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Economic News Includes Reminders that Low Mortgage Rates May Not Be Permanent

January 8th, 2009

A funny thing happened in economic news this week:

Since low interest rates generally go hand-in-hand with a weak economy, why were Treasury yields moving higher, and what might this mean for mortgage rates?

Treasury Yields

Over the last third of December, 2008, 10-year U.S. Treasury bond yields hovered at around the 2.10% mark. Historically, this represents an extraordinarily low level, but that wasn’t a surprise considering the economic environment. In part, interest rates represent the price of capital, and with spending slow, there was little demand for capital. As with most things, if you take away the demand, the price will fall — in this case drastically.  Back in July of 2008, those same Treasury yields were above 4%, so they fell roughly in half in less than six months.

Treasury yields are also very sensitive to inflation. The higher the expected rate of inflation, the higher interest rates have to be to compensate for the loss of purchasing power this inflation would represent. With the historic collapse in oil prices over the second half of 2008, along with falling demand for a wide range of goods and services as the recession took hold, inflation had the wind knocked out of it. In fact, inflation figures moved into negative territory during the second half of 2008. This sudden disappearance of an inflation threat is also consistent with the low level of Treasury yields.

However, at the end of December and into early January, Treasury yields suddenly rose by forty basis points (0.40%) in just five trading days. Why? One clue may be indications that the price of oil has just about hit bottom. Looking at oil futures, the consensus is for a rebound to around $58 per barrel by the end of 2009. That may not seem outlandish given where oil has been over the past year. However, it does represent a 40% increase over current levels — enough to put a little upward pressure on inflation, and by extension, on Treasury yields.

Treasury Yields and Mortgage Rates

While Treasury yields and mortgage rates don’t move in lockstep, they are driven by many of the same things and so they generally move in the same direction most of the time. Certainly, mortgage rates are more closely related to Treasury yields than they are to Fed fund rates. So, even though 30-year mortgage rates fell for the tenth consecutive week to reach a new low of 5.01%, the bump up in Treasury yields should be cause for concern. If nothing else, it is a reminder that financial markets do not move in a straight line indefinitely.

These market undercurrents are a call to action for potential home buyers. If a buyer has good credit and a steady job, then there should be no delay in shopping for a mortgage. Mortgage rates have never been lower, and they are not likely to stay that way forever.

Is There a Hint of Stability in Housing Prices?

January 1st, 2009

On the surface, 2008 seemed to end with more of the same — relentless bad news on the economic front:

It looked like a week only the Grinch could love. But were there perhaps some signs of hope just below the surface? 

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Housing Prices and Mortgage Rates Provide Holiday Hope — For Some

December 26th, 2008

The week leading up to Christmas was relatively free of dramatic developments. With the government having exhausted many of the options at its disposal, there was just a steady drumbeat of continued negative economic news. Meanwhile, mortgage rates slipped down a little further, exploring new record-low territory. Those lower rates take on greater significance with the slide in housing prices looking like it may actually be bottoming out in some areas.

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Record-Setting Week Means Good News for Mortgage Shoppers

December 18th, 2008

It was a record-setting week all around, which adds up to good news for mortgage shoppers:

While economic weakness is enough to give some home buyers pause, it is important to remember this same economic weakness is creating the extraordinary buying opportunity.

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Mortgage News Reflects Conflicting Philosophies About Debt

December 11th, 2008

This week’s mortgage news reflected something of a tug-of-war about what consumers should be doing in the face of the recession:

The first two items reflect the hope that consumers can be induced to start borrowing enough to spend their way out of recession. The second two items reflect the grim reality that underlying this recession is a debt problem that has to be addressed before the economy can get healthy again.

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Recession News Might Be Green Light for Mortgage Borrowers

December 4th, 2008

It may only have confirmed what most people already suspected, but the biggest financial news of the week was the official announcement that the United States was already in a recession.

Two very different consequences of the slumping economy could be seen in other news of the week:

While the prospect of unemployment may be enough to give anybody pause, those low mortgage rates should be a green light for many borrowers.

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New Fed Tactic Triggers Dramatic Drop in Mortgage Rates

November 27th, 2008

This week’s mortgage news was dominated by a dramatic drop in mortgage rates triggered by a new Federal Reserve approach to the financial crisis.

Of all the actions taken to address this crisis, none has had such immediate and tangible effects. Neither lowering Fed rates nor providing direct financial support to lenders seemed to make so much as a ripple in the credit markets. However, on news of this latest Fed program, 30-year mortgage rates dropped the better part of a full percentage point, falling near their all-time lows.

The Fed has announced that it will buy $600 billion in existing, mortgage-backed debt. This move both frees up capital for new lending, and gives lenders renewed confidence to make loans. It is the latter especially that accounts for the immediate drop in interest rates.

It is worth a closer look at what this action will and won’t accomplish, but in the short term it is undeniable that it has created a rare opportunity for home buyers and people who want to refinance. 

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Bad News Has Hidden Benefits for Mortgage Rates

November 20th, 2008

There has been plenty of bad news for the economy over the past week:

Though these developments are certainly bad news in the near term, it is important to recognize how each contributes to the self-correcting nature of the economic cycle, which allows recoveries to occur. Already, consumers can see some positive side effects of economic weakness at the gas pump and in mortgage rates, and each of the above stories will ultimately contribute to the next recovery phase of the cycle.

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Mixed Week for Mortgages Amid Grim Economic News

November 13th, 2008

Economic news was generally grim this week, highlighted — or lowlighted — by a sharp increase in unemployment. Unemployment figures are one of the most accurate signs that the slowdown is affecting the real economy. What’s worse is that unemployment can lead to further economic weakness, as consumer spending power is dampened.

Against this backdrop, mortgage news was mixed. Some prominent stories:

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What Will an Obama Administration Mean to Mortgage Rates?

November 6th, 2008

By far, the dominant news story this week was the election of Barack Obama as the 44th President of the United States. While people have different ideological views on what this means to the nation, it is also natural to view any news of this magnitude through a lens of personal self-interest. For anyone contemplating buying a home, the question of self-interest that comes to mind is: what will an Obama Administration mean to mortgage rates?

Specifically:

  • What will be the impact of Obama on the current financial crisis?
  • What will be the impact of Obama’s long-range fiscal policies?

Looking at the recent news provides some perspectives on what the Obama Presidency will mean for mortgage rates, both short-term and long-term.

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