Daily mortgage rates news provides you with current information on the real estate and mortgage market.  Today’s article looks at the prospect of higher mortgage rates due to the increase 10 Year Treasury Yield

The correlation between the 10 year treasury yield and the 30 year fixed mortgage rate is undeniable.  Since Freddie Mac started documenting average mortgage rates back in 1971, the relationship between the 10 year treasury yield and mortgage rates is almost exact.  When yields increase so do rates; when yields decrease rates follow suit.  If this is the case then why has the 10 year treasury yield been uptrending since January but mortgage rates have been in a steady downtrend?  Government interaction!

Investor Glossary defines the 10 year treasury yield as

A 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. A 10-year Treasury Note is issued with a defined rate of interest, or coupon rate (for example 5% of the note’s face value). Every year, holders of the 10-year Treasury Note receive the coupon rate from the Treasury. After ten years, the 10-year Treasury Note matures and the owner is paid the face value. The percentage of that total payment that exceeds the 10-year Treasury Note’s market price, annualized, is called the yield. When the current market price for the 10-year Treasury note rises, the yield for the 10-year Treasury Note falls, and vise versa.

When the yield starts to increase, it is often a sign that the economy is getting better as investors are willing to put money back into the United States.  We are at a very unusual time in that the housing market remains in terrible condition and yields are rising.  The President and Federal Reserve Chairman were hoping to help the housing market by creating very low mortgage rates that would spark the interest of new home buyers.  Well, it looks like that is not going to be the case as yields are going to pull mortgage rates back to reality.

It will be very interesting to see what comes out of this situation.  Either the yield increasing is a prediction that the economy is going to get better and home prices will eventually increase due to the increase in investments and consumer spending or much worse will happen.  If mortgage rates head higher, the economy does not get better and home prices continue to slide, we could see a VERY long recession.  Every American has already felt the effects of the recession so far and it could get much worse.

Imagine home prices sliding even further and the amount of defaults continuing to rise.  This could definitely happen if mortgage rates get to 6% or higher.  The only reason there has been even remote interest in the real estate market over the last half year is because mortgage rates have been close to or under 5%.  Unfortunately, most of the interest that has come from mortgage rates being so low is in the form of refinancing.  What the housing market and economy needs is for NEW home buyers to come into the market and take some of the excess supply out.

New housing supply remains over 10 months which is well above the norm.  To see a stabilization in home prices new housing supply needs to get under six or seven months which doesn’t look like it is going to happen any time in the near future; especially if mortgage rates are on the rise.  To make matters even worse, the amount of defaults is continuing to rise as we are starting to see the second wave of resets.  Expect to see many Alt-A and other exotic mortgages reset in the next year which will be a HUGE problem for many home owners.

Overall, it looks like an increase in mortgage rates is inevitable.  This does not mean that you will not be able to get a very low mortgage rate.  As many of my friends like to tell me, if I could get that low of a mortgage rate when I was your age, I would have been estatic.  We have to realize that even if mortgage rates do add a half of a percentage point, they will still be at some of the lowest levels in the history of the housing market.  If you have been debating getting a refinance, I would strongly urge you to do it now before mortgage rates follow the 10 year treasury yield higher.

In other economic news, it looks like the restaurant industry is started to see a light at the end of the tunnel.  There is still contraction in the overall industry, but much less than over the past year.  Since the beginning of the year, that contraction is slowly working its way towards expansion.  Sadly, I think part of this is the psychology that things are getting better because the stock market has increased and our President keeps telling us he thinks the economy is showing glimmers of hope.  It will be interesting to see if there is heavier contraction after mortgage rates start rising again coupled with the decline in home values.

• Interest Rate Predictions Indicate Higher Mortgage Rate
• Mortgage Rate Trends Reverse Quickly; Rates Headed Higher
• Low Mortgage Rates Not Helping as Home Prices Slide In March

We all know that many banks and mortgage lenders are in horrible financial condition.  Now the government is forced them to lend at extremely low rates which is pushing people through their doors.  The problem is that many of these lenders are not ready for the influx of mortgage applications.  I honestly feel that we will start to see mortgage rates go higher due to the fact that lenders cannot keep up with the applications.

