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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.

Mortgages: Fed Throws in the Kitchen Sink

December 19th, 2008

There was a very good article about the US economy in general–and mortgages in particular–in the Times this morning. No, not the New York Times or the Los Angeles Times. It was in the original Times, which was first published in 1785 in London, England. Maybe you need to view things from across the Atlantic to get some perspective on our current financial plight.

Anyway, I urge you to read the piece. It’s all about the Fed’s latest policy of ‘quantitative easing’. Never heard of it? Me neither, up until very recently. But bankers do tend to use dry language, even to describe their most radical initiatives.

And quantitative easing is sure radical. It is the printing of vast amounts of money to buy up long-term debt-mortgage securities and government bonds. And if there’s a grain of truth in Milton Friedman’s monetarist theories, that can only mean inflation.

Perhaps we could use a dose of inflation to kick-start the mortgage and real estate markets. Maybe the alternative, stagflation, is even worse. The Times isn’t so sure. It says:

Quantitative easing is, in essence, what you do as a central bank when you have run out of things to do to avert catastrophe. It is that moment in the horror movie when you are backed up into the kitchen by the intruder and you start pulling out the kitchen sink as your last weapon.

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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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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Trick for Treat: Mortgage Rates Defy Federal Funds Rate Cut

October 30th, 2008

To much fanfare, the Federal Reserve cut interest rates on October 29th. That was supposed to be this week’s Halloween treat for the markets. The trick came the next day, when Freddie Mac’s survey of mortgage rates revealed that 30-year rates had risen sharply for the week. 

So what gives? A clue to why market rates moved contrary to the federal funds rate could be found in two other pieces of news:

For the time being then, despite the Fed’s actions, things got tougher for borrowers rather than easier. This highlights some realities of what the Fed can and cannot do.

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Connect the Dots… to Lower Mortgage Rates

August 7th, 2008

Current events give a good demonstration of what really drives market interest rates:

The reason for the drop in mortgage rates can be traced to a third significant development:

All of which suggests that potential homebuyers — or mortgage refinancers — would do well to keep their eyes on the price of oil in the weeks ahead. 

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Busy Week for Mortgage News

May 1st, 2008

The past week was chock full of news affecting the mortgage and housing markets:

In short, a clouded economic picture continues to make this a buyer’s market for financially sound house hunters.

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A Good Week (!) For Mortgage Markets

March 20th, 2008

While the action of the Federal Reserve to lower its rate to 2.25% grabbed the headlines, a little further behind the scenes were several positive indications for the mortgage markets:

As much as the regulatory actions indicate a desire to ease the mortgage crisis and stimulate the economy, it is the financial market developments that could indicate a fundamental improvement in conditions on the way.

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News Flash: Federal Reserve Makes Dramatic Interest Rate Cut (Again)

March 18th, 2008

In the latest move to both stabilize financial markets and shore up a flagging economy, Ben Bernanke and the Federal Reserve took dramatic action on March 18th, cutting interest rates by 0.75%.

This move is part of a growing patchwork quilt of government economic initiatives which have emerged since year-end. That quilt includes:

  • Three separate Federal Reserve rate cuts
  • A sweeping tax rebate program
  • Extraordinary measures to provide liquidity to financial institutions

The maddening thing about economic policy moves is that it will take months to know how they will pan out. However, while Washington and the heartland wait to see what the results of these stimulative measures will be, one group that should not be waiting is mortgage shoppers. For anyone looking to refinance, and especially for prospective home buyers, the best time to act might be the present.

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