RateWatch Jan 28 – Conventional “Wisdom”?

Markets: We’re trading in a very narrow channel this week, and no news is good enough or bad enough to get us out of it.  Our benchmark 4.5% FNMA 30-year bond is off 3bps, meaning it’s flat for all intents and purposes, exactly as it has been for the past week.  We successfully weathered another $12 billion in bond auctions this week without a blip.  This is remarkable, and ought to be telling smart people something.  More on that below.

Analysis: I want to point everyone at a really interesting article from the Wall Street Journal about what’s coming in interest rates on mortgages when the Fed stops buying mortgage-backed securities.  For a long time now, conventional wisdom has held that the only think keeping interest rates this low (5% as of this writing, and a fraction lower in some instances) is the presence of the Fed, doling out huge chunks of money to keep the mortgage market stable.

But look, people, this can’t be right.  Market players aren’t stupid.  They can see the same things everyone else can, and if they really thought that the true market level – minus the Fed – was 6%, we’d be seeing a move in that direction right now.  Instead, what we see is…nothing.  And that’s not because the Fed is buying everything in sight, either.  The markets just don’t believe that there’s going to be a big rate move on April 1.  I don’t believe it, either.

Action: That means that the true market mover right now is the new home purchase market, because the $8000 tax credit for first-time homebuyers and the $6500 credit for long-time owners will expire on schedule.  Houses must be under contract by April 30, and the close deadline is June 30.  If you’re in this market, now is the time to move.  Short sales take an average of 40 days to get completed, which leaves us about a month of extra window in case something goes kablooie.  Which in this market, folks, it does with regularity.

Been saying it for a while.  Do not wait.

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