For those who have been considering applying for a mortgage, the window of golden opportunity may be coming to a close. Although they remain low, mortgage rates have begun to increase and are expected to rise further later in the year. Since the pandemic hit, home buyers and homeowners have been taking advantage of record-low mortgage interest rates that have helped keep their monthly mortgage payments down. However, forever-dropping rates had to come to an end sometime and that time may be now. In order to understand what’s causing these shifts in interest rates, it’s important to understand the US bond market.
Interest rates are rising because of expectations for better economic growth, and they are expected to continue to increase, though moderately. Understanding the 10-year treasury yield is key to understanding what the economy is likely to do, since the 10-year impacts mortgages and other consumer and business loans. In February, treasury yields began to quickly rise and though a March 10th auction brought rates back down, this may be a sign of changes to come in the financial market.
A rise in interest rates generally results in a decrease in mortgage applications. In fact, this is what trends are showing early March; applications for mortgages decreased 1.3% in the past week as mortgage rates hit the highest point since last July (3.26%). However, interest in home purchasing remains high as the spring selling season approaches. The seasonally adjusted purchasing index increased 7% the first week of March. Gains are seen in both conventional and government applications. Overall activity was just 2.4 percent higher than a year ago at this time, and loan sizes moderated for the second straight week. The latter may be a sign that more first-time buyers are entering the market.
Higher interest rates also take a toll on borrowers who are less likely to refinance; the demand for mortgage refinancing is 43% lower than it was a year ago. This number is 5% lower than it was as recently as the end of February. Last year at this time mortgage rates fell dramatically as fears of the coronavirus hit financial markets causing a large spike in refinance demand.
As mortgage rates loosely follow the yield on a 10-year Treasury bond, many are watching to see what the coming weeks hold as we enter the spring buying season.
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