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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.

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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Mortgage Rates Zig and Zag: This Week It’s Down

October 23rd, 2008

As expected, mortgage rates continued their manic behavior, heading downward this week as focus shifted to the likelihood of recession: 

Certainly, this is the most troubling economic environment in a generation — but one with at least some glimmer of hope.

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Bailout or No Bailout, Expect Manic Mortgage Rates

October 2nd, 2008

Mortgage rates, which had enjoyed a sustained downtrend through mid-September, rose for the second consecutive week, as of October 2, 2008.

This rise was despite the fact that the mortgage bailout bill seemed to have edged a step closer to passage by achieving overwhelming Senate approval. The rise also appeared to occur into the headwind of bad economic news, as factory orders were reported to have dropped sharply in August, while new jobless claims rose.

The contradiction is that the bailout bill is supposed to give lenders more confidence, while interest rates in general typically fall during an economic slowdown. Despite this, mortgage rates rose. So what is going on here?

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Mortgage Rates Respond to a Double Dose of Good News

September 11th, 2008

30-year mortgage rates fell sharply over the past week, extending a sustained move into more affordable territory. Two key factors were behind the change:

Is this reason to be optimistic about the housing market? As always, optimism about housing should be tempered with a healthy dose of caution, but this does spell opportunity for certain buyers and home owners who want to refinance — especially those with strong credit histories.

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Mortgage Data: Is that a light at the end of the tunnel, or is it a train?

September 4th, 2008

It was enough to make any mortgage observer recall the old joke about the light at the end of the tunnel turning out to be a train. A steady drip of positive news lately was overshadowed by the news that lender GMAC Financial Services was closing 200 retail offices and laying off 5,000 employees. The move was designed to scale back the firm’s mortgage lending presence in reaction to losses in that sector.

Still, while this story grabbed the headlines, home buyers and mortgage shoppers should not lose sight of some of the more positive news:

While the GMAC story was a reminder of why economic recoveries can take so long to develop, the underlying fundamentals suggest that conditions may be getting better for the housing market.

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Positive GDP News a Wake-Up Call for Home and Mortgage Shoppers

August 28th, 2008

An unexpectedly strong revision of second quarter gross domestic product (GDP) stood out amid an otherwise mixed bag of economic news of interest to home and mortgage shoppers.

In fact, this strong GDP number should be something of a wake-up call, or a call-to-action, for anyone who has been putting off buying a house. It may not pay to delay any further before starting to look for a house and compare mortgage companies.

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Highlights, Lowlights, and Reading Between the Lines of Mortgage News

July 31st, 2008

Mortgage news was dominated by two items this week:

On the surface, the first would seem to be a highlight, and the second a lowlight, of the week’s mortgage and housing news. Reading between the lines, though, reveals that the first item may not be as good as it’s been reported, but the second item may not be as bad.

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New Home Buyers Need to Focus on Forward Mortgage News

July 24th, 2008

With all the mortgage news coming out these days, it is important for new home buyers to distinguish between stories which primarily affect existing home owners and borrowers, and those which will impact future buyers.

As an example of the range of stories over the past week:

New home buyers should have a different take on these stories than the angles widely reported by the media.

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