Realtor Advice

What Now With Mortgage Rates?

RatesAs I am sure you already know, we are continuing to get hammered in the Bond Market, pushing mortgage rates higher. The 10 year Treasury (a good proxy for the direction of mortgage rates) is now up to 2.25%, which is the same level as we last saw on December 28, 2015. I wish I could tell you when this would end, but clearly we are in uncharted waters and I have no history to rely upon.

However, a market watcher that I follow says – “I can tell you that I FIRMLY believe this is temporary and we will see a massive correction in either the days or weeks to follow.”

If you remember last December, the Fed increased short term rates by .25% and we saw a reduction in mortgage rates over the next few months into 2016.  On December 13-14 of this year, the next Federal Reserve meeting is scheduled and the market is expecting another .25% increase in short term rates.  This is will the Prime Rate and any home equity line indexed to Prime up by .25%, but it will not directly impact mortgage rates.  Indirectly however, we could see mortgage rates improve as a result as happened last year.

The economy is still fragile. Personal savings are lower than we’ve seen in many years, consumer credit is higher than we’ve seen and Job growth is still weak. Rates are highly unlikely to remain high without firm economic data that will keep them high. We don’t have that right now, and all we have are assumptions about growth that a Trump Presidency may bring us. I don’t see that right now. While his administration most likely will drive growth and that growth may drive inflation, it will take months if not years to see those results. Just as we gave back the Brexit gains, I believe we will reclaim a good deal of the Trump losses.  See chart of the 30 Year Fannie Mae Mortgage Bonds below – my yellow line is the election day – and you can see around 225 basis points in price since the election.  Translated – this means that conforming 30 year fixed rates have moved from the 3.50%-3.625% range to the 4.00%-4.125% range in less than a week.


I will say that although rates will most likely recover in the short term, we may not see the lows we saw in 2016 over a sustained period of time. This is not a bad thing as growth is good for everyone and a thriving economy will drive a more robust housing market than most of us can imagine right now.

If you would like to discuss your client’s situation, please contact me directly.  I’d be happy to help.


Why All The Volatility?

August 31, 2015

August is ending and with it a month of volatility in all financial markets.  Some thoughts on this follow from the founder and president of RateLink,  a mortgage rate newsletter to which I subscribe:

“Trade in all asset classes (stocks, bonds, commodities and currencies) remains volatile with large intra-day moves.  The global financial markets are intertwined.  What happens in China no longer stays in China.  Just like the US, what the Federal Reserve does affects every country in the world.  When lightning speed computers are added to the mix, the volatility increases exponentially.  Investors hate uncertainty.  Global traders are uncertain when it comes to future Fed policy and the economy in China. Trade will remain volatile until they get more confidence in both of these areas.

The Federal Reserve:  The Fed has been jawboning a rate hike all year long.  This is called “forward guidance” and is used to make sure the market is not shocked when the Fed actually raises rates.  A Fed rate hike in the near future is almost a given.  However, even the Fed is uncertain of the timing and the trajectory.  The Fed has two mandates, full employment and stable prices.

Hiring has been strong and by many measures the mandate has been fulfilled.  The Fed would like to see wages rise, the middle class has not seen wages rise above inflation since the 90’s.

Price stability is another issue.  Inflation has been stubbornly low.  Europe is battling deflation.  While it sounds like falling prices would be a bonus for consumers, it actually causes them to delay purchasing goods and services opting to wait and see if they can get a better deal later.  This causes an economy to contract (lower GDP) and can create a “death spiral” for economic output.   One irony the Fed faces is the US dollar.  Global commodities are priced in dollars.  When the Fed raises rates the dollar will strengthen and commodities will get cheaper, creating a downward push on inflation.  In addition, a strong dollar makes US goods more expensive overseas, which can cause the economy to slow.  These are just a few examples of how complicated global economics can be.

China:  They have been a major driver in the global economy for the past two decades.  As they grew, the demand for commodities grew which supported many emerging economies.  Wages in China have risen to the point that many companies are looking to Vietnam and other places to produce goods.  China needs to transition from a smokestack economy to one driven by consumer consumption and financial services.  The events in China will cause global volatility for a long time.”


Mortgage Business, Realtor Advice

Down Payment Amounts versus Interest Rates?

ListingsThe question is frequently asked – do home-buyers care about how much money they need to put down or the interest rate they receive on the mortgage loan.  Do one of these factors drive housing demand more than the other?

The Federal Reserve recently studied this question in the 2014 SCE Housing Survey and found that the amount of the required down payment tend to have a large effect on the willingness of a buyer to pay for a certain home.  This is especially true among current renters.

The effect of the current interest rate is not as pronounced – i.e. a change in mortgage rates has only a modest impact on willingness to buy.  You can read more on the study and it’s implications by clicking this link:  Do Borrowers Care About Down Payment Amounts and Interest Rates


The Federal Reserve – Patient on Raising Interest Rates

PercentageJanuary 28, 2015:  The Federal Reserve maintained its pledge to be patient on raising interest rates and boosted its assessment of the economy and labor market, even as it expects inflation to decline further. Economic activity has been expanding at a solid pace, the Federal Open Market Committee said today in a statement in Washington. Labor market conditions have improved further, with strong job gains and a lower unemployment rate. Policy makers said inflation is anticipated to decline further in the near term, adding that price gains are likely to rise gradually toward 2 percent over the medium term as transitory effects of low energy prices dissipate. Fed officials are confronting divergent economic forces as they weigh the timing of the first interest-rate increase since 2006.

Surprisingly strong job gains argue for tightening sooner, while inflation held down by a plunge in oil prices and a cooling global economy provides grounds for delay. The Fed acknowledge global risks, saying that it will take into account readings on international developments as it decides how long to keep rates low. The Fed also dropped a clause from its December statement that the assurance of patience was consistent with a previous pledge to hold rates low for a considerable time, especially if projected inflation continues to run below the 2 percent target. The Fed has kept its main interest rate near zero since December 2008.

All 10 voting FOMC members backed today’s policy statement, marking the first unanimous decision since June.

It now looks like it will be at least until this Summer before the Fed begins to increase the Fed Funds rate would lead to an increase in the Prime Rate and other short term (non-mortgage) interest rates.

What is your outlook?  Let me know in the comments below.