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Friday, February 1, 2008

Truth About Mortgage Rates & The Fed Cut

Is the media correct in their assessment on the Fed rate moves and how that relates to mortgage rates and the lowest mortgage rates ever? Are we as real estate professionals thinking this to be the case also?

Just so you know, fixed mortgage rates directly correlate to the 10 year treasury bond, which is an investors haven of choice when other markets such as the stock market are tanking. With a flush of investors money into mortgage backed bonds, rates drop as supply and demand dictates.

However, when the Fed lowers the short term discount rate, this is designed for consumer spending on short term credit and therefore investors may see the stock market as the better investment as profits pour into retailers etc. They bail out of bonds, and interest rates are on the rise to enhance back the now elusive bond investor.

This all happens with lightening speed, and in many cases it happens prior to any Fed move as investors hedge on the expected or react to the unexpected.

Here is what occurred over the last wild 10-day period: (NOTE: The 10 yr. bond is what affects the 30 year fixed rate mortgage rate)
· January 22nd (TUESDAY): 10 yr bond starts day at 3.60%. Fed drops short term lending rates by ¾% (75 basis points) which such a decrease had been unprecedented for 24 years! By the end of the day, the 10 yr. bond had dropped 18 bps to 3.42%.
Rates were set for the following day based on this information, and Wednesday morning opens with the best 30 year mortgage rates in many many years. It was short lived however. Like 1 hour!
· January 23rd (WEDNESDAY) The 10 yr bond goes up 16 bps during the day to end at 3.58% which is basically where it began the day before. Almost ALL wholesalers and the investors changed rates 3-4 times that day before finally just “calling it quits” and STOP taking rate locks until the dust settled on a very volatile market. Rate lock websites were jammed and rates at one minute were not good the next, all day.
Only a very lucky few got their rate locked, the rest either fell in the trap that rates are dropping so they wait, or they simple could not lock due to rate fluctuation and black outs.
· January 29th (TUESDAY) Fed drops short term lending rate AGAIN. This time by ½% (50 basis points)
· January 31st (THURSDAY) As of 11:30AM est. the 10 year bond is at 3.62%
Summary: Fed has dropped short-term rates an aggregate of 125 basis points in the last 9 days. This 1.25% drop is HIGHLY publicized and “every Tom, Dick, and Mary” consumer has seen it on the news and ASSUMES this directly affects mortgage rates going DOWN 1.25%. In fact the media hype it as exactly this.
In fact the 10 year bond started at 3.60% prior to Fed cuts, and is at 3.62% Thursday 31st. It is safe to say that there has been NO discernable over all decrease in mortgage rates in the last 10 days, except for a VERY short period of time on Wednesday January 23rd for one hour.
The good news in all this for the housing market is that the media, consumers and even real estate professionals believe that the Fed move means mortgage rates must be at an all time low. And this media hype is priceless to the perception needed right now in the housing market.
Perception is reality. So I am not here to dispel the hype, just to inform. After all, I am along for the ride as every one else, and my success rides on a robust housing market. So I for one say...."Thank You Ben Bernanke for lowering the mortgage rates by 1.25%!"
Maybe that's all any of us really need to know anyway.
Thank You
Jeffrey Bastress

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1 comment:

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