Rates on the rise in November

Refinance rates started the month on an upward trend as the stock market has again topped the 10,000 point barrier. Fixed interest rates have steadily moved up from the beginning of October when they briefly flirted with the potential to drop below five percent for thirty year loan terms. Since early October, long term interest rates have been on a slow but steady ascent higher. The upward move with mortgage rates can be traced to a number of areas.

The first item that contributed to pushing long term rates higher was the rapid rise in oil prices. The month of October saw oil rise above $80 per barrel for the first time this year. This sharp increase in pricing helped renew fears over the potential long term effects higher energy prices could have on inflation. Inflation is one of the key components to moving interest rates, a perception of low level risk associated with inflation helps to keep long term rates lower, as investors are more content with their investments. Fears of higher inflation lead investors to seek higher rates, pushing up bond yields and interest rates for loans such as mortgages along the way.

The second factor that pushed up long term rates over the past thirty days has been the perception that the economy is getting healthier. The third quarter report on gross domestic product (GDP) was a shocker for the entire economy. The report highlighted positive economic growth for the first time in the past year, a signal that the economic recession is coming to a quick end and brighter days are certainly on the horizon. This report also was a key ingredient in helping to drive the stock market back above the 10,000 point level. The rise in the stock market tends to dilute the interest in the bond market, which inevitably leads to higher interest rates. The bond market moves like any normally commodity based on supply versus demand and investors pulling capital out of bonds in favor of equities leads to higher interest rates.

The last component that is driving up refinance rates is the FOMC. The Federal Reserve met again this past week and announced their would be no changes to the current monetary policy, leaving rates unchanged for the Fed Discount and Fed Funds rates. This move had no impact on interest rates, as it was all but certain the Fed would not be changing interest rates. The area of the Fed that has the impact to influence long term rates has to do with the Feds commitment in subsidizing the secondary mortgage marketplace by purchasing mortgage securities from Fannie Mae and Freddie Mac. The Fed has reiterated its position that it would like to transition this role over to a private secondary investment market. The process of the Fed pulling out of its role in helping to keep liquidity in place for mortgage bonds is certainly going to add fear into this market, which will have an immediate impact of pushing rates higher. Long term refinance rates remain very attractive as they have remained well under five and a half percent for the entire year (excluding the first two weeks of June) and have provided a great opportunity for eligible home owners to lock in financial savings and reduced interest expenses on their home loans.