Safe Haven Trade to Unwind

Mortgage rates had a nice run from February through most of March. Much of the improvement with rates was due to major disasters in New Zealand and Japan along with the unrest in the middle east. Geopolitical concerns and unrest drive investors to the bond market as a 'safe' place to put their money when there are times of uncertainty. This played out nice for mortgage rates as the increase in the demand for mortgage bonds drove down rates. Though the situation in Libya and mess in Japan are still front page news events their immediate threat has passed a bit and mortgage rates are starting to trend higher. Along with the average investor starting to pull out of bonds the Treasury department has began to unwind their holdings of mortgage bonds and the Federal Reserves QE2 program ends in June. All these events along with the 1.6 TRILLION dollar budget deficit will need to be funded with new bonds being issued in the market place. 1,600,000,000.00 LOTS OF ZEROS!! That's a lot of supply that will hit the markets which will likely push rates higher through the next year. I have tried to stress to my clients that rates have been extremely low the past four years...and that typically rates are around 7%-8%. When...and I did mean to use the word 'when'... rates go up many will have a harder time affording homes due to the higher payments that will come along with those higher rates. We are living in a very unique time. With these low rates and the drop in prices buyers have a great opportunity to jump into home ownership with rates they will be able to brag about for decades to come. If you need a home loan...now is the time to lock it in!

Whats up with advice?

So I have been tweeting and blogging and FB-ing for weeks now that its a prudent choice to lock in your rate if you are a current homeowner shopping for a refinance or a new buyer trying to figure out if you should lock or float on your interest rate. I have been very consistent on my advice. I have said...'lock' and 'lock today' and 'lock now'...you get the picture. Along the way each day rates seemed to improve a bit and my advice may have seemed wrong.

I am certainly capable of admitting when I am wrong (just don't ask my wife), but in this case I stand by my advice and still suggest its the time to lock. Though rates have managed to improve over the past few weeks due to the events in the middle east and the disaster in Japan (that is still playing out) the improvement has been part of a defensive play for investors. The fundamentals are still pointing in the direction of economic recovery and real signs of inflation...both of which are ultimately going to drive rates higher.

So if you have been reading my posts, my tweets, my Facebook page and think I have lost my mind...I haven't. I just think those out there who are playing the float game will eventually (likely very soon) get burned on the volatility working against them and when rates do move higher I don't see them coming back down again...unless there is an even more devastating natural/human disaster than Lybia and Japan have experienced.

What are the odds things will get worse than what we have seen...those are the same odds that we will see rates get lower from here.

Lock 'em if you are looking to do a loan in the next 30 days!

Japan-Safe haven in bonds

What a sad story coming out of Japan. The earthquake wasn't enough. Then a tsunami...still not enough. Now the potential melt down of their nuclear facilities. This massive disaster has investors pulling out of the equity markets and going to the safe haven of bonds as a way to protect their investment funds in such an uncertain time.

This is pretty typical behaviour during a time of uncertainty, but it is usually just a short term move as the uncertainty will eventually not be as 'uncertain.' Mortgage bonds have benefit ted tremendously over the past three weeks and we are seeing rates at the same levels we saw back in January. Though this is great for the still struggling housing market it will likely be short lived.

The trouble in Japan will be less cloudy and once the government of Japan and the insurance companies in Japan start pulling funds to clean up and rebuild the mortgage bonds and US Treasuries will take it on the chin. Japan is the 2nd largest owner of US Bonds. Japan will likely sell some of their holdings in US Bonds to pay for the repairs and clean up...the amount they will have to spend to repair the damage is going to be a very big number. Bonds will very likely fall when Japan begins to sell and investors feel the worst is behind them.

So those of you who may be celebrating these low rates and may be looking to buy a house in a few months or later this summer...don't get too carried away because rates may be back in the 5's on a 30-year fixed mortgage by the time you actually get ready to close.

Now is a great time for those homeowners who were going to refinance last year, but waited a little too long...don't wait any longer and miss this opportunity a 2nd time...you really will kick yourself in the backside if you wait for things to get better from here.

My thoughts and prayers go out to the families and communities affected by this disaster in Japan. I hope things improve each day and that country can begin the process of recovery.

current market

What a weekend of news. I am amazed at the devastation in Japan that occurred last Friday. The pictures are heartbreaking. I am sure the situation in Japan is just as difficult for you to watch as it is for me. This natural disaster along with the continued trouble in the middle east has caused our markets to take a pause.

Mortgage rates are often a beneficiary of instability and times of uncertainty. With these latest events mortgage rates have improved and have moved back to the levels we were seeing late last year. Though the reason rates are lower is sad it does provide an opportunity for home owners and buyers to take advantage of what may be the last chance to lock in really low rates.

