Fed Raises Rates

30Y, What is the impact on 10y of the rate increase?

Yesterday the yield on the ten year went down, in other words people bought treasuries., and therefore interest rates went down a bit. I heard Jeffrey Gundlach's analysis; he is the bond king and he knows his stuff. He is predicting that the yield in the next few months should go down somewhat but nevertheless he says the yield by the end of the year will probably be at 3%. A 3% yield we haven't seen for quite sometime. At 3% the interest rate on a conventional loan would be about 4.5% maybe a bit higher.

4.5% would be a full point higher last Summer and I think would represent a 13% increase in a mortgage payment on the same loan amount.

It's hard to say what exactly the rates would be. Rates vary according to FICO score and loan to value. I just checked to see what Wells Farg rates are as of today and I saw 4.375% for a conventional loan. Yet a wholesale lender called me and sent me a rate sheet that had 3.75%. And this lender doesn't charge an underwriter fee.

I agree that it's hard to tell what rates would be on any individual loan, but odds are that for any individual they are going to be a point higher than they would have been last summer. That is a significant increase. The real test is going to be what happens for the rest of this year and next year. If we see additional increases and interest rates rise 2 percent it almost has to have a significant impact on the Real Estate market.

From Quicken Loans:
" As expected, the Fed raised interest rates today in the first of three likely rate increases"

30,

What do you make of the current 30y rates being lower that late 2013. I would think most people in Manhattan do not do 30 years any way.

https://fred.stlouisfed.org/series/MORTGAGE30US

5/1 seems to be more common in Manhattan. Even that is the same level as late 21013 high despite 3 rate increases by the fed.

https://fred.stlouisfed.org/series/MORTGAGE5US

The Fed is poised to raise rates at least a few more times this year., and next year also. And that will definitely affect adjustable rates. While conforming rates from Wells Fargo are showing as of today 4.250, and that's because the yield went down a bit, the jumbo rate is only an eight of a point lower.

I do believe that the yield on the ten year may very well go lower within the next few months, but then by the end of of the year the yield will go back up. It's a good time to buy treasuries.

@300_mercer

Do you have data on this? Just curious why you think a 5/1 is more popular than a 30 yr in Manhattan?

https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci16-8.pdf
The table on page 3 shows that prime jumbo are much higher percentage adjustable.

Rates are definitely on the rise, but an important factor to consider is that the banks for example in the last hike actually absorbed most of it instead of passing it along to the consumer due to the increased competition between banks for the business. You may find this article an interesting read: https://www.elikarealestate.com/dont-necessarily-fret-fed/

A bunch of the banks didn't raise their rates, not because they were in competition with other banks, but because they had already raised them in anticipation of the announcement. rates were already up half a point over last summer without the fed announcing yet.

30, Actually, it is bit more complex that. Hopefully you will feel less scared about rates crashing housing market after reading this (perhaps you not scared in which case ignore).

1. Banks and investors need minimum return on capital. In a very low rate environment, they try to compensate for it by wider spreads over say 10 year rates or appropriate bench mark.
2. As the rates go up without the worry that economy is coming crashing down (early cycle of raising rates), they are willing to live with smaller spread as all-in rates (risk free + spread) are higher.
3. Fed increases do not necessarily impact the 10 y rates. If the fed raises too much, the curve may invert with the front-end higher than the back-end.
4. Current low 10y rates are largely driven by central bank buying globally and a lack of inflation with the former being a result of the latter. There is a good chance that low inflation is there to stay due to technological changes.
5. Housing market impact is unclear for another 100 bps increase in rates.
6. If fed only increases a 100bps from now to 2% over 1 year period and declares the fed fund rate of 2% new normal, we may see further housing boom as the market participants may believe that long dated rates are permanently lower.
7. Asset sales by the fed will increase 10y rates by 50-100 bps or so to around 3%. That will be the main driver of an increase in mortgage rates in addition to inflation rather than fed raising short-dated rates.
8. No one can predict inflation and rates more than 2 years out with a reasonable accuracy. Every one has best guesses.