Federal Reserve Chairman Ben Bernanke hinted in a press conference yesterday that its massive $85 billion monthly bond buying program could moderate later this year and may end as early as June 2014. This tentative statement was enough to send the Dow Jones Industrial Average down 560 points the past two days, and send the dollar, yields on ten-year U.S. Treasuries and mortgage interest rates sharply higher.
Wells Fargo Mortgage reported that 30-year mortgage interest rates moved up 37.5 basis points yesterday from 4.125% to 4.5%. Given that 30-year mortgage interest rates were as low as 3.35% in November 2012, the 115 basis point move higher is having a significant impact on borrowing costs.
Here in California, where the median home price is nearly $400,000, borrowing costs (assuming a 20% down payment), have jumped more than $200 per month, or $2,400 dollars per year. If the median California income is approximately $60,000 per year, the increase amounts to more than 5% of disposable income.
Real estate markets are very sensitive to any movements in mortgage interest rates and this latest move is bound to impact those sectors of the real estate market most sensitive to interest rate movements, homebuyers, builders, and those wanting to refinance existing mortgages.
What is interesting to us is that the Federal Reserve has been hinting at its intentions to taper its bond purchasing program for over a month, so this latest statement should not have come as a surprise. But, leave it to the fickleness of the market to have a major temper tantrum when it is announced that its sugar high may come to an end.