Why are interest rates for home mortgages rising?

Question

They are at 6.47%, last week they were 6.14% and for a while it was even in the 5's.

Answer 1

Supply and demand.  Everyone that got hosed on an ARM before is trying to refinance now.  The surge in new refis shrinks the supply of available funds driving up the rates.

Answer 2

Fear of inflation.

As you point out in your letter, the economy is slowing down. According to government statistics for the fourth quarter of 2007, the national economy grew at its slowest pace since 2002.

We are not in a "recession" yet -- which is technically two consecutive quarters, six months, of negative economic growth -- but some economists think we are heading in that direction.

Usually, a recession is "good news" for the mortgage business because interest rates typically drop as the Federal Reserve tries to "prime the pump" to get the economy rolling again.

But this time, Fed rate cuts are not likely to help mortgage rates, because investors don't want to get locked into long-term investments (like mortgage certificates) with low interest rates in a high inflation rate environment.

The national inflation rate is now at its highest rate since the "bad old days" of the early 1980s.

The price of gold is going through the roof, which means many investors expect inflation to get worse.

That's bad news for home buyers and homeowners hoping for lower mortgage rates.

Mortgage rates made a very brief dip in January after the first Fed rate cut, but since then, mortgage rates have increased a full percentage point. For example, you could have locked in a 5.25 percent, 30-year fixed rate mortgage immediately after the first Fed rate cut. Today, you would get about a 6.25 percent, 30-year fixed rate loan for the same fees.

In fact, mortgage rates are currently higher now than they were before the first Fed rate cut in mid-January.

Normally, mortgage rates drop in a slowing economy, but because of the increasing fears of inflation, mortgage rates are likely to trend upward for the remainder of this year.

I don't usually like to make mortgage rate predictions because there are so many different financial and economic factors that affect the rates, but in this case, I would lean toward "locking in" if and when there is another dip in mortgage rates because all signs point to higher rates this year.

Answer 3

Banks are in trouble have little money to lend.  You have doubtless heard about Fannie & Freddie.  Between the two, they guarantee over $5Trillion in US mortgages.  Without a strong guarantor, limited capital, a declining economic picture, risks are very high for banks lending mortgage money.  So interest rates have to increase dramatically.

Note that as soon as the "Fannie & Freddie Show" aired on the news, interest rates began escalating sharply.