Not only are lenders struggling to go through all the applications, they are also struggling to fund many of these mortgage loans.  Almost every financially sound home owner in America has a desire to refinance at these low rates.  If only 1/5 of America does go through the mortgage application process, lenders are going to find it VERY difficult to fund these mortgage loans.  The only way to solve this issue is for lenders to turn away borrowers who are not elite.  If there is a second thought by the lender, it is likely the borrower will not get financed.

The next few months should be extremely interesting in the housing market, but I still do not see a bottom any time soon as the unemployment rate and new housing supply continue to rise.

As I have stated several times in the last few weeks, the housing market WILL NOT get any better until housing supply equals demand.  The only way that housing supply will equal demand is if Americans have the money to buy new homes.  With the unemployment rate over 9% in many states, this is definitely not the case.  What is even more disturbing is the fact that 78.5% of last weeks mortgage applications were for refinancing.  From personal experience I know only the most elite borrowers in America are getting a rate under 5%.

There is absolutely no way that you will be considered for a rate under 5% unless you have a credit score over 800 and you have 20% or more equity in your home.  If your home has declined in value over the last three years it is highly likely that you do NOT have 20% equity.  Unless you have paid double mortgage payments of have lived in the home for over 8 years, it is very difficult for anyone to have 20% equity in their home in the current housing market.

Now that you realize these are the facts, what does it matter if applications are soaring?  Many of those applications are the same individuals who attempted to refinance earlier this year.  I would also guess that there is a large number of home owners who currently have SEVERAL applications pending.  If you know mortgage rates are at historic lows, why wouldn’t you apply to a few different lenders?

Sadly, the media continues to fill Americans with what they want to hear; taking the lead from our President.  Claiming that refinanings have never been higher and the dollar remains strong could not be further from the truth.  It is quite possible that refinance APPLICATIONS have never been higher, but who is actually getting through the appraisal process?  If you are in any major metropolitan city, your home has lost value.  There are no housing markets that are immune to this disease of which the only cure is jobs.

It will be very interesting to see what the job data released on Friday, March 27 shows us.  If we see further increases in the unemployment, it is likely that housing supply will not fall.  We did see a drop from 14.6 months supply in January to 12.o in February, but this is still excessive and the uptrend has not been broken.  To put this number into prespective, in Febuary of 2004 there were 3.7 months supply compared to the current 12.0.  While it is highly unlikely we will get to that point anytime in the next 10 years, we still need to see months housing supply under 9 months to gain any footing in this struggling ecomony.

Please do not believe everything the media tells you.  The current administration is doing everything possible to place blame on others.  Ultimately, President Obama needs to continue to work on creating jobs.  I give him all the create in the world for acknowledging that job stabilization and subsequent growth is needed.  Well, President Obama, please work on this issue instead of going on ESPN to create a NCAA Tournament Bracket and the Leno Show to talk about your bowling adventures.  We have bigger problems.

• Savings, NOT Credit, is the Lifeblood of a Healthy Economy President Obama
• Obama Mortgage Bailout Plan – 64% of Americans Feel it is Unfair
• Americans Against the Obama Mortgage & Housing Bailout

It is easy to see why the unemployment rate often determines the strengh of the stock market and the overall economy.  We will use the company Subprime Blogger as an example.  If Subprime Blogger has done very well financially over the last year, they are going to want to expand.  By expanding, the current workforce is going to be put under much greater stress as they will have the same amount of time to do many more jobs.  To reduce this problem, Subprime Blogger is likely to invest in more employees.

If there were 500 hours of work to be done before expansion with 10 employees, those employees were expected to do 50 hours each.  After expanding, there is now 750 hours of work but revenue is expected to rise 100%.  Is it possible to get 75 hours of quality labor out of the same 10 employees?  Yes, it is definitely possible, but their abilities will be greatly hindered because they will have less time outside of work and will be asked to do more with less.  To alleviate the workload of the current staff, Subprime Blogger will likely hire at least five new employees.  If five employees are hired, they will work the same 50 hours as the current staff and 15 employees will do 750 hours of work.

