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The stock market has continued to push upward to new highs, with the Dow Jones Industrials (^DJI 0.56%) earlier this week setting a new record high for the sixth time in 2015. Yet concerns about the sustainability of economic growth have shown up in other areas of the financial markets; in particular, an apparent near-panic in the bond arena has raised fears about whether mortgage rates will crush growth in the housing market. However, investors need to realize just how insignificant these short-term moves have been so far, maintaining a broader perspective that could include historically low mortgage rates well into the future. Let's take a closer look at what's been happening with the mortgage market and what it means for would-be homeowners and the housing industry.
Big bond-market moves have little impact on rates
The most important thing to realize about the current low-rate environment is that relatively small rate moves have huge impacts on bond prices. The iShares 20+ Year Treasury ETF (TLT 0.36%) has fallen by nearly 15% since its 2015 high in January, as long-term rates have soared above the 3% level. Yet all it took to create that 15% drop in long-term bond prices was a 0.75 percentage-point move in the 30-year Treasury bond rate.
So, what is hugely important to bond investors doesn't have nearly as big an impact on mortgage borrowers as you'd expect. First of all, 30-year mortgage rates haven't spiked by nearly that amount, rising from about 3.6% in late January to their current level of 3.85%. Rates on 15-year mortgages have risen by an even smaller amount of about 0.15 percentage points. Even rates on adjustable-rate mortgages that are more closely tied to short-term rate fluctuations haven't changed much, with five-year ARMs remaining very close to their historical lows.
When you take that quarter-point increase in the 30-year rate, you'll find it doesn't affect housing affordability to any great degree. For a $250,000 mortgage loan, the higher rate results in about a $35 increase in monthly payments, to $1,172. Put another way, the amount a typical borrower could get from a lender for exactly the same monthly payment actually falls when interest rates rise, but the quarter-point boost in rates only reduces the potential loan amount by $7,500 on a $250,000 mortgage -- leaving all but the most marginal buyers able to move forward on their home purchase plans.
More importantly, even with the increases, mortgage rates remain well below levels from a year ago. In May 2014, the typical 30-year mortgage cost borrowers 4.25% in interest. That roughly 0.38 of a percentage point doesn't produce a huge monthly savings, but it nevertheless reflects the continuing impact of rates that remain near their lowest levels in decades for the housing industry. That explains a lot about why the SPDR S&P Homebuilders ETF (XHB -0.54%), which tracks the stocks of several major homebuilders, has hardly declined at all from the eight-year high it set earlier this year.
Inevitably, reports on adverse trends are overblown into potential calamities. Yet even though a longer-term rise in rates could well eventually have implications for the housing market, what we've seen so far is hardly worthy of notice -- let alone calls for immediate slowdowns for housing.
