Rising headlines are nothing new, but there has been a bit of a double whammy this week … or a triple whammy, depending on your point of view.
Whammy 1: Highest prices in a year
It’s March 2021, and you would have to return now by March 2020 to see higher mortgage rates. It will take the mainstream media a while to become familiar with this new reality as the most cited mortgage rate survey tends to lag behind such sharp moves.
Whammy 2: It was a bumpy ride
And that brings us to “whammy 2”. This step was surprisingly abrupt. Not only have interest rates risen faster than ever in the past two months, there have also been several false starts where it looked like interest rates were pausing to jump much higher in a single day.
Friday was one of those days. The first four days of the week were among the more hopeful and resilient we’ve seen in 2021. Yields on 10-year government bonds (a measure of the dynamics of longer-term rates like mortgages) were safely below their recent cap of 1.62% and even traded below 1.50% on Thursday.
Things changed suddenly on Friday. The complete lack of any open, short-term motivation makes this blow all the more frustrating. In other words, there weren’t any major new developments that caused the jump. It was exactly the way traders acted.
The graphic above may not look like much, but it is just a snippet of a bigger trend. And this bigger trend represents a noticeable acceleration over the previous trend of rising rates. Incidentally, this week’s rate is bringing 10-year returns back above their pre-covid bottom for the first time.
Speaking of Covid, that is ultimately why traders act this way! The 2021 acceleration is mostly about increased vaccine distribution, a sharp drop in the number of cases and the passing on of stimuli to alleviate Covid (which affects interest rates in two ways: by boosting economic activity / inflation and by adding the Government bond offer). Here’s another look at the same graph, this time focusing on the “covid effect” and then rebounding.
If it doesn’t look like mortgage rates were warned exactly as suggested on the Treasury charts, it’s because they didn’t! To be fair, we did it warn against complacency When interest rates were always at lows, it is one thing for a newsletter to point out the risks and quite another when interest rates rise half a percent in February alone.
Why did interest rates wait to get “the memo” from Treasuries? In short, the mortgage market has not been able to keep up with the broader bond market. Mortgage rates could continue to fall and stay lower as they were still caught in the movement of bonds. We have referred to this as “the pillow” several times, and here’s another look.
Whammy 3: Additional costs for investment properties and second homes
The first two whammies are bad enough (or good enough if you’re willing to view higher rates as a logical by-product of the fight against Covid). The third, fortunately, only applies to a small portion of the mortgage market, but to those with second homes or investment properties can sting a bit.
In the last days of the previous Administration, Treasury and the FHFA the conditions changed Fannie and Freddie’s rescue agreement, which limits the amount of certain types of loans that could be acquired. This week, Fannie Mae finally formalized the announcement and started contacting lenders who had too many secondary / investment loans on their books.
The result? Multiple lenders Immediately jacked up prices / fees on these loans – some of enormously Amounts (such as 5+ points or $ 20,000 on a $ 400,000 loan). Those who didn’t respond immediately are expected to follow suit in the near future, even if not all of them are as severe as the early adopters.
what does that mean to you? Simply put, if you have one unlocked Investment property or home loans 2. in progress may have just gotten a lot more expensive. However, this will not be the case for all (at least not initially). Make sure to check with your mortgage expert to find out what your options are.