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Cool Mortgage Rate Calculator Paints a Grim Picture

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June 10, 2009 – Comments (0)

As I mentioned in my previous post one can usually tell where mortgage rates are headed by looking at the yield on 10-year Treasuries.  Calculated Risk had an excellent post on this subject today.  It provided a link to a cool calculator that is available on a blog called Political Calculations.  The calculator lets you plug in the yield on the 10-year and it will estimate where mortgage rates are headed using the historical correlation between the two.

The yield on the 10-year spiked to 4.0% this afternoon (it has since cooled off slightly).  I was curious what sort of mortgage rate this would translate to if the Fed was not interfering in the market so I plugged 4 into the calculator.  It spit out a 30-year fixed rate of 5.81%.  Now that's not bad by historical standards, however it's a far cry from the 4.0% that many people were looking for several months ago when the Fed embarked on its quantitative easing campaign.  No wonder mortgage refinancing activity has fallen by around 60% over the past two months and mortgage applications fore new homes fell at a 20% annualized rate in May.

Let's what the difference in payment is between a 30-year mortgage rate of 4.5%, which we saw not that long ago, to a forecast 5.8% in the near future has upon mortgage payments:

$100,000 loan: $80.06/month

$200,000 loan: $160.14/month

$300,000 loan: $240.20/month

$400,000 loan: $320.27/month

$500,000 loan: $400.34/month

You get the idea.  That's a big difference in the affordability of homes.  The higher rates go, the lower prices must go to achieve the same monthly payment.  Similarly, that's a lot of money that could have been used for discretionary spending by homeowners who refinance that's no longer there for the taking. 

That's bad news, but at least the calculator that I found is cool :).  It will be interesting to see if the Federal Reserve is interested in increasing the size of its QE program to try to combat this increase in rates or if it will even be successful in doing so if it chooses to.

Predicting Mortgage Rates and Treasury Yields

Deej

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