Late last year, two key announcements were made by the government. First, Treasury Secretary Paulson stated that one of the keys to recovery in the housing market would be mortgage rates around 4.5%. This was originally presented as a possible stimulus plan that Treasury would undertake for those purchasing homes. Although Treasury has not implemented such a plan (and has not even made additional comments since the "trial balloon" was floated), the statement amounted to a de facto target rate for the market. Soon after, the Federal Reserve announced plans to begin buying huge quantities of mortgage backed securities (MBS). They have stated their intention of purchasing up to $500 BILLION in MBS between January and June of this year. Mortgage rates are based on the yields of mortgage backed bonds. As demand for the bonds (i.e., buying pressure) increases, the price of the bonds also increases. Since bond yield moves inversely to the price, significant buying of mortgage bonds generally leads to lower interest rates. That buying by the Fed began January 5th and pushed 30 year fixed rates for the most credit-worthy borrowers down to the Treasury target of 4.5%!
Since that initial drop, rates have moved steadily higher and 30 year fixed rates are now around 5.25% for the best credit quality borrowers. Does that mean rates will remain at this level? I don't think so (tune in tomorrow for a primer on mortgage bonds and the Fed's buying activity), but I'm beginning to believe that it may not be wise to hold out for 4.5% or lower because the market does not seem to stay there for very long. However, those who want to take advantage of lower rates can submit the application paperwork to their loan officer with instructions to lock in when a reasonable target rate becomes available.
The strategy of getting an application in process is the best way to be sure you get the rate you want. You see, it is worth looking backward to see what the future might hold. Approximately 3/4 of loan originators that were working in 2005 have left the market due to lack of business. That means there are far fewer people to handle what is already becoming overwhelming demand for refinance mortgages. In 2003, many lenders were taking a week or more just to return phone calls and e-mails - if they returned them at all. This history is beginning to repeat itself, so it's critical for those wanting to refinance to get prepared now.
With the amount of money the government is pumping into the economy, there is a real likelihood of significant inflation developing once the economy takes a turn for the better. Some economists are already worried about hyper-inflation similar to the 1980s. What this means is that when the economy starts to rebound, the government will have to work quickly to pull stimulus out of the economy. The net effect on interest rates will be a sharp, rapid increase. This will be particularly true for mortgage rates since they are being artificially depressed due to the current government intervention. Another worrisome cloud on the horizon is the impact of foreign purchases of US bonds. Huge sums of money from foreign governments and investors are pouring into the US bond market right now. This a a "safe-haven" play during this global economic slowdown. When the global economy improves, money will begin to move back out of US bonds and become repatriated back into the foreign government's own currency or bonds. This too will serve to drive up interest rates in the exact opposite fashion of the governments current bond-buying spree. The bottom line is that when rates begin to move up, I expect them to move AGGRESSIVELY HIGHER, VERY QUICKLY. Those who did not catch the refinance wave early will miss out.
Skip Dyer, CRMS, CMPS
Owner, ProActive Mortgage, Inc,
Author, The Essential Mortgage Guidebook
DISCLAIMER: This commentary represents my personal opinion based on my own interpretation of current market conditions. Do not take any action based on this commentary without seeking competent advice from a mortgage or investment professional.