in control. Regardless, 4.71 percent rates are likely history. Moreover, with the spread between 15-year mortgages and 30-year mortgages at .75%, the 30-year mortgage is a questionable play.

In my opinion, if you cannot afford to pay the house off in 15 years, you probably can’t afford the house. The 1-year ARM at 3.23% is a genuine sucker play, exactly of the kind that helped get us into this mess in the first place.

Mike “Mish” Shedlock
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