Barring an international crisis that sends investors scrambling to the safety of the U.S. dollar, 30-year mortgage interest rates of 4.5 percent may stick around for a while.
On June 19, 2013, the mere mention the Federal Reserve might begin to curtail its massive $85 billion monthly bond-buying programs was enough to cause a two-day temper tantrum in financial markets that sent the Dow Jones Industrial Average tumbling 560 points and caused mortgage interest rates to spike nearly 38 basis points. We estimated the spike in interest rates would cost a California median-income homeowner 5 percent of his disposable income.
According to Freddie Mac, mortgage interest rates averaged 4.46 percent in the week ending June 27, 2013, up 53 basis points, or 13.5 percent, from 3.93 a week earlier. Borrowing costs for the median income California homeowner ($60,000) buying the median priced California home (nearly $400,000) with a 30-year fixed rate mortgage were up 6.5 percent for the week and have climbed 14.5 percent since the week of May 2, 2013, when mortgage interest rates reached an interim low of 3.35 percent.
We all know the Fed’s $85 billion bond-buying program is what’s keeping mortgage interest rates at historic lows and that eventually, this program must end. Last week’s mortgage interest rate spike, however, is a testament to how vulnerable financial markets are to policy change announcements and how difficult it will be for the Fed to return mortgage interest rates to their historical norms. We doubt Chairman Bernanke will risk another market temper tantrum anytime soon.
In the near term, it appears the dust may have settled a bit as the stock and bond markets adjusted to higher interest rates. After all, 30-year mortgage interest rates remain near record lows, a long way from their 25-year historic average of 6.25 to 6.5 percent.