Mortgage rates staying above 5%
Interest rates have risen above 5% and are unlikely to fall again soon.
NEW YORK (CNNMoney.com) -- Mortgage rates burst past the 5% mark for a 30-year fixed-rate loan late in May, peaking at an average of 5.45% on Thursday. It was the highest level reached by mortgage rates this year, but on Friday they fell back to 5.27%.
Still, the days of sub-5% mortgage rates may be over, which could threaten to depress already stagnant housing markets. A half-point rate increase adds about $30 a month to mortgage payments for every $100,000 borrowed. That could be enough to discourage some potential homebuyers from going through with purchases.
To figure out where mortgage rates are going, you have to watch the bond market. The price of a home loan closely follows the yield on the 10-year Treasury note. And Treasurys are trying to figure what direction they are heading.
"We had an ugly Treasury market the other day, which caused a flare up in mortgage interest rates," said Keith Gumbinger of HSH Associates, a publisher of mortgage data.
The government is currently issuing a great deal of debt -- otherwise known as Treasurys or bonds -- in order to pay for all its economic-recovery programs. But there haven't been as many buyers at recent auctions, which drove the yield on the 10-year note higher to 3.7% last week. It had stayed below 3% most of the year until late April, when the rate broke through the 3% barrier.
When supplies of Treasury bills increase - or demand for them falls - yields rise and price falls to draw in more buyers. "The demand for Treasurys won't grow [this year] as rapidly as the supply. Mortgage rates will take a direct hit. You can kiss 5% goodbye," said Stuart Hoffman, chief economist for PNC Financial Services, the nation's fifth-largest bank.
The Federal Reserve has stated that it will prop up Treasury prices -- and tamp down yields -- by purchasing more longer-term Treasury securities over the next six months. It has committed up to $300 billion for that purpose.
But that still might be enough to keep mortgage rates from rising, according to Mark Zandi, chief economist for Moody's Economy.com. He said the Fed may need to spend closer to a trillion dollars to meet its goal.
Mortgage interest rates have been at historical lows all year, never surpassing an average of 5.25% (with 0.8 origination points and fee) before this week. But home sales have lagged despite these low rates, even with home prices at their most affordable levels in many years and a first-time homebuyers tax credit that, effectively, lowers purchase prices by up to $8,000.
Of course, the possibility of rising interest rates could convince people to buy, according to Tom Kunz, CEO of real estate agency franchiser Century 21.
"There's a segment of the market saying, 'Prices are still falling. I'll wait for the bottom,'" he said. "These people will probably miss the bottom. Even if they could save $15,000 or $20,000 on the purchase price, the savings could be wiped out by the rise in interest rates."
HSH Associate's Gumbinger argues that rates should plateau for a while, and that while they have risen, they are still very attractive - even if it doesn't feel that way to homebuyers trying to lock rates right now.
"We're coming out of emergency levels that we've been in so long they feel normal," he said. "Whether interest rates will remain at 50-year lows remains to be seen. But even if they don't, rates will still be favorable, just not as favorable."