Wednesday, May 27, 2009

Conforming fixed-rate mortgage yields have bottomed

10-year Treasury yields are the main drivers of fixed rate mortgage yields, and they have risen enough now to have marked a bottom in conforming fixed-rate mortgage yields. The spread between the red and blue lines on this chart reached an historical low of 68 bps the other day, and that was the limit to how far the spread could compress. It's now back out to 78 bps as 10-year Treasury yields continue their rise that began early this year. The low in 30-year fixed-rate conforming loan rates was thus 4.7%, and it occurred in early April. According to BanxQuote, rates are already up to 5% in some areas, and they will likely rise further.

While the rise in rates may be disappointing to some, it is still the case that rates are incredibly low from an historical perspective. Plus, jumbo rates are likely to hold steady or even decline a bit, since the spread between conforming and jumbo rates is still unusually large. So this is not bad news for the housing market at all.

Indeed, I would argue that this is very good news. The extreme low level of 10-year Treasury yields at the end of last year was the market's way of saying that the outlook for the economy was desperately awful. Now that the economy is beginning to recovery, yields need to rise to reflect the economy's improved growth potential (and perhaps also the increased risk of higher inflation). Higher yields are actually good for households in aggregate, since households have more floating rate assets (e.g., bank CDs) than floating rate debt (e.g., ARMs). And anyone who refinanced into an extremely low fixed rate mortgage in the past several months has now locked in a rate that might never be seen again.

My good friend Russell Redenbaugh reminds me that rising mortgage rates should be good for housing, because it will force people off the fence who have been waiting for signs of a bottom in housing. Buy and borrow now, before prices and rates go higher; that's what we all learn to do in times of rising inflation.

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