3 ways the coming rate hikes can sink the housing market

Julie C. Nichols General

HousingWire – Trey Garrison

With few exceptions most are projecting interest rates will be edging up over the next 12 months, as the Federal Reserve tapers off its four-year-plus policy of printing $1 trillion a year to buy MBS and Treasurys. The Mortgage Bankers Association is projecting interest rates on the 10-year Treasury yield to go from 3.0% in the first quarter of 2014 to 3.3% by fourth quarter of 2014, averaging 3.2% for the year, and then creeping up to 3.5% by the last two quarters of 2015, averaging 3.4% for 2015.

Mike Fratantoni, chief economist for MBA, said he expects the Fed will taper down its quantitative easing entirely later this year. So how will that affect mortgage applications and refis? Historically, fixed 30-year mortgage rates run about 125 bps above Treasurys, meaning a 3.75% interest rate results in mortgage rates topping 5%. "To the extent the Fed can clearly communicate what their path is and begin to raise short term rates very slowly," Fratantoni said, meaning the housing market will be able to adjust gradually. "As we saw in May of last year if their communication catches markets by surprise, we could see rapid jump."

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