Will interest rate still go lower? 4.5% or less, fact or fiction?

• Keith Akada
• March 6, 2009
• Seattle Real Estate

Boy does media have it wrong to say the least, they are normally about a week behind the actual news and continually quote national averages. Lets keep it real, what do national averages mean to you, nothing.  What is directly impacting your city/neighborhood/area and how are home loan rates impacted?

There are still many that believe home loan rates will lower….. The real question is, how much lower?   There is definitely a pattern that has been created in the mortgage markets.  The days that Wall Street gets hammered and sells off by 200 to 300 points we see the Mortgage Backed Securities move up slightly translating to a possible .125% improvement in interest rate.  In today’s market these significant sell offs hardly improve home loan rates.  

Let’s dive a little deeper.  Media has not even announced how the Federal Reserve is going to maintain home loan rates.  The initiative began when the Feds announced $500 Billion being allocated to purchase Mortgage Back Securities from January 1, 2009 to June 30, 2009.  With President Obama’s stimulus plan they allocated another $200 Billion, totaling $700 Billion.  WHAT DOES THIS MEAN?

As a simple reference.  You have a product that you manufacture and sell on the open market.  You have guaranteed buyers waiting for your product, would you market your product on sale at a reduced price?  Most likely not, that is business.  

Now going back to the Federal Reserve and Banks.  If the banks know that there is a guaranteed buyer for mortgages that they produce what would make them lower the rates / put it on sale?  HMMMM…. clearly not with a demand.

This creates a floor and ceiling for home loan rates for now.  Locally we have seen rates touch 4.75% (30yr fixed) and then bounce up to 5.375%. Each time we approach the low and high we test a level of resistance that is now difficult to break.  

 

 

Traditionally when the Dow Jones deteriorated and lost 200 points, money was invested in Mortgage Backed Securities and Bonds as a “safe haven.”  More money invested into the “safe havens” reduces the yields, creating lower home loan rates.    

So why is this not happening?  This is still true in today’s market but at a different level.  Wall Street is gun shy when purchasing Mortgage Backed Securities.  They buy & sell to the supply & demand of the Federal Reserve which is roughly $4 Billion per trading day.  Keep in mind of the reference we previously used, putting your product for SALE.  When Wall Street rallies for positive gains where does that money come from?  In most cases directly from Mortgage Backed Securities and the bond market, which increases yields, INCREASING home loan rates.  

The Dow Jones is down over 55% since 2007.  Unemployment numbers released on March 5th were at 25 year highs!  With this significant news, home loan rates barely broke 4.75% (30yr fixed).  The question is why rates would go even lower.  Government?  Wall Street?  Strike those ideas!

Clearly the Federal Reserves initiative to keep home loan rates low is working. Maintaining rates where they are is critical to the recovery of real estate and the future of our economy.  

There is a BUT to this, INFLATION!  What happens to home loan rates when the $700 Billion is used up, the Federal Reserve does not allocate more funds and the market still has not turned the corner to recovery? Remember, mortgages are exposed to the supply & demand model. If Wall Street is not purchasing Mortgage Backed Securities to meet the supply then yields of these securities will increase to attract buyers, and will interest rates.  Now if rates go up and housing is still flat…that is just a bad thought, does not need to be written, imagination can take over from here.

Right now is the time to consider what you need to accomplish, based on your own goals, not the market. If cash flow is a concern why wait, increase the cash flow by refinancing and have one less concern. If you are looking to buy, the only question is what your comfort level is?  Yes the market may still be soft, but there is an important balance of low rates and low home prices.  Create a realistic goal to take advantage of today’s market.  There will always be buyers and sellers, real estate values will appreciate regardless of the market.  It all boils down to timing; can you take advantage of low rates and home prices?  

We hope you enjoyed this posting, please feel free to give feedback and if it was valuable to you please pass it along and share it with others.

Committed,

The Mortgage Reel