Wednesday, April 12, 2006

5.00 + 1.40 + .25 + .90

With real estate sales transactions slowing down, you hear many Realtors and real estate bulls explaining the slowdown as a return to “normal” market conditions. This got me thinking, what if interest rates returned to normal? More specifically, where would mortgage rates be if the yield curve, which is currently flat, returned to its normal slope?

As it stands now, with the flat yield curve, mortgage rates are about 6.40%, or about 140 basis points higher than the yield on the 10 year treasury of about 5.00%. If the Fed raises short term rates only one more time to 5.0%, which it is expected to, then there is a strong possibility the market would push the 10 year rate to about 5.10% assuming the yield curve remained flat. However, if the slope of the yield curve returns to “normal”, then over the course of the next 6 to 12 months, we should see the 10 year treasury yield widen by about 90 basis points to short term rates, which is the average spread between the 2 and the10 year bond over the past 20 years. At that point, the 10 year rate would approximate 6.0% and assuming the spread between mortgage rates and 10 year yields was constant at 140 basis points, mortgage rates would then be about 7.4%.


Anonymous Anonymous said...

if mortgage rates do return to normal rates and at 40 year lows they should only be heading one way. how fast will prices drop? can you graph historic price vs. historic rates? to give us an idea. and of course how much will prices drop? it would be nice for mls examples (price) can grim help?

Thursday, April 13, 2006 2:19:00 PM  
Blogger Coyote said...

If mortgage rated went to 7.4% for a 30 year fixed then many ARMs would hit 9% and even 10% based on their terms. With no or very little down and a market that will depreciate with higher rates you have the perfect foreclosure

Monday, April 17, 2006 4:47:00 PM  
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