Economy Down Rates Go Up?

Mortgage rates see record jump
Posted Oct 16 2008, 10:24 PM by Karen Datko Rating:
Filed under: investing, housing, banking, Karen Datko
As people wait for the federal government's various bailouts and rescues to trickle down and stabilize the economy, they got more bad news: The cost of financing or refinancing a home purchase has gotten more expensive.

The average interest rate on a 30-year fixed-rate mortgage jumped to 6.74% (6.4% for a 15-year), the biggest weekly increase in 21 years, according to Bankrate.com's survey of lenders. Last week's Bankrate benchmark was 6.2%.

According to Bankrate, the new rate means the monthly payment on a $200,000 mortgage would be $1,295.87, about $70 more than it would be for a buyer who locked in a rate last week.

So we're right where we were eight weeks ago. Why is this happening? Weren't we supposed to see help for the housing market?

Part of the reason is that the price of Treasury bonds is falling, which drives interest rates up. Investors are no longer flocking to uber-safe Treasury notes as other opportunities open up. Mike Larson of Interest Rate Roundup also says that investors are dumping Treasury bonds now because the government is going to have to borrow billions of dollars to pay for its bailout commitments. Larson explains:

That means a mammoth flood of Treasury debt is going to wash over the market in the coming year or two. Bond traders know that all of that bond supply will overwhelm bond demand. So they're not sticking around. They're selling bonds NOW, driving prices down and rates up.

Time adds that Uncle Sam's decision to semi-nationalize banks has made bank debt seem even safer than the super-safe bonds of Fannie Mae and Freddie Mac, so people are selling those too.

Lower prices (and thus higher interest rates) for Fannie and Freddie bonds make it more expensive for the government mortgage guarantors to borrow, and that means that Fannie and Freddie have less money to purchase home loans. Which means a lower supply of capital available for mortgage issuers. The result is higher mortgage rates for the average American.

Of course, higher interest rates mean that fewer people can afford to buy a house or refinance a mortgage. That, in turn, hurts a housing market in need of life support. Add to that job losses and the other ills that accompany a recession, and housing values will likely continue to fall.

How high will interest rates go? Nobody really knows, although the figure most often tossed around is 7%. Some good news is that just over half of the experts on a Bankrate panel expect mortgage rates to drop down again within weeks.