At This Rate...

Many of you who were finally off the fence to consider a mortgage refinance or a potential home purchase have encountered some pretty startling news when shopping for interest rate quotes. Since late June, mortgage interest rates have been gradually increasing, and for this most recent week and a half, the jumps in rate have been quite dramatic. 

The cause of this negative volatility in interest rates can be directly traced to the increase in yields in both the treasury bond and mortgage securities markets. For the past few years, the Federal Reserve has been purchasing either/both mortgage backed securities or US Treasury bonds in order to keep overall interest rates at lows. The reason the Fed did this was to keep borrowing costs lower for banks and for mortgage loan borrowers, thereby freeing up capital to be used throughout the rest of the economy. These programs have been largely successful in that intended purpose. However, since early summer 2013, the Fed announced that it would begin "tapering" these bond purchases, which then triggered other bond owners to begin selling their holdings and thereby increasing those attendant interest rates. Since that initial announcement, bond investors have been speculating whether or not the Fed will actually follow through on it's tapering all throughout the summer months, causing interest rates to ebb and flow. Bond investors have largely concluded that the Fed will begin the tapering in September because economic indicators have been fairly positive, thereby negating the need for the Fed to remain involved in bond purchases. 

The unfortunate result of all this is the increase in both interest rates and in overall borrowing costs, which have their own negative impacts on the housing sector in particular, and on the economy in general. The more it costs borrowers to finance home purchases, the less they'll have to spend in other areas in the economy and the more likely it is they'll rethink a home purchase at all. We'll have to see how much of an impact these higher borrower costs will have and what actions the Fed takes to mitigate any meaningful downturn, if they choose to act at all...