Bonds trading much lower

Interest rates were below 4% on a 30-year fixed only a month ago..whats going on now? Rates have moved up .75% in a months time due to the quantitative easing 2, improved economic indicators, and government actions that will increase our deficits.

Home buyers and folks who have hit the pause button in December will wake up on New Years day (or just after) to rates that are significantly higher than they expected. Though these rates are still very attractive in comparison to historic averages this rise in rates will either force buyers to lower their price point, put more down, or be ready to assume a higher payment for the same house.

I have folks tell me they are going to wait a little longer for values to come down further. Here is a real lesson. current list price of 400k. Buyer with 20% down on a 30 year fixed mortgage at 4% would have a principal and interest payment of 1527.73/month ($320k loan amount.)

If the same buyer waited and buys next spring when rates are at 5% (hopefully not higher) to keep their payment at the same 1527.73/month the loan amount would be $284600 which would either require an additional $35,400 more down, or buy a house listed at 355,750 (assuming the same 20% down.)

Most buyers don't have an extra $35k laying around so they would likely opt for the lower price. $355,750 would represent an 11% reduction in value. What does all this mean. It means if prices fall 11% and rates go up to 5% you just waited to get the same monthly payment. As rates go up further you can see that the payment increase will require a much larger drop in values. I am pretty sure rates will continue to rise, but I am not sure values will drop more than 10% in 2011.

Buyers should be anxiously looking to lock in a house and a rate early in 2011 to avoid the tough decisions that will come later in the year when rates track higher. I think rates have seen their lows and if you were waiting for a better rate you may have just missed out on that opportunity as I don't see many scenarios that put interest rates back where they were.

Job Report a surprise 39K

Today's job report of only 39,000 jobs created in November is way off the estimated 140,000 jobs that the market expected. This bad news is typically good for mortgage rates and we would expect rates to improve on the news. Though rates are better than they were yesterday they are not making a move lower like I would expect.

The only explanation I can come up with is that interest rates are poised to go higher no matter what news is presented. It does look like the US economy is improving little by little based on most of the economic data. This jobs report has been the only miss as of late. So I take today's big miss with little impact on rates as a sign the markets are shrugging off the figure and that would mean rates may move higher from here.

There are a lot of moving parts when it comes to interest rates, but this job report typically sets the tone for the next few weeks. I would recommend borrowers in contract to buy or refinance that haven't locked their rate be in contact with their loan originator and be ready to lock. There is a chance rates could improve slightly from here, but there is a lot of technical support to break through and I don't think that will happen...so I am recommending to my clients that they be ready to lock at the first sign of a reversal today or early next week.

Have a great weekend. Please let me know if you have any subjects you would like me to discuss in future blogs. Cheers!