After Record-Lows, Mortgage Rates Are Rising

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For much of this year, banks have been offering mortgages at historically low rates — at least to those people who qualify. But in recent weeks, rates have been climbing. To find out why, Steve Inskeep talks to David Wessel, economics editor at The Wall Street Journal.

STEVE INSKEEP, host:

For much of this year, banks have been offering mortgages at historically low rates - at least to those people who qualify. But in recent weeks, rates have been climbing. And to find out why, we turn to David Wessel, as we so often do. He's economics editor of The Wall Street Journal.

David, good morning.

Mr. DAVID WESSEL (Economics Editor, The Wall Street Journal): Good morning, Steve.

INSKEEP: Why are rates rising now?

Mr. WESSEL: Well, mortgage rates on 30 year fixed rate mortgages have now moved a bit above five percent. That's up about - from about 4.3 percent just two months ago.

INSKEEP: Mm-hmm.

Mr. WESSEL: And that makes a big difference. You know, if you have a $300,000 mortgage, that adds about $100 a month. Now, the reason this is going on is because what's going on in the bond market. Mortgage rates are tied to the rates on U.S. Treasuries and investors are demanding higher rates on U.S. Treasuries for a number of reasons. The outlook's better and that tends to make credit a little more pricey.

INSKEEP: Mm-hmm.

Mr. WESSEL: The Fed is considered less likely to step up its efforts to keep Treasury rates down, and there's some worry about the federal deficit and the lack of a business plan to address it. So everything seems to be pushing in the same direction.

INSKEEP: Is it oversimplifying basically to say that the federal government is just borrowing a ton of money right now and as the economy picks up at least a little bit, there's a bit of a shortage of money so the price of money goes up?

Mr. WESSEL: Exactly.

INSKEEP: Okay. So that's the situation that's pushing rates up a little bit here. But you said just a tick over five percent. I would wager that's a lower rate than most people are paying if they've had their mortgage for several years. That's still a pretty low rate. Does it have a big effect on the housing market?

Mr. WESSEL: Well, actually, a lot of people are paying less than that now. Because if you've bought a house in the last few years, you had a lower rate than that - you might have - or a number of people who have equity in their houses have been able to refinance at lower rates. But basically this doesn't help the housing market. Any time mortgage rates go up, it makes buying a house more expensive. That makes it harder for people to buy, fewer people buy houses. It tends to push down the price, and the housing market doesn't need any help in the pushing down the price department. Home prices begin - seem to be declining again. They rose earlier after there was this tax credit to encourage home buying. That's worn off. And so it's kind of another drag on a part of the economy which really has been a big problem.

INSKEEP: I'm reminded here that a lot of the people who've gotten in the most trouble over the last several years are people with adjustable rate mortgages -rates that can float up and down in unpredictable ways. I suppose a lot of them must be bracing for a little extra payment or maybe a lot of extra payment in some cases.

Mr. WESSEL: That's right. It really depends on the exact nature of your adjustable rate mortgages. Some of the mortgages are tied to long-term Treasury rates, and those are going up. Some of them are tied, though, to very short-term rates. And for now, those are rates that the Fed are keeping very low. But the bottom line is, a lot of these rates are going to go up. It's just a question of how much they go up and which ones go up first.

INSKEEP: Hasn't the Fed been trying to keep rates as low as possible to keep the economy moving?

Mr. WESSEL: Well, that's right. The Fed has spent $600 billion to keep long-term interest rates from rising and it looks like that effort hasn't worked out very well. Their argument is, well, if we hadn't done all this, rates would be going even higher. But the fact is that this change has been surprisingly fast, and I think that's been quite difficult for some people to take.

There are people who have emailed me that I had a deal to buy a house and I thought I was going to get one mortgage rate, and now the mortgage rate's gone up a lot so my monthly payments are going to go up more. And, of course, there's a whole slew of people who are just sitting there saying, oh gosh, I wish I had been able to refinance where rates were at 4.3 percent. Now they're at five percent and I'm never going to get a chance to refinance.

INSKEEP: Well, what can we expect - a long-term increase in rates then?

Mr. WESSEL: Yes. I think the most likely direction of rates is up. It doesn't mean it'll be steady. There will be hiccups in the market, but the era of super low mortgage rates seems to be gone for a long time.

INSKEEP: David, always a pleasure to speak with you.

Mr. WESSEL: You're welcome.

INSKEEP: David Wessel is the economics editor of The Wall Street Journal and a regular guest right here on MORNING EDITION.

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