The election results caused rates to JUMP UP approximately 0.50% from Tuesday 11/9 to Monday 11/14. For more information please read the update on Mortgage Rates below.
With the sudden increase in rates of .5% since last week, from 3.5% to 4%, changing mortgage rates do more to influence home affordability than changing home prices.
When rates increase by .5%, a buyer loses 5% in purchasing power.
For example, see how the payment at the 3.5% rate on a $400k loan, is roughly the same payment as the 4% loan at $380k, a loss of 5% in purchasing power for a buyer.
If you or someone you know has been thinking about about purchasing a home or refinancing but never pulled the trigger, it would be a good time to lock in a rate soon. This Saturday Tim Kelly of Highlands Mortgage and myself are hosting a homebuyer seminar at 11am at my office in Falls Church. See attachment.
Update on Rates
Remember: Weak economic news normally causes money to flow out of stocks and into bonds, helping bonds and home loan rates improve. In contrast, strong economic news normally has the opposite result. The chart below shows Mortgage Backed Securities (MBS), which are the type of bond on which home loan rates are based.
When you see these bond prices moving higher, it means home loan rates are improving – and when they are moving lower, home loan rates are getting worse.
To go one step further – a red “candle” means that MBS worsened during the date, while a green “candle” means MBS improved during the day. Depending on how dramatic the changes are on any given day, this can cause rate changes throughout the day, as well as on the rate sheets we start with each morning.
The election of Donald Trump with the Republicans controlling both houses of Congress caught the investment world by surprise. Global markets had priced in a win for Hillary Clinton. Fear and greed are the two emotions that drive trade with fear being the most powerful. CURRENT prevailing wisdom believes that through deficit spending and rolling back regulations enacted under Obama the economy will expand causing inflation to rise. Inflation, real or perceived will cause rates to rise.
The US dollar continues to gain in value as global traders assess the implications of a Trump presidency. The dollar strengthens when interest rates rise because foreign traders sell local currencies to purchase the dollar in a chase for yield. Throw in the prospects of a Fed rate hike in December and you have the dollar stronger than it’s been in over a year. The odds of a rate hike in December currently stand at 81%. The recent spike in Treasury yields makes the Fed’s decision easier.
Rates are going to remain under pressure until the market get clarity on what to expect from President Trump and a Republican controlled House and Senate. It is believed that the economy will grow causing inflation to rise. Any increase in inflation will push rates higher to compensate bondholders for the loss of purchasing power on interest payments received in the future.
What to expect and how to deal with it. There is no rational reason for the sharp rise in rates, however we are not dealing with a reasonable market. Rates will continue to spike higher until they don’t. That is not meant to be quip, however we are dealing with a market full of fear and fear causes actions that are not rational.
Chart: Fannie Mae 3.5% Mortgage Bond (Monday November 16, 2016)