It looks like the party is over soon for interest rates! The Feds have just come out and announced that they are NOT going to support the mortgage rate market after March 31st 2010. The Feds have been manipulating the markets these past 12 months with their $1.25 Trillion mortgage rate reduction program to directly buy mortgage backed securities (MBS) on the open market and artificially lower rates, this program is due to end in March 2010. The Feds have been successful in keeping mortgage rates around 5% and lower.
Everyone was hoping they would announce an extension to this program so not to upset the markets, but that is not going to happen now. The Feds now have limited funds left in this program and have already begun to wean the market off this support. Since this announcement rates have spiked up .5% in the past several trading days.
Don’t listen to the media..understand how mortgage rates work!
For anyone sitting on the fence waiting for the perfect time to buy or refinance, they are probably going to miss the boat unless they act soon. The Feds have been giving everyone an opportunity to get the lowest interest rate they will likely see in their lifetime. But unfortunately I still think there are many buyers and homeowners out there who do not understand how the interest rate markets work, and are getting the wrong advice or are looking at the wrong indicators as to what determines interest rates. I want to explain with the help of a few charts just what causes interest rates to fluctuate and what will happen now that the Feds are pulling the plug on their rate reduction program.
(MBS) The only chart that matters for mortgage rates
Here is a picture of a weekly mortgage backed security/mortgage bond (MBS) trading chart above. This will dictate if interest rates will go up or down. This chart represents trading from the 14-21st of December. MBS are traded everyday just like stocks and they are bought and sold and either go up or down. Usually MBS trade in a daily range of 0-12 basis points (bps). If MBS go up 12 bps (positive) then interest rates go down .125% in cost, if MBS go down 12 bps (negative) then rates go up .125% in cost. As you can see above MBS were trading in a calm 12-15 point range for most of the week and have been trading in this range for the past few months, but from the 18th of December to the 21st MBS fell off a cliff and dropped almost 100 bps ( from 101.20 to 100.20), this translates to a 1% increase in the cost of interest rates. This means it would cost you an extra 1% ($3500 on a $350k loan) to buy the same interest rate before this 100 bps selloff.
This sudden selloff in MBS (increase in rates) is because MBS traders now know that rates are going to rise beause the Feds are not going to manipulate the markets anymore come March, so traders have begun selling their MBS in anticipation of the Feds weaning the markets off their program.
A look at how the Feds manipulated mortgage rates during 2009
Here is another chart of interest rates in the past 12 months and shows what a great job the Fed did keeping rate’s artificially low. Rates have kept been around 5% and lower for the majority of 2009. They did spike in June for a few weeks but the Feds quickly manipulated them back down again with extra buying. It is important to note that before this program was announced by the Feds, interest rates were around 6%.
Experts predict mortgage rates for 2010?
So the question on everyone’s mind is where will interest rates go from here? Do not be surprised if they continue to rise over the next few months. As noted above rates were at 6% before this Fed program began, so it will probably swing back into that range sometime in 2010. Freddie Mac deputy chief economist announced this past week “interest rates are bound to rise to 6% in 2010 because private buyers will demand a higher rate of return on the securities than the Fed did”. Mark Zandi the chief economist at Moody’s also just announced “if you told me by the end of 2010 a 30 year rate was at 6%? that sounds about right”.
Get the right information and lock in soon!
My advice to everyone is to get locked in soon, because it is going to be extremely volatile over the next few months as the Feds wean everyone off their MBS buying program. Rates are still good so take advantage of the opportunity if you are able to. Also make sure you are working with a professional who is watching that first trading chart above live everyday and will be able to quote you accurate rates, because if someone is not watching MBS being traded everyday then they are guessing what rates are and you are getting the wrong information. Be careful too what you read or hear in the media, more often than not they are not giving the right information.
I watch and study these charts live everyday and make sure my clients always get the most accurate information. If you have any questions or are looking for more information on interest rates please free to contact me directly at 858-200-9602 or you can also visit my blog at www.michaeladeery.com/blog for additonal information. I look forward to chatting soon.
P.S. Mortgage bonds (MBS) are down another -31 already in this mornings trading, so mortgage rates are continuing to increase.
