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Short Term Direction of Mortgage Rates Depends on Greece

Mortgage rates increased the past month, following 10 year U.S. Treasury yields higher. Mortgage rates today on 30 year conforming loans are averaging 4.18 percent. About a month ago, 30 year mortgage rates were averaging 3.85 percent. Where rates move the next week is entirely dependent on how Greece's debt talks play out.

Bond yields in the United States and across the globe have been swayed on the ups and downs in debt talks involving Greece and its creditors. The most recent news is that its creditors rejected Greece's new proposals, according to Greek Prime Minister Alexis in a Tweet.

Their proposal was rejected but counterproposals were submitted, which is why 10 year U.S. bond yields are only down 2 basis points to 2.38 percent this morning. Greece needs more aid to prevent it from defaulting on its 1.6 billion euro debt at the end of the month. Lenders so far have refused to release funds to Greece unless more reforms are done.

Grexit Would Send Bond Yields and Mortgage Rates Plummeting

If Greece defaults at the end of the month equity markets will be in a freefall. As a result, bond yields would plunge in the classic flight-to-quality we have seen before when markets tumble. Bond yields move inversely to prices of bonds so as bond prices move higher, yields move lower. 10 year bond yields would fall back below 2.00 percent and might even break through the record low of 1.67 percent set in early 2013.

30 year mortgage rates would fall back below 4.00 percent and might also fall below the record average low of 3.34 percent set in early 2013. Conventional 15 year mortgage rates that are currently averaging 3.19 percent would fall below 3.00 percent and possibly break below the record average low of 2.56 percent.

Jumbo mortgage rates on 30 year loans currently averaging 4.35 percent would fall below 4.00 percent and towards 3.75 percent. 15 year jumbo mortgage rates averaging 3.19 percent would fall back below 3.00 percent and possibly as low as 3.50 percent.

If this scenario plays out, don't expect rates to stay low for long. Investors will eventually realize a Grexit from the Euro and possibly the European Union won't have a profound impact on the U.S. economy. At that point, equity markets will start rallying, bond yields will rise, and mortgage rates will move higher.

Outside of the Greek issue, the long term trend for bond yields and mortgage rates are higher. Yields and rates were driven to record lows the past 6 years as a result of the financial crisis, Great Recession, and the FOMC lowering the fed funds rate to a record low.

Direction of Mortgage Rates is Higher by the End of 2015

Now that the economy is back on its feet, interest rates have nowhere to move but higher. The FOMC is expected to increase the fed funds rate by 25 basis points in September, which would be the first increase in almost 10 years. While mortgage rates are not directly dependent on the federal funds rate, an increase will send bond yields higher, thus sending mortgage rates higher.

The FOMC is expected to do 2 or 3 interest rate increases in 2015. The most likely scenario are for 25 basis point increases for each. That would put the fed funds rate, currently in a range of zero percent to 1/4 percent, towards 0.50 percent to 0.75 percent by the end of the year.

As a result, 30 year conforming mortgage rates and 30 year jumbo rates would be between 4.75 percent to 5.00 percent. 15 year conforming mortgage rates would head towards 4.00 percent. 15 year jumbo mortgage rates would be around 4.50 percent.
Author: Brian McKay
June 24th, 2015