Mortgage Rates Appear Set to Increase

The spring selling season has so far been very robust and has surpassed many expectations. Many would-be sellers have been hesitant to list their properties amid the collective perception that the market is extremely poor. This has created a more balanced supply of properties and at the same time a new group of buyers has emerged to create relatively strong demand.

The combination of the very low interest rates, the first time buyer tax credit of $8000, and historically low prices, has created a
wave of pending home sales in south central Wisconsin.

The trend of low interest rates, however, appears to be reversing. The U.S. Treasury Department announced several months ago that they would use (some would say “print”) 1 trillion dollars to purchase US treasury bonds in an effort to keep rates low (some would say artificially low). This effort appears to have been very successful in the short term as rates have been very low so far in 2009. The problem with the feds plan is that at some point they can no longer keep propping up the bond market and they must then rely on purchases of U.S. debt by foreign governments.

Although U.S. debt is considered among the safest in the world, foreign governments may view the feds action as increasing the risk of a decreasing return on their investments in U.S. bonds. When the feds print money they dilute the value of all dollar denominated assets, including, of course, all U.S. debt obligations.

The yield on the 10 yr treasury, which is closely correlated to movements in the mortgage market, has hit a high for the year on May 7th. As you can see on the chart below, rates are still low relative to last year but that they are definitely now trending higher.
The big question is whether the higher rates will impede the current housing market recovery or if the economy is gaining enough strength to overcome the higher rates.