Mortgage Rates Fall as the Bond Market Rallies
What Real Estate Investors Should Watch for This Week
Mortgage rates are a critical input for the housing market
Mortgage rates are the lifeblood of the housing market. The Fed’s plan to help housing began when it pushed rates lower to allow people to refinance. The central bank also hoped that lowering mortgage rates would support home prices.
The government’s focus now is to draw first-time homebuyers into the market. It has announced measures to increase credit availability for first-time homebuyers. We’ll see if the changes actually affect buying patterns.
Mortgage rates rise despite a bond market rally
Mortgage rates have tended to fade the big moves in the bond market lately. When rates fall well below 1.9% on the ten-year bond, mortgage rates move lower, although very reluctantly. When rates rise to 2.3%, mortgage rates tend to rise only grudgingly. Last week, the ten-year bond yield fell by 13 basis points and mortgage rates rose by ten basis point to 3.99%.
As a general rule, mortgage rates are somewhat stabler than bond yields. When we see big outsized moves in bond markets, mortgage rates tend to lag the move. Investors interested in making directional bets on interest rates should look at the iShares 20+ Year Treasury Bond ETF (TLT).
Effect on mortgage REITs
Mortgage bankers such as Nationstar Mortgage Holdings (NSM) are in a position to perhaps wring out a good 2015 after a dismal 2014. Certainly, the MBA (Mortgage Bankers Association) indices suggest an improvement.
If mortgage rates continue to fall, you should start seeing the rate of prepayments accelerate. Lately, it’s not until rates hit 3.8% that prepays start kicking in. REITs that focus on agency mortgage-backed securities, including MFA Financial (MFA) and American Capital Agency (AGNC), will have to deal with the combination of lower rates and increased rates of prepayment if mortgage rates fall back toward their lows.
Investors interested in trading in the mortgage REIT sector through an ETF should look at the iShares Mortgage Real Estate Capped ETF (REM).
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