With this move, Subprime Blogger will increase revenue by 100% by only increasing their workforce by 50%.  Sounds like a great deal, right?  Of course!  The company is making more money while not over extending their payroll.  If we fast forward six months and see the Subprime Blogger has in fact increased revenue by 100% one would think that the stock of the company would follow suit.  The more money a company makes, the higher the stock price, all things considered.

By looking at this example on a national scale, you realize that when MANY companies are expanding, more workers are being hired to increase productivity and ultimately revenue.  When 5000 companies increase revenue, the overall economy continues to grow and stock prices increase.  This is what happened in the 1990′s and again from 2002 through 2006.  The unemployment rate was steadily decreasing during these times as companies were looking to expand and grow their profits and revenue.

The problem with the previous situation was that many of the jobs were created in the housing and real estate markets.  Construction was booming; the economy would never faulter, right?  Unfortunately that is not the case.  The level of supply in the housing market grew over eight months of supply and the housing bubble popped.  There were way too many houses being built which caused there to be a supply/demand imbalance.

With too many houses being on the market at one time, there was a subsequent decline in housing prices.  When the economy started to turn even slightly sour and home sales started to dry up, many constrution and housing jobs were cut.  This started the downward spiral we are currently in.  When those jobs were cut, the workers that once made more than enough to make mortgage payment were now broke.  How were they going to pay a $1400 a month mortgage payment without a job?  They didn’t.

After several months of slumping home sales, job cuts continued to increase in the construction and real estate industry.  While these job cuts didn’t put a huge dent in the overall unemployment rate, it was the underpinning of the overall economy.  The value of home prices falling ultimately lead to the greatest financial crisis in the history of the United States.  The snowball effect took place when housing prices fell over 10% from the peak.  Home builders stop building homes – more job losses.  Real estate offices needed less brokers – more job losses.  Construction companies no longer needed to clear land – more job losses.  The amount of concrete, lumber and home building supplies greatly decreased – more job losses.

As you can see, the trickle down effect of falling home prices is quite drastic in the United States.  It can easily been seen that as home prices fall, unemployment rises.  Many will argue that it is almost impossible to guess when the unemployment rate will turn around and start falling again which would be a great time to invest in the stock market.  Well, that may be true, but one thing is certain.  If current housing supply remains at the highest it has ever been in the history of the United States, there is no way that the unemployment rate will fall!  Until some of the excess inventory is sold, housing prices will continue to fall which in turn will cause unemployment to rise.

When will housing prices bottom?  We are in a VERY though situation in the United States of America right now.  If individuals do not have jobs, how are they going to afford to buy up some of the excess housing inventory?  They are not!  Until home builders figure out that they cannot build another home in many areas, the value of homes are going to continue to fall.  The only way the housing market will get better is time.  As college graduates and young professionals start making money, houses will start being bought.  In time, enough educated professionals will start buying homes which will bring the months of supply back down to reasonable levels.

How low should new housing supply be before we start to see a bottom?  This is a very though question as we are in an unprecedented time in our history.  United States history shows that when current housing supply goes over 10 months, a bottom in the housing market is near.  This is not the case today as home owners are in so much trouble financially that they are defaulting on their mortgage loans consistently.  So the problem compounds itself by putting even more homes on the market!  If we see new housing supply under 8 or 9 months of supply, we are definitely headed to a road of recovery.

So until new housing supply starts to decline, the unemployment rate will continue to increase?  Exactly!  You can find the new housing supply chart here to track the current data.  I will warn you ahead of time, the chart is VERY scary when you realize just how bad things could get.  Not even the Obama Mortgage Plan can solve this problem.

• Americans Against the Obama Mortgage & Housing Bailout
• Will the Subprime Mortgage Crisis Cause Retailers to Go Out of Business?
• “Not Everybody Can Own a Home”