So…what the heck has happened interest rates for home loans in San Diego recently and what’s next?

It sure seemed as if a bomb has gone off in the mortgage bond market in the past 60 days. We lost an astounding 210 on one day alone, which translates to interest rates jumping from 4.875% to 5.5% on our rate sheets for the best qualified clients for home loans here in San Diego. This means a client will now have to pay a lot more for the same house. I wanted to write this article to better explain exactly what has happened recently, i think it is very important that everyone understands the dynamics and technical’s that dictate our bond market, so when we have days where rates jump .25%, we can better explain what happened and have homeowners locked in before these events occur.

The main culprit for yesterday’s selloff…SUPPLY.  The Treasury has literally been printing money by way of Treasury auctions to pay for the massive spending.  And these hundreds of Billions of dollars of new Bond supply have to be absorbed by the market, so the additional supply literally weighs on the entire Bond market and drags prices lower.  Also, when you think of SUPPLY, consider we have all been doing tons of refinances and all those loans have been bundled, packaged and sold on Wall Street…and this additional SUPPLY has now started to hit the secondary market, as those closed loans are now getting turned around and sold. This supply also must be absorbed, and while the Fed has been a buyer, they simply can’t buy enough to balance all the selling. It’s Economics 101, anytime supply vastly exceeds demand, prices will move lower. And as prices move lower, yields rise - that rise in yield will attract new buyers as they get a higher return on their investment. This is how the market finds balance.

Many governments have made attempts to support a currency. In other words, a country individually, or a group of countries, can join together to purchase a nations currency in an effort to “prop it up” or support it. A historical perspective indicates that this may work as a temporary fix, but never works over the long term. In some ways, we can draw parallels to what the Fed is attempting to do with mortgage rates.

So the question on everyone’s mind is…will rates come back? The answer is that we will probably see some improvement, but it will be difficult to see rates fight back to the levels they were at just last week. There are both fundamental and technical reasons why a retracement back to last week’s levels would not be easy. Fundamentally, the aforementioned supply issue still exists, with no end in sight to the amount of debt still to be issued - the printing presses are just getting started, and the Fed now has to almost endlessly push sales of Bills, Notes and Bonds to raise the capital needed to continue to spend. Yes, the Fed will continue to buy Mortgage Bonds, which will help to some degree but put your traders cap on for a minute, and think about this. If you were a trader, and saw that US Treasury yields were moving up, up, up “making them more attractive” and Mortgage yields were moving lower, you would be tempted to sell your Mortgage Bonds and buy Treasuries. This is precisely why the Fed announced that they will be buying $300B in Treasuries in addition to the Mortgage Bonds - to protect against this. But it’s like trying to clean up a flood with a sponge.

Moreover buying long term Treasuries at the same time they are trying to sell them has got to make you wonder who came up with this bonehead idea? Especially since the Fed efforts should have been to sell as much long term paper as possible, when they could have locked in paying rates of 2%! You almost wonder why the government chooses not to act like a normal rational consumer or homeowner would it makes no sense whatsoever. Would you advise your clients to pass up a 2% rate on a 30 year fixed loan, and opt for a 1% rate on a six month ARM with no caps on future rate increases when they are planning to remain in the home forever? This is exactly what the government is deciding to do.

More news from the housing sector, as New home Sales were reported at 352K, just under consensus estimates of 360K. Last months numbers were revised just slightly lower, down to 351K from a previously reported 356K. Inventory is moving lower, showing a 10.1 month supply, down from 10.7 last month.

A look at how the mortgage market is performing is not that great, and this is also true for the home loan market in San Diego too. Delinquency rates for prime, subprime and overall are hitting record levels with almost 8% of loans currently delinquent. This does not count loans in foreclosure, which represent about 3% of all loans so add them up, and the combined percentage of loans not current is more than 11%…that’s a big number. This should continue to weigh on the housing markets, as properties already in foreclosure or about to hit foreclosure will compete with any new listings. A further breakdown shows that 5% of prime or A-paper mortgages are delinquent, while a whopping 22% of subprime loans are past due. Once again, this does not take into account those who have already gone into foreclosure.

As the economy eventually improves and the important jobs picture also begins to get better, this presently ugly delinquency situation should start to turn around. But that will take some time, which will likely mean more pain, especially in the states hardest hit by real estate price declines, such as California, Florida, Nevada and Arizona; as well as those hit hard economically like Michigan and Ohio.

The recent price declines have pushed Bonds into an “oversold” state, which means prices could be ripe for a bounce or reversal higher, yet we need to be mindful of a few things. After a few bad days, we have fallen through several floors of support, which now become overhead resistance. Additionally, should the Bond start to move lower again, the next clear floor of support lies at the 200-day Moving Average, still a sizable 100bp beneath current levels.

So what happens from here, will we see 4.875% again? it might take a few weeks or maybe even months for the market to re correct itself back to those levels. The market has just wrapped up for today and it was a better day today, the bonds bounced off the 200 day moving average and ended up positive for the day + 35, this is a very good sign so things should improve from here because the Fed’s will not allow rates to stay in this range..they are artificially keeping rates low to kick start the housing market. If rates stayed in the 5.5% range the housing market recovery would come to grinding halt. The next few days or weeks will dictate what happens from here, i will not be surprised to see Bernanke and the Fed come out and try to “move the market” with additional funding so rates get back to where they have been for the past few months. There is no doubt that these low rates are helping to cure the market a lot faster.

Now If ever you have any questions regarding interest rates and mortgage bonds please call me or visist my site at www.michaeladeery.com , i study this information daily and religiously and have software that tracks the mortgage bonds live everyday, so when these events occur i have been warned to lock rates in before the lenders change their rate sheets and clients lose their rates. I have been able to protect and lock in the interest rates for many home loans in San Diego recently, becuase understanding how the technicals work will help you lock in ahead of a rate increase, i truly believe that understanding this information is paramount in todays marketplace. I look forward to hearing from you soon.

Sincerely

Your mortgage planner

Michael