A thought on mortgage rates

I had a conversation yesterday with one of my clients about the state of the economy and where things might be going with interest rates. It seem that with so much inventory on the market, buyers are feeling pretty confident that they can hold back and keep waiting for prices to drop. This certainly could be one scenario, but another scenario is that while the present moment has the benefit of wide scope of inventory and extremely favorable interest rates, a very real concern is how long can interest rates hover at the present level. On Tuesday, I got an update from my mortgage broker friend Andy Scott from Peregrine Lending who gave me a quick snapshot of what was going on currently. Here is what he had to say as of Tuesday:

We’ve seen Mortgage Backed Securities (MBS) hit lows nearly everyday over the last week. Much of this can be attributed to inflation concerns…as we can all feel at the pump and the grocery store. Speaking of inflation, the Fed Funds Futures are now pricing in at 0.25% increase for the next Fed meeting. That means that the current prime index would move from the current levels of 5.00% to 5.25% should that increase actually materialize. This would actually be good as raising the short term rates would benefit the strength of the dollar and inversely lower the cost of oil as well as improve long term rates (30 year money) since inflation is the arch enemy of bonds, and lowering inflation would benefit MBS and long term bonds. Rates have been on the rise, but some good news is that Fannie Mae and Freddie Mac have made decisions to remove the “at risk”/”declining” market policies which have been effect. These market policies helped lenders identify areas that have had significant loss of value and thus allowed lenders to restrict the amount of money they would lend by 5% of the total loan-to-value. This is good, as many forecasters and analysts believe that we are seeing a bottom to the market and this move should help to provide more liquidity to the marketplace.”

It is a complex set of factors that move our economics, and as you can glean from Andy’s comment, there are certainly some nice things that are happening that are an advantage to buyers such as the removal of the declining market policies… which frankly have made it difficult for some buyers who are really pushing their limits on what they can afford on a monthly basis as far as mortgage payments because needing to put down more money initially is sometimes just not possible. The removal of the declining market policy could potentially save buyers who only have a minimum down payment from having to look at homes that fall into a lower price range than they might now be able to afford… and this could make the difference between being in a better neighborhood. It is fascinating stuff. I certainly don’t have a crystal ball and every person I know that has been involved on the mortgage end of real estate pretty much have the same story — things are changing on a daily basis, and “I can’t tell you what’s really happening other than what I see before me today.”

My advice to buyers who can purchase now and have decent credit is to go find a house that you can live in for the next 5 years and buy it. If you have the potential for buying an investment property… go out and find a property that you can get to cash flow and buy it. Get it while the gettin’s good!


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