Good news for the economy, bad news for mortgage borrowers

June 05th, 2013

If you used a mortgage calculator three or four weeks ago to plan for a home purchase or refinancing, you will probably have to crunch the numbers again. Thirty-year mortgage rates rose by 22 basis points in the last week of May, the latest leg of a move that has seen those rates rise by 46 basis points in four weeks. What gives? Well, people are finally starting to believe in the economic recovery.

The bad side of good news

One of the more interesting aspects of the financial markets is that sometimes good news is treated like bad news. If you've been planning on refinancing or buying a house, you can probably relate to that right about now. Recent weeks have seen news on the economy get considerably brighter, but the downside for people in your situation is that this means that mortgage rates are headed higher. As of May 30, mortgage finance company Freddie Mac reported that the average 30-year rate had risen to 3.81 percent.

What's behind this rise in rates? Well, the recent surge of optimism began with an unexpectedly good employment report released at the beginning of May. The most recent catalyst was a report on home prices, which featured the biggest year-over-year increase since 2006. It also didn't hurt that on May 30, the second estimate of first quarter GDP growth confirmed what the advance estimate had indicated: that while the economy is still not roaring along at a robust rate, it has improved considerably from the near-standstill of the fourth quarter of 2012.

An improving economy means more demand for capital. That generally translates to higher interest rates, since interest rates are essentially the price of capital. Also, economic improvement would hasten the day when the Federal Reserve ceases its aggressive monetary easing, which would allow interest rates to rise to more natural levels.

Back to the mortgage calculator

So, back to those mortgage calculators. As you re-work your numbers to adjust for the rise in rates, be comforted by the fact that even those higher rates are still well below historical norms. Just don't take too long to figure out your next move, because if the good news on the economy continues, the rise in rates is likely to continue as well.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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