Posts Tagged ‘Mortgage rates’

PENDING RATIOS STILL IMPROVING

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The ratio between pending sales and listed properties is the best single indicator of future market direction.
Silicon Valleys Pending Home Sales Index (PHSI) has now improved for 16 months in a row from from February 2011 to May 2012.
A PENDING SALE is defined as a Signed Purchase Contract.
Given the Federal Reserves commitment to keep rates down for at least another year this trend seems sure to continue with a steady increase of home prices.

The Fed and Mortgage Rates.

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I’ve lost count of the number of times I’ve been asked “I see the Fed lowered it’s rate(s) today, www.federalreserve.gov/ how much have mortgage rates dropped by”?

When I answer, as is most often the case, “they’ve not gone down, they’ve gone up”, the response is “how can that be.

So let’s try to explain it once and for all.

First the basics.

There are 3 actors in this story.

1.The Federal Reserve Bank.

2. Mortgage Backed Bonds/Securities.

3. Inflation.

FACT: There is no direct relationship between the Federal Reserve and Mortgage Interest Rates.

FACT: Despite the continued repetition from the Talking Heads in the mainstream media, there is also no direct connection between the 10 year Note and Mortgage Interest Rates. In fact the two will often go in opposite directions after a Fed action.

SUPER FACT: Mortgage Interest Rates are directly affected ONLY by the prices of Mortgage Backed Bonds, commonly referred to as Mortgage Backed Securities. For the most part these are Long Term Bonds issued by FANNIE MAE and FREDDYMAC, and it is their price going up or down which drives Mortgage Interest Rates.

As with all Long Term investments, Bonds are most directly affected by the outlook for Inflation, which makes it likely they will be paid back in the future with inflated dollars. Inflation reduces the current value of all Fixed Investments such as Bonds.

The Golden Rules:

1. Prospects of higher Inflation drive down prices of all Bonds.

2. When Bond prices go down, Mortgage Interest Rates go up, and vice versa.

Here is where the Fed comes in. Drastic lowering of rates by the Federal Reserve Bank will always lead to fears of Inflation and put downward pressure on all Bonds. This is precisely what we have seen since the start of this current lowering cycle.

The sole exception to this is your Home Equity Line of Credit (HELOC) which is usually tied to the Prime Rate. The Prime rate is historically 3% more than  the Fed Funds rate; so in today’s topsy-turvy world you will often  find your Equity Line loan having a lower interest rate than your 1st. Mortgage.

What Really Drives Mortgage Rates?

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I’ve just seen yet another “expurt” (spelling deliberate) on CSNBC explaining how we should track the 10 year Treasury Note in order to see what is happening to mortgage interest rates.

WRONG.

Mortgage interest rates are a direct result of prices on Mortgage Backed Securities. Prices for Fannie Mae Bonds are a good reflection of the market for these.

Just to illustrate this fact, consider that between Wed and Thu mornings of a recent week the 10 yr Note went up by 285 basis points while Mortgage Bonds rose by 12 basis points. Mortgage interest rates were virtually unchanged.

If your Loan Broker is using the price change in the 10 year Note to advise your clients on when to lock their loan, they might as well be reading the tea leaves in their morning cuppa. As a result your client is receiving financial advice from an unqualified person. Over the life of a Mortgage this can be very expensive advice. If you are the person who recommended the Loan Broker you may well lose a client and any referrals in the future.

To understand why this misconception survives you have to consider that most of the pundits who fill our airwave are involved in the Secondary Market where individual mortgages go to be collateralized. During the weeks between your loan closing and the Lender getting it packaged ready for re-sale its value can be reduced by market forces. To protect against that possibility the Lender will hedge by buying options on the 10 year Note. For these pundits the 10 year Note is very important. For us down here in the retail world it is totally irrelevant and should be ignored for our purposes.