The WSJ had a story about interest rates today with the following comment:
"Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
While I still have a hard time wrapping my head around 5.75% interest rates as "high" it is clear that the sub-5% rates of the last couple of months were definitely a driver of increased buying activity. What is unknown is the effects on supply. Loan modifications are based off of prevailing interest rates, people who can refinance may stay instead of short sale, etc. There is a massive pipeline (application already taken, some but not all locked) of 5% and below interest rate refinances that will simply go away if rates continue at this level. Lenders give priority to purchase deals and we have seen the climbing numbers of homes under contingent contract on the weekly inventory reports here. Many of those, especially the short sales, will not be able to continue without either a concession from the seller on price. Over the short term though rising rates put pressure on buyers with rate locks to make a decision.
I think a lot of people are holding their breath right now hoping this is just a short term issue. But investors are showing more of an appetite for risk and are shying away from treasuries and moving into corporate bonds & equities and that pressure mortgage rates. Also as rates rise the prepayment speeds on portfolios fall and investors are left with longer duration portfolios. Many will try to re-balance the portfolios duration by selling off the longer duration mortgages adding to the pressure on mortgage rates. Mortgage rates could fall if the Fed steps up some of their purchases or more bad economic news destroys investors risk appetite.
I recommend following the Mortgage Rates Blog if you would like to see what is going on in the mortgage market on a daily basis.