Mortgage Rates: Why Homebuyers Should Listen to "Bond King" Bill Gross

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The average 30-year mortgage rate rose one basis point to 4.00% on Tuesday, which equates to a $477.42 monthly payment per $100,000 borrowed (one basis point equals one hundredth of a percentage point). A month ago, the equivalent payment was higher by $1.15.

The average 15-year mortgage rate declined one basis point to 3.15%, equating to a $697.82 monthly payment per $100,000 borrowed. A month ago, the equivalent payment was higher by $0.48.

5/1 ARM: ADJUSTABLE-RATE MORTGAGE WITH AN INITIAL FIXED 5-YEAR INTEREST RATE. DATA SOURCE: BLOOMBERG. RATES MAY INCLUDE POINTS.

Mortgage rates: Why homebuyers should listen to "Bond King" Bill Gross

If you're a potential homebuyer, you may want to have in mind the following warning from PIMCO co-founder Bill Gross, who is nicknamed the "Bond King" (the emphasis is mine):

Now, however this super strong, frequently tested downward trend line [in the 10-year Treasury bond yield] is at risk of being broken. 2.55% to 2.60% is the current "top" of this trend line, and over the past few weeks it has held and reversed lower by 15 basis points or so. BUT----------. And this is my only forecast for the 10-year in 2017. If 2.60% is broken on the upside -- if yields move higher than 2.60% -- a secular bear bond market has begun. Watch the 2.6% level. Much more important than Dow 20,000. Much more important than $60-a-barrel oil. Much more important that the Dollar/Euro parity at 1.00. It is the key to interest rate levels and perhaps stock price levels in 2017.

That paragraph, from Gross's January Investment Outlook, follows a graph for the 10-year Treasury yield that I have reproduced below. The downward trend line he refers to is shown in green:

Why is the level of the 10-year Treasury yield key for potential homebuyers? The following chart, to which I have added the 30- and 15-year mortgage rates (the green and red lines, respectively) provides the answer visually:

As you can see, these two mortgage rates are very tightly linked to the 10-year Treasury yield.

According to Bill Gross, then, if the 10-year Treasury yield breaks through 2.60% -- it closed at 2.38% on Tuesday -- we're in a secular bear market for bonds (as yields increase, bond prices fall) in which rates are headed in one direction: up. That would include mortgage rates.

While I have no idea about key levels, it seems to me more likely than not that rates will head higher in 2017 -- potential homebuyers may want to sharpen their searches and consider making the leap sooner rather than later.