The stock market has continued to push upward to new highs, with the Dow Jones Industrials (DJINDICES:^DJI) 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 (NASDAQ:TLT) 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 (NYSEMKT:XHB), 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.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.