Mortgage Rates Continue To Rise

On Monday this week I took note that Freddie Mac interest rates had jumped from 4.99% up to 5.08% since the Fed ended their mortgage purchase program.

Today we received word that they have jumped again from 5.08% up to 5.21%.

Yesterday the Mortgage Brokers Association announced an enormous rise in the 30 year fixed rate mortgage from 5.04% to 5.31%.

I would imagine Bernanke is watching these rates like a hawk, the eye in the sky, ready to pounce back into this market should rates continue to rise.

If mortgage rates were to rise to the 6% to 7% range, (they would already be double that without Fed intervention) it would bring the housing market to its knees.

The 30 year treasury bond auction today clocked in at 4.77%.  The 10 year bond this week crossed over the important 4% level.

Why is this important?

Treasury bond rates have a major impact on mortgage rates.  If an investor can get a guaranteed 4.77% return over 30 years lending to the government, would they be willing to lend to an American homeowner for 5.21% over 30 years?

Risk free at 4.77% vs. massive risk at 5.21%.  Which would you take?

The answer hopefully would be the 4.77%, which is why treasury rates will have to go much lower to keep mortgage rates from exploding higher, or the Fed is going to have to come back into the mortgage market.  The only way to get treasury rates lower would be to create a stock market sell-off, (scare people back into treasury bonds) or for the Fed to begin buying treasury bonds again themselves.

Chris Martensen has written another incredible article discussing the future of the treasury bond market (the most important story of this decade).  Last year he wrote the original shell game, which was probably the most important article of the year.