My concern with many consumers is that there is often a sense that things will stay the way they are for a while. Rates were on the rise earlier this year and I expect they will rise again throughout the year as other economic trends become more obvious. So my advice now is for home owners (and buyers) to lock in their interest rate (if possible) and take advantage of this current situation as it will soon be resolved and once it has rates will likely be back on the rise.

With both Japan and the middle east we will likely see economic events that will ultimately have a negative affect on mortgage rates result so now really is the time.

big week

Today reports out of China and Britain show that inflation abroad is a real concern. China has had to make several rate hikes within their banking system to keep inflation from getting away on them. Though inflation here in the US is still low its a global market for investors and if they are able to get a higher yield on investments in China (due to their higher rates) our bonds look less attractive and our rates will have to rise to attract investors.

That being said we have both the Producers Price Index (PPI) and the Consumers Price Index (CPI) figures coming out tomorrow and Thursday. If these numbers show inflation is creeping up here in the US we could very easily see mortgage rates move higher in a hurry. Rates have made a big move higher in recent weeks, but the past few days rates have found a level of support and stabilized. IF these reports are not big surprises we could see rates improve in the short-term, but the long-term outlook is still indicating that rates will be moving higher in 2011.

My next post will address some of the changes coming with Fannie Mae and Freddie Mac along with the new Fed rules coming out in April that relate to the Dodd-Frank bill. All these changes are part of the governments effort to avoid another big disaster in the housing market. The effect they will certainly have is higher rates and costs to the consumer and potentially limiting competition in the mortgage lending industry. Stay tuned.

What to expect tomorrow?

Rates managed to improve a little today after going higher yesterday due to an ADP payroll report that exceeded all expectations. Though the ADP report has been all over the place and hasn't consistently been a good indication of the actual payroll figures that are released the first Friday of the month. The Non-Farm Payroll report due out tomorrow can be a big market mover.

Technically (technical indicators on the FNMA bond) the bond is set for a bump higher which would mean rates may improve going forward, but technicals take a back seat to this report as a good job number will be bad for mortgage rates and will certainly trump technicals.

So what will happen tomorrow? The number everyone is expecting is 150k new jobs or more. If the number of new jobs created is much larger than this rates will certainly go higher...and quickly. If the number is much below 150k I would expect rates to either improve or hold where they are now. I don't expect rates to improve dramatically even with a miss to the downside...unless its a huge miss.

So what to do? If you are looking to refinance you should have been locking in your rate by now, but if you are trying to figure out if you are going to be able to benefit from a refinance in the next few months I guess you hope for a low employment figure and then lock in the rate pretty quick because rates are on the rise and I don't think that general trend will reverse over the coming months.

Me...I want low rates, but I also want to see the economy improve and jobs added so there are more people out there who can afford to purchase a new home or feel more secure in their current job and make a move to a more expensive home...this is what is needed to really get the housing sector back on solid ground.

Either way I will be here to help with any questions or a new loan if that is in your goals for 2011.

Watch the the number tomorrow morning and you can also follow me on Twitter..where I am a little more timely with info. http://twitter.com/westseattlemtg

Happy new year...it will be a fun one!

Bonds trading much lower

Interest rates were below 4% on a 30-year fixed only a month ago..whats going on now? Rates have moved up .75% in a months time due to the quantitative easing 2, improved economic indicators, and government actions that will increase our deficits.

Home buyers and folks who have hit the pause button in December will wake up on New Years day (or just after) to rates that are significantly higher than they expected. Though these rates are still very attractive in comparison to historic averages this rise in rates will either force buyers to lower their price point, put more down, or be ready to assume a higher payment for the same house.

I have folks tell me they are going to wait a little longer for values to come down further. Here is a real lesson. current list price of 400k. Buyer with 20% down on a 30 year fixed mortgage at 4% would have a principal and interest payment of 1527.73/month ($320k loan amount.)

If the same buyer waited and buys next spring when rates are at 5% (hopefully not higher) to keep their payment at the same 1527.73/month the loan amount would be $284600 which would either require an additional $35,400 more down, or buy a house listed at 355,750 (assuming the same 20% down.)

Most buyers don't have an extra $35k laying around so they would likely opt for the lower price. $355,750 would represent an 11% reduction in value. What does all this mean. It means if prices fall 11% and rates go up to 5% you just waited to get the same monthly payment. As rates go up further you can see that the payment increase will require a much larger drop in values. I am pretty sure rates will continue to rise, but I am not sure values will drop more than 10% in 2011.

Buyers should be anxiously looking to lock in a house and a rate early in 2011 to avoid the tough decisions that will come later in the year when rates track higher. I think rates have seen their lows and if you were waiting for a better rate you may have just missed out on that opportunity as I don't see many scenarios that put interest rates back where they were.