This past week sure has been a great week for interest rates and home loans in San Diego as they dropped to their all time record lows on the 30, 15 Fixed, 5/1 & 10/1 ARM’s – all loan types hit their lowest levels of the year! For the weekly Freddie Mac survey of all lenders, this is the first time that all have been at their lowest level. Some clients were lucky enough to get their home loan locked in at 4.5% this past week.

 Rates are artifically low

But it is imperative that all buyers understand though, that interest rates are artificially low right now! Last November, Ben Bernanke and the Fed put into place their mortgage backed securities (MBS) buying program to lower rates, essentially they are buying these securities in the billions every week so they can manipulate the markets and artificially suppress rates. That program though is due to end on March 30th 2010, as the Federal Reserve has already purchased over $1 Trillion of these mortgage backed securities this year, and with less than 20% of allocated funds left in the program, rates are sure to increase. The only questions remaining are by how much and when.

The chart above shows the 30 Year Fixed Rate over the last 11 months. The first red arrow shows what took place when interest rates shot up in May, rising nearly 0.75% in a matter of days. Interest rates that were in effect prior to the implementation of the announcement of the Fed’s program last year were well above 6.00% and a return to those levels cannot be ruled out.

People on the fence
For example, a payment on a loan at 4.875% on a $350k loan is $1852 a month, versus $2098 a month at 6%. This $246 a month in savings amounts to $88,560 in overall loan savings for the 4.875% rate loan versus the 6% loan. So even though some people might be waiting for another 5% reduction in prices that might amount to only $10k, they would not be factoring in the $88k in lost savings if and when rates go back to 6% as indicated on the above example.

 
What will happen when the Feds stop buying MBS?

So the question on everyone’s mind is…what will happen when the Feds stop buying MBS come the 2nd quarter 2010? Well it will be difficult to see rates ever fight back to the levels we have seen this year, as there are both fundamental and technical reasons why a retracement back to these low rates will not happen. Fundamentally, the massive 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.

The Treasury has literally been printing money by way of Treasury auctions to pay for the massive spending and as we all know this is not going to stop next year.  These hundreds of Billions of dollars of new Bond supply will have to be absorbed by the markets, so the additional supply literally weighs on the entire Bond market and drags prices lower, thus raising rates. This supply must be absorbed, and while the Fed has been the largest  buyer recently, it will be difficult to see who will step in and take their place next year to balance all the selling. I am hopeful the Feds will make the decision to extend this MBS buying program at sometime next year, so they do not destroy the rate markets, just like the $8k tax credit program was extended to help the real estate market.

 
Get locked in soon

If you are interested in looking to refinance or are currently shopping for a home loan in San Diego, I would advise you to get your rate locked soon, so they can take advantage of the lowest rates we are likely to ever see in the future. If ever you have any questions regarding rates and mortgage bonds please feel free to contact me directly at 858-200-9602, I study market information daily and religiously and have software that tracks mortgage bonds live everyday, I think this is important so clients are always getting the right advice about what dictates interest rates and when and why they should lock their rates in. Also feel free to go to my websites at  www.michaeladeery.com or www.homeloansnsandiego.com for additonal information. I look forward to chatting soon.

Sincerely

Your mortgage planner

Michael Deery