RateWatch – Not So Fast!

Market: So the economy is roaring back, eh? Weeeeellllll…. Some are beginning to wonder.  Mortgage-backed securities (these are the bonds issued by FNMA, etc. that directly link to mortgage interest rates – also abbreviated “mbs” in this space) are not reacting the way one would expect if everything was rosy going forward.  As the economy heats up, money should be flowing into stocks (it is) and out of bonds (it isn’t).  The benchmark 4.5% FNMA bond today is up 25bps (bps are “basis points”; 100 basis points = 1%) because existing home sales data was worse than expected.  As bond rates rise, mortgage rates fall.  A move of 25bps on the bond translates to less than .125% move in mortgages, but it’s something.

Analysis: strong economic growth is supposed to mean bad things for bonds, because investors take money from fixed-return investments – bonds being chief among them – and put it in stocks.  As bond rates fall, mortgage rates rise, all else being equal.  There are other factors, of course, like inflation, but in the main, good economic news is generally considered bad for mortgage interest rates.  So with rates sitting in the low 5% range on fixed 30-year mortgages and in the low 4% range on 5/1 ARMs and the like, why is the end of the recession not causing a move higher?

Answer: we don’t know.  But the suspicion is that the recession’s end might be oversold just a tad.  Remember, in the last giant downturn, we had a fool’s rally in 1930 that almost got us back to the level before the 1929 crash.  Then the bottom fell out, and we didn’t see those highs again for 20 years.  Not saying here that history is repeating itself, by any means.  But the possibility that history will repeat itself is in the back of every trader’s mind, I assure you.  Caution is warranted.  Therefore I fairly confidently predict that the thing you should worry about, if you’re buying a house, is getting it done before the $8000 federal tax credit vanishes on December 1, rather than the interest rate you’ll get.

My recommendation is that you have your house under contract by Hallowe’en, if you want to have a chance to be closed by Thanksgiving.  And not every mortgage guy can get you done that fast.  Please understand and remember this.


Leave a Reply