Have you ever been unicorn hunting? If so, you came back empty handed didn’t you? Many people we have talked to over the last couple of months may as well be full time unicorn hunters! The unicorn, in this case, is the elusive 4.5% interest rate without points. We had several people that had a 4.75% offer in hand, but opted to wait until rates got lower. That proved to be like hunting for a unicorn; and now those people would gladly take a 5.0% rate!!
The Federal Reserve has spent over $550 Billion dollars year to date in an effort to drive down mortgage interest rates. For the most part, the plan worked. However, their plan could only do so much and it wasn’t a permanent buy down. According to Freddie Mac the average interest rate for the week of May 21 was 4.82%. In the following 3 weeks interest rates have risen to 5.59% for the week of June 11.
Fortunately, since that time interest rates have begun to improve. So why the spike and will we ever see rates below 5.00% again?
First of all, let me start with a disclaimer. We have been in a period of several months where the financial markets are not taking their cues from economic indicators any longer. The market is being driven wildly by fear. I remember when Saddam Hussein was found in that hole and the stock market shot higher in belief that the war was a thing of the past. That day I think interest rates worsened by .25%; and that day hung in my brain as a HUGE day in the market. Flash forward to today and we have interest rate swings of at least .25% almost regularly. Is there logic for it? No. Investors want to be at the forefront with buyers and sellers, (whatever the flavor of the hour) and they seem to have a stomach for buying or selling a lot! So because fear is unpredictable you must allow me the caveat to be wrong.
Have you ever tried to mop up a flood with a sponge? You’d better have a big sponge, or a small flood! With all the mortgages being refinanced currently, all of those mortgage backed securities are no longer securitized by a mortgage. They’re being sold again on the market. There is a huge supply of securities right now (the flood) and few buyers (sponges). The Fed can buy them, but only so much at a time. With increased supply comes lower price. With lower price comes less money to lend and thus higher interest rates.
Additionally, the Fed’s efforts are very inflationary. They are buying debt like crazy. This has got to cause inflation (eventually) and the fear of inflation is terrible for long term securities like long term mortgage rates. Investors are planning for this inflation by selling long term securities and buying stocks. In the last couple of days we’re seeing a reversal of this, but long term I believe interest rates are going to continue their trend upward with little dips along the way.
The good news is that the economy is showing glimmers of life, housing seems to be really be taking off, both nationally and locally, and people can still get a mortgage in the mid 5% range. Historically how often does that happen??
Dempsey Hammond, Jr. a friend of mine and President of “Asset Protection Strategies, Inc” has this to say about interest rates: “Under President Obama’s Budget Plan, the Federal Debt has exploded. Unfortunately, it is rising much faster than our Gross Domestic Product (GDP). The Congressional Budget Office projects that the Federal Debt is on-track to hit 100% of GDP in just another 5 years. This Debt burden is clearly incompatible with our current Triple A rating. The time to “lock-in” rates is now before the potential downgrade is realized, and subsequent rates increase.”
I believe Dempsey is correct. Are you hunting unicorns, or are you going to finally take advantage of our (still) low interest rates to purchase or refinance a home?
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