Bond-Market Bloodbath Likely to Hit Mortgage Rates Soon—Another Test for the Housing Market

Rates for home loans moved sideways in the most recent week, but the burgeoning bond market sell-off will likely hit mortgages in the coming weeks, setting up another test for a strained housing market.

The 30-year fixed-rate mortgage averaged 4.71% in the October 4 week, down one basis point from 4.72%, mortgage liquidity provider Freddie Mac said Thursday. That snapped a five-week stretch of gains for the benchmark product, which had recently hit its highest point since April, 2011.

The 15-year fixed-rate mortgage averaged 4.15%, also down one basis point. The 5-year Treasury-indexed hybrid adjustable-rate mortgage averaged 4.01%, up from 3.97%.

Those rates don’t include fees associated with obtaining mortgage loans.

Mortgage rates track the 10-year U.S. Treasury note but with a lag. In the days covered by Freddie’s survey, bonds were whipsawed by geo-political events. The announcement of a trade deal between the U.S., Canada and Mexico buoyed stocks and diminished interest in bonds on Monday. But by Tuesday, concerns about Italy’s fiscal problems rattled markets, sending investors back into the perceived safety of bonds.

Bond yields move in the opposite direction of prices.

For now, there’s little fresh housing data, a reprieve after a dismal stretch of reports on new-home sales, existing-home sales and new construction. But the specter of higher rates is distorting the mortgage market in unexpected ways.

On Wednesday, the Mortgage Bankers Association noted that the average interest rate on 5/1 adjustable rate mortgages had hit its highest ever, although the group has only been tracking ARMs since 2011. (“5/1” means that the mortgage carries a set interest rate for the first five years of its life, and then re-sets every one year.)

Adjustable-rate mortgages, unlike fixed-rate ones, follow the path of short-term interest rates, which are currently being nudged upward by the Federal Reserve. Some analysts think the compressed yield curve — the spread between rates demanded for longer-dated bonds versus shorter ones — is what’s making ARMs so unattractive.

In the early 2000s, ARMs were a popular strategy for getting home buyers into properties they couldn’t have otherwise afforded. But they’ve always been a smart hedging tool for buyers or re-financers in specific situations: those who know they’ll only be in the home a short period, or are likely to pay off their mortgage quickly, for example.

With such a small difference between the rate on the ultra-secure 30-year fixed-rate and ARMs, there’s been little reason for homeowners to take a chance on future interest rates. (It’s worth noting that the share of all mortgage applications that were ARMs in the most recent week ticked up a bit, possibly because the effective rate — the actual rate when points and fees are factored in — declined.)

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