Why Did The Rate on A 30-Year Fixed Rate Mortgage Rise Above 5 Percent This Week?

Back in March of this year, the Fed began buying long-term U.S. Treasury securities with a two-fold objective: a) increased demand for longer-term Treasuries would produce lower yields, which would in turn cause the rates associated with 15- and 30-year fixed-rate mortgages to decline, and b) lower yields would also stem the flow of capital to the safety of government debt by souring the Treasury security milk (the government would rather have capital moving to riskier investments like stocks and corporate debt, which would be much better for the economy.)

For a while, it looked like the Fed got exactly what it wanted with regard to mortgage rates. According to the mortgage giant Freddie Mac, the average rate on a 30-year fixed-rate mortgage (FRM) was 5.47% on December 11, 2008. The average rate dropped below 5% during the winter and spring of this year, declining to 4.78% twice during April.

But now rates may be starting to trend upward. On Thursday, Freddie announced that the average 30-year FRM rate rose from 4.91% last week to 5.29% for the seven-day period that ended yesterday. But why did the average rate spike?

The average mortgage rate jumped because investors reacted positively to the not-as-bad-as-expected May employment situation report released by the Labor Department Friday. Wall Street economists were expecting non-farm payrolls to decline by 530,000 last month, but the figure for May came in at 345,000. 345K is still a lots of pink slips, but it’s the softest monthly decline since September of 2008. Investors saw this as sign that an economic recovery may be in the offing, and moved enough capital from the safety of government debt to stocks to cause bond yields to spike. As demand for bonds wanes, the yields associated with bonds rises, and as long-term bond yields rise, so do the rates on 30-year FRM's.

Here is how the yield on the benchmark 10-year Treasury Note looked over the past 16 days:

• 5 Jun 2009: 3.86%
  
  
• 4 Jun 2009: 3.72%
  
  
• 3 Jun 2009: 3.55%
  
  
• 2 Jun 2009: 3.64%
  
  
• 1 Jun 2009: 3.71%
  
  
• 29 May 2009: 3.46%
  
  
• 28 May 2009: 3.67%
  
  
• 27 May 2009: 3.69%
  
  
• 26 May 2009: 3.49%
  
  
• 22 May 2009: 3.45%
  
  
• 21 May 2009: 3.35%
  
  
• 20 May 2009: 3.20%
  
  
• 19 May 2009: 3.24%
  
  
• 18 May 2009: 3.21%
  
  
• 15 May 2009: 3.12%
  
  
• 14 May 2009: 3.11%
  
  

So if you've been sitting on the fence waiting for mortgage rates to bottom out before diving into the housing game, you may want to consider jumping in now, especially if you think more capital will move out of bonds in the coming weeks and months.

Then again, you may want to take your chances and bet that rates will head south again in the future. That's because the Fed plans to continue buying mortgage-backed securities during the rest of 2009, and long-term Treasury securities into the fall of this year, which will keep downward pressure on rates.

Moreover, the recent economic news that managed to seduce the bull out of recession-weary investors may well have been the siren song of a false dawn. During the Great Depression, there were many instances in which the economy looked like it was getting better, when in fact economic conditions were only to get worse.

Home values across much of the country probably won't improve in a significant way during 2009, so whether you choose to get a FRM now or wait a few months, you'll probably going to get a deal that'll have you smiling for a while.