Are mortgage rates rising?

(Originally published October 2010)

YES!

The Fed's second round of Quantitative Easing (QE2) has pushed mortgage rates higher in the last 3 weeks. But why? Several reasons. As investors look ahead they see little reason for mortgage rates to decrease and four possible causes for them to increase.

These causes include stronger than expected economic data which could lead to stronger economic growth. Stronger growth decreases the need for additional Fed stimulus, and it generally leads to higher inflation.

Domestic and foreign opposition to QE2 means the Fed will most likely not expand the program, meaning that the Fed will face strong resistance to an expansion of the program. Investors had viewed the $600 billion figure as a first step which would likely be increased in the future. Stronger economic growth and opposition to quantitative easing reduce the likelihood that the program will be increased and possibly could cause the program to end early.

Printing an extra $600 billion weakened the value of the dollar relative to other currencies. When foreign investors sell US securities, they must convert the US dollars they receive into their own currency. If the value of the dollar falls, then the value of their US investment falls in relative terms to their own currency. As a result, foreign investors may reduce their purchases of US securities, including mortgage-backed securities (MBS), which would cause yields to increase. This fear of weaker foreign demand hurt mortgage rates.

China also announced a rate hike which requires yields to rise in other foreign markets to remain competitive.

The good news is that current inflation levels are low and the Consumer Price Index data released mid November shows annual core inflation at a record low in October.

In conclusion, we shouldn't be surprised that mortgage rates are rising; because they've been extremely low they are positioned to increase very quickly!

Thank you to Jeffery Grossman in SunTrust Mortgage and MBSQuoteline!