Posted
Dec 17 2008, 08:11 AM
Yesterday the Federal Reserve cut the benchmark fed fund rate to a range, yes a range, of 0% to .25%. If you have been a reader of the blog, you should know that when the fed cuts or hikes this rate it does not correlate to an automatic reduction or increase of mortgage rates. One reason being, who didn’t know they where cutting yesterday? Everyone knew the fed was cutting, the only question was how much so we see the movement in mortgage rates before the announcement. The bigger factor on days like yesterday is the accompanying statement released. The statement has a much bigger effect on mortgage rates then anything else. As a mortgage professional, I couldn’t have asked for a better statement from the fed. Here is the best part “…over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.” As a reader, you should know that mortgage rates follow the price of mortgage-backed securities. As the price of mbs’ go up, the yield, or mortgage rates, goes lower. Basically, what the fed said in their statement is that they are going to buy a lot of mbs, which will cause the price of them to increase. As with anything, if you have a lot of buyers the price goes up and if there are very few buyers the price goes down. The Fed will not purchase all mbs as other investors will also be buying, but the Fed will be a backstop. If we start to see a sell off which would cause mbs prices to drop, the Fed will step in to buy keeping the price high. It appears that we are set for an extended period of mortgage rates in the sub 5% range. At this point, very hard to say how low they will go but expect 30 year fixed rate mortgages under 5% and approaching the middle 4% range.
Of course, things can change quickly in today’s environment as we are in unchartered waters. The question I am getting all the time is should we lock or keep floating for a lower rate. There will always be a risk floating, but everyone closing in January or after should be in the float boat. The best strategy at this time is to determine when you are closing and lock your rate a few days before hand. Many readers are hoping to lock at the lowest point of rates, but here is the problem with that strategy. No one will know what the lowest rate will be until rates move higher. I was having a conversation with one of my clients the other day, he has a rate in the upper 6’s and due to credit he doesn’t qualify for the best rates but still can get a rate which was lowering his mortgage payment by $600 per month or 20%. Even if rates got a .25% better for him it would only save him an additional $36 per month so about a 22% reduction in payment. So, I asked him this question. If your boss approached you today and said he would give you a 20% pay hike, would you tell him that you want to hold off until you got a 22% hike? I don’t thing anyone reading this blog would. So, what this client must consider is should he continue to pay $600 more then he has to each month to hope for a better rate. I do think 6 months from today, rates will be lower but if he waited 6 months he would have over paid $3600 during that time and maybe or maybe not get a better rate. And even if he got a .50% lower rate, it will still take several years before he recouped what he lost with the higher payment. Life happens, his credit could suffer, could lose his job, etc… I have had clients in the past who wanted to wait, but then life happened to them and they couldn’t refinance. Maybe there property value went lower due to foreclosures in there area, maybe there employer due to a sagging economy had to cut there position, maybe they cosigned a note for a child but the child feel behind on the payment which would hurt their credit(by the way, that has happened to a couple clients of mine in the past), etc… In today’s economy things are changing very quickly and you can chase rates for a while but you don’t want to miss the boat. I would advise all readers, determine a rate that makes sense as far as what it costs and how much you are saving. Once rates hit that level, lock, close and move on with your life. Rates can and will go lower, but there is much more room above for rates to go higher then below for rates to go lower. And keep in mind, LIFE happens, things can change, you could simple forget to make 1 payment to a credit card and your credit could fall and now you don’t qualify. One month ago, rates where 1% higher then they are now, 2 months ago rates where 1.25% higher then now. So, as you can see, things can move quickly.
As I have been typing this blog, we are in rally mode in mbs. Float boat is sailing, come on board.