Home buyers, start your engines
No one seems to be saying this, so...
The Fed's switch to addressing the credit markets and the cooling economy with its surprise 1/2 point cut in the discount rate Friday will help the real estate market for conventional A buyers. The reason? --- mortgage rates will start heading lower as the credit markets calm down and factor in the lower interest rate window now being projected.
Mortgage rates are highly correlated to 10-year and 30-year Treasury bond rates, but are determined by the price of mortgage bonds. However, last week mortgage rates generally increased over last week (30-year fixed up .03%), while 10-year T-bond yields fell .15%. This Bankrate analysis explains in part the logical reason - during last week's global credit crunch, investors rushed into T-bonds not only because they are one of the safest investments ("flight to quality") but also because investors believed that the Fed would drop interest rates (increasing value of T-bonds) and thus provide a quick profit (and they were right). Mortgage rates stayed high simply because mortgage bonds are perceived too volatile and risky, and the high yield reflects this risk, like a junk bond.
Assuming the Fed interest cuts (culminating in the predicted easing of the Fed Funds rate on September 18) stabilizes credit markets and more lenders return to the mortgage markets (the credit crunch created bottlenecks that forced lenders to curtail activity or reprice aggressively), then 30-year fixed mortgage rates will eventually reflect the lower T-bond rates and also drop, say, 1/2 point give or take, and perhaps more if further Fed rate drops are seen necessary for the economy.
Mortgage rates will start dropping within the next weeks and continue as long as the economy is impacted by problems in the credit markets (including subprime). This window may be viewed by consumers as a "last chance" to lock in a good mortgage rate. Why? The Fed and many economists are understandably hesitant to return to a lower rate environment that exacerbated housing hysteria (and other effects of easy credit), and will ratchet the rate back up the instant it sees inflation or dollar weakness become a problem. Consumers will understand that these lower rates will be a window because the media seems to have already declared the era of cheap credit kaput.
The San Francisco Bay Area is particularly primed to benefit from lower rates - the market has pent up buyer demand from qualified buyers and multiple offers are already common in demand cities illustrated in this SF Bay Area mashup map on housing demand. Pat Kapowich of Silicon Valley Broker senses this window coming up - qualified buyers sit out the "sweet spot" of the buyer's market, then enter in droves when the market turns.
Technorati Tags: Fed, interest rates, mortgage rates, discount rate, mortgage bonds, treasury bonds
Pat, I came to the same conclusion only from a different angle. I posted this morning and then read your post after the fact but you did beat me to the punch. What are the chances of us being right?
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Tony, we see it coming like a freight train...
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good analysis of what is currently taking a toll on mortgage brokers like me.... it is eery and unnatural that the ARMs are more expensive than Fixed Rates and that we're scrambling around because someone with an 850 credit score and millions in the bank won't get as good of a rate as a first time homebuyer!
something has to give but there are a lot of puppeteers each pulling their own strings.
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A bad situation would be to receive a sub-prime adjustable ARM in 2004 with a pre-pay and your house is worth less than what u paid for it - in order to get out u need to get a larger laon?
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Agreed... on CNBC I heard the range of homeowners exposed to this kind of ARM refinancing problem in the next few years is upwards of 3 million?
An interest rate drop will help the housing market by maintaining housing price levels and, thus consumer confidence, but it won't significantly help the foreclosures... this afternoon's Fed discussion continues to be the push-pull of the market pressuring the Fed towards lower interest rates, but the Fed's Lacker announcing the relucatnce to do so. Short term treasury yields continue to drop.
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