If you are a believer in the proverb “what goes up must come down” then last week doesn’t hurt so bad.
Home Loan Rates
Mortgage rates suffered the biggest increase in one week since the presidential election in November 2016. Interest rates rose by +.25% last week.
It seems obvious that as the cost of borrowing increases affordability of homes worsens. But how much? For every 1% increase to interest rates purchasing power decreases by 12% for homebuyers.
Therefore, homes got 3% more expensive in five short days.
The good news and bad news is that average hourly wages are increasing in the US. Over the past year American workers have seen their pay increase by 2.9%. That is good news because it allows households to afford higher mortgage payments but bad news because it helps contribute to higher interest rates via wage-based inflation.
Why are rates rising?
One of the primary reasons why we’re seeing mortgage rates rise is because the Fed is no longer supporting them. I explained this concept back in February (HERE). For years the Fed had been purchasing mortgage-backed securities via quantitative easing. Instead of stopping the support immediately they gradually tapered their activity.
As recently as September they had been reinvesting some of their capital into the mortgage-backed securities market. Starting on October 1st that activity has ceased and as a result interest rates have risen in order to attract capital from other places.
The week ahead
The economic calendar is relatively light this week. There are three Fed officials speaking today. Tomorrow we’ll see the producer price index and on Thursday we’ll get the consumer price index. Since mortgage rates increased so sharply last week I am going to recommend floating this week in the hopes that what goes up must come down.
Current Outlook: floating bias