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.