Knee-jerk Reaction by Home Mortgage Interest Rates

With the Fed’s announcement last week that there may be a tapering of its bond purchase program sooner than later, stock market indices reacted by dipping by a few hundred points. A stock that I had bought with careful thought also took a dive! As an aside, the minute I buy a stock (a meager 100 shares), its price will go down!

With the Fed's announcement, home mortgage interest rates jumped up. This was to be expected – interest rates had been ridiculously low at around 3.5% for over a year. According to Freddie Mac, interest rate for 30-year fixed mortgages took ‘its biggest leap in 26 years’ from 3.93 percent last week to 4.46 percent!

"Higher mortgage rates may dampen some housing market activity but the effect will be muted by the high level of buyer affordability, and home sales should remain strong,” says Frank Nothaft, Freddie Mac’s chief economist. 

I don’t see how there can be a higher level of affordability. For the same monthly payment of principal and interest, home buyers will now afford a slightly smaller home (or lower priced home). But what will happen is that home buyers who were vacillating will be galvanized into action with the fear that interest rates may go up further.

 

With all the knee-jerking that’s going on, we might as well be watching the cancan at the Moulin Rouge!