Bond Yields and Mortgage Rates are Moving Up
This week has been an eventful one for bond markets. Just before the election, ten-year yields began to increase from the 1.8 percent yield they had held somewhat consistently in the second half of October. As of yesterday’s close, ten-year yields are now over 2.2 percent.
Mortgage rates, which generally track the ten-year bond yields closely, have responded in kind. If one is looking at a daily source, such as from the Wall Street Journal or New York Times, mortgage rates were near 3.9 percent as of yesterday, up from 3.5 percent as recently as three weeks ago. Other industry publications show that the most prevalent rate has hit 4 percent. It’s too soon to know whether these increases will stick, but tightening from the Federal Open Market Committee either later in 2016 or early 2017 and anticipated infrastructure spending both tend to suggest higher rates are in the future.[2] Home shoppers will likely have to adjust to these new rates. While incomes will grow and home price growth will undoubtedly slow, neither will adjust as quickly as mortgage rates. But what will that mean for home shoppers? How Will These Moves Affect Potential Home Buyers’ Budgets? Looking at how NAR’s Affordability Index would change in a higher rate scenario gives an idea of what may be in store. At the national level, moderate home prices relative to incomes give the market space to accommodate a rate increase. The monthly payment increases by $11 per month per 10 basis point increase in the mortgage rate, and the income needed to qualify to purchase the median priced home increases by just over $500.[3] The current median income family household earns nearly 1.7 times the income needed to qualify to purchase the median priced home. If rates were to rise to 4.2 percent and prices and incomes were to stay steady, the median family income would be just less than 1.6 times the income needed to qualify to purchase the median priced home. Another group more likely to notice the interest rate increases are those who put smaller down payments. Those putting only five percent down to purchase a median-priced home will see the monthly payment increase by $13 per 10 basis point rise in the mortgage rate, and the qualifying income increases by just over $600. [1] See for example Mortgage News Daily’s tracking survey of mortgage rates: http://www.mortgagenewsdaily.com/data/30-year-mortgage-rates.aspx [2] In the summer of 2013, mortgage rates rose rapidly in response to anticipated Fed policy changes in what has come to be known as the “taper tantrum.” From May to July rates rose sharply and while they declined from September to October, they turned back up in November and December before starting a longer-lasting decline in January 2014 that has lasted (with a few hiccups in 2015) through the summer of 2016. [3] These calculations assume a 20 percent down payment. Powered by WPeMatico
Certain groups however are more likely to notice the interest rate increases. Those who live in the West, where home prices tend to be higher, will see the monthly payment increase by $16 per 10 basis point rise in the mortgage rate, and the qualifying income increases by just less than $800.
While the recent changes are notable given the steadiness in rates prior to the last few weeks, data suggest that the typical family budget will be able to handle this rate increase. If you are working with potential buyers who are near the threshold for qualifying based on their income and shopping price range, recent changes in mortgage rates may mean a new shopping strategy is required.