rates higher and prices lower

Today the Case Shiller Index reported home prices fell more than twice as fast as expected in September than they did in August. I know many of my clients gasp when I tell them what their home appraised for, but it would appear prices may be going lower still.

On top of home values going down interest rates have gone up about .25% over the past few weeks and seem to be poised to go higher still. For many home buyers the rise in interest rates will negate the savings from a lower sale price, but that seems to be lost in the media's reporting.

Rates fell below the 200-day moving average (MA) back on November 15th and once below this key mark its going to be tough to see rates go lower again. The FNMA 3.5% bond shows that bond traders have tried to rally back above this 200-day MA three times over the past two weeks and turned lower each time. (bond prices going higher means rates go lower and vise versa).

I have been surprised rates have managed to stay as low as they are as long as they have. If you are looking to purchase a home or have been waiting to refinance because you expected rates to go lower...you may want to reevaluate your plan and get moving sooner than later to capture these low rates.

Rates continue to move higher

It was a rough week for mortgage rates. Rates are up about .25% for all loan products due to a jittery bond market. Ever Since the Fed announced Quantatative Easing 2 (QE2) last week mortgage bonds have gone lower; pushing up the yeilds (thus rates).

Many had heard or hoped that this round of QE2 would push rates even lower and held off on a refinance opportunity for those lower rates...turns out that was not a good decision. Most of the time my adivice to clients is that if they like the rate they are being offered they should lock it in and not worry about if things get better or worse after that moment.

Many think they can hold out for what they think will be a better rate...sometimes that gamble pays off...and sometimes it doesnt. Keep in perspective that getting a .125% better rate on a 300k loan is only $21.70 savings in their payment. $21.70 savings over 360 months (30 year loan) adds up to $7811.71. Do you really want to gamble with rates going up to save $7800 over a 30 year period?

I have been surprised with the long run of low rates. I dont expect rates to shoot through the roof quickly, but I do think that rates will go up from here and if you have an interest rate over 5.25% or are in an adjustable rate mortgage you really should jump on this opportunity to refinance to a low rate now...and not be the person trying to save $21.70/month who missed out on the opportunity altogether because rates never did go back down.

QE2-rates go up

The phone is ringing with clients asking how low rates have gone due to the Fed's Quantitative Easing 2 (QE2). hmmm...I guess the expectation is that with the Fed buying up Treasuries everyone thought that would push prices up...and thus the yields down (rates down.) That makes sense to me, but that isn't whats happened....why you ask?

The Fed is trying to accomplish a few primary goals.

1-to push the US dollar lower. When the dollar goes down it makes our exports seem cheaper in foreign markets thus increasing our exports. If we need to export more there will be a need for more workers to fill that demand thus improving the employment troubles.

2-because of #1 above the increase in exports will also improve the stock market...as those exports become sales the bottom line of US companies will improve and thus help the stock market move higher. An improvement in the stock market typically leads consumers to feel more 'confident' and consumers spend more of their money thus further improving the economy.

These both seem to be great goals if you are living in the US, but the trouble with these actions are that they are both designed to cause the economy to heat up and lead to improved GDP. Higher growth is good for your investments and if you want a job, but the growth is inflationary and inflation is not a good thing...above 2-3%. The Fed wants some inflation, but the trouble is that it could be hard for the Fed to control the rate of inflation in the coming years...things may heat up too much and inflation will definitely lead to higher rates. How high is the question.

Think back to the late 70's when we had massive Deflation...the Fed acted to heat things up then and if you are old enough you know what happened...rates in the early 80's were in the TEENS. Lets hope this round of Fed action will help improve the economy and that the Fed recognizes improvements early and can slow the ship before its cruising toward high inflation...and high rates.

Investors are mindful of the threat of inflation and may not be buying into the Feds plan to push bonds higher and rates lower...if investors dont buy the bonds along with the Fed the idea of lower rates may be a dream of the Feds and may not materialze for homeowners. The moral of the story is that rates are low...and may not go lower. Homeowners looking to refinance should be acting now and not wait for lower rates...4% should be low enough to encourage any thoughtful homeower.