Interest Rates Jump

Interest rates for mortgages have moved significantly higher over the last 30 days, as investors have been spooked with fears of inflation.

We've talked about the correlation between mortgage rates and 10 year treasury yields before and that relationship is evident in the graph above.

As higher food and energy costs begin to be felt worldwide, and with Fed chair Ben Bernanke now talking about supporting the dollar against other currencies, investors are beginning to anticipate higher rates in the future. This expectation drives the value or price of fixed income securities, like 10 year treasuries, lower and their corresponding yields higher. This in turn leads to higher rates for mortgages.

High Rates Mean Less Purchasing Power

In the last 60 days, rates on 30 year fixed rate loans have increased from around 5.6% to near 6.25%. For a loan of $300,000, this means about $125 more per month, an increase of 7%.

Another way to look at this is that a payment of $1850 at 5.6% would buy you a $321,732 loan. Now that same $1850 buys only $300,000.

Is Now The Time To Buy?

Though I don't expect home prices to increase quickly anytime soon, I do think we'll see higher interest rates going forward. And as rates increase, your purchasing power decreases. So even if home prices continue to go down, higher mortgage rates may cause your monthly payment to remain the same or even increase.

So if you've been considering buying a home, now is a good time to get out and look; there are lots of houses to look at and rates are still historically low.