Mortgage Rates Slowly Increasing

The Fed is Expected to "Taper" Asset Purchases Starting Next Week

The Federal Open Market Committee (FOMC) meets next week, and expectations are they will announce tapering of asset purchases. From BofA analysts today:

The upcoming FOMC meeting will be important for three reasons: 1) the announcement of tapering; 2) guidance around what tapering means for the path of hikes; and 3) nuanced changes in views around inflation risks given recent data.

The Fed’s asset purchase program was intended to flatten the yield curve to stimulate the economy. Research has shown that interest rates are impacted by the stock of assets the Fed holds, not the flow (so tapering will not push rates up quickly). The Fed will have to reduce their balance sheet to increase rates.

Mortgage rates (and Treasury yields) will mostly be determined by the strength of the US economy. And a strong economy will be positive for housing - so that will work as a counter balance to higher rates.

With the ten year yield 1.57%, and based on an historical relationship, 30-year rates should currently be around 3.5%. Mortgage News Daily reports that the most prevalent 30 year fixed rate is now at 3.22% for top tier scenarios (up from 3.13% a month ago). So mortgage rates are a little lower than expected based on the ten year yield.

The graph shows the relationship between the monthly 10 year Treasury Yield and 30 year mortgage rates from the Freddie Mac survey.

Currently the 10 year Treasury yield is at 1.57%, and 30 year mortgage rates were at 3.14% according to the Freddie Mac survey last week.

The record low in the Freddie Mac survey was 2.65% in the week ending January 7, 2021 (Survey started in 1971).

Freddie Mac has a similar graph here with a linear fit (using data since 1990).   Using their formula, 30 year rates would also be around 3.41%.

If the ten year yield rises to 2.0%, 30 year mortgage rates will probably increase to around 3.8% (still historically very low). This increase in rates will slow refinance activity, but probably have little impact on purchase activity.

Finally, here is a graph from Mortgage News Daily (MND) showing 30 year fixed rates from three sources (MND, MBA, Freddie Mac) since 1971. Mortgage rates are just above the all time record low.

If you go to MND and you can adjust the graph for different time periods.

Many analysts expect rates to increase further as the economy picks up speed. However, as has been the case throughout the pandemic, the economy is dependent on the spread of COVID.