Mortgage update
It has been an interesting week. We have seen some significant rate improvements, especially in the loan amounts below 417k. You can get below 5% if you are willing to pay some points!
Another major headline that has been causing a great deal of excitement was the announcement that Treasury is now authorized to buy HUGE additional quantities of Mortgage Backed Securities (MBS), with an eye towards driving rates down to a target of 4.5%.
Let’s walk through the logic of this: The idea is that treasury buys huge amounts of mortgages. Then, the rest of the market is supposed to respond to this additional demand, and jump in to buy.
A quick sidebar – The more demand there is for MBS, theoretically, the lower rate investors will demand to be willing to buy them. The safer an investment it is seen to be, the lower rates will go.
Okay, back to our story. So, the government will buy all these MBS. Then, the financial markets will get over their fear of MBS and the additional demand will create a world where MBS will be bought at 4.5%.
There is one flaw in this theory. YOU CANNOT LEGISLATE MARKETS. The government can try to keep the money moving, but rates will only come down when the financial markets get over their fear of mortgages as an investment. In my mind, it is the same as the government saying “we are going to make GM design and build cars that people want”. GM might figure that out on their own, but the government can’t force it. Might rates come down over time? Perhaps, but bear in mind that a rate of 4.5% is well into uncharted territory, so there will be some resistance to that kind of improvement. All I am saying is things are never quite that simple.
What does this mean to people who are trying to decide if they should buy now? Well, if they buy now, they are getting a great price, and a great rate. If the governments plan doesn’t work, then they still got a great price and a great rate. If it does work, and rates plunge, that will create a huge amount of buying demand, and home prices will bounce upward. Then, those that bought low will have enough equity tor refinance into an even better rate.
To that point, in late day trading today, we have seen rates run back up just a tiny bit. The rally that started late last week into this week has lost some steam, at least temporarily. It may pick back up next week, but when you are out meeting folks this weekend it is good to let them know that rates are not in a total free fall.
It is hard to feel like too much of a bonehead taking a fixed rate loan around 5%!
Regards,
Doug Smith – Stratis Financial
Your Conventional, Jumbo, and FHA/VA expert since 1993
3625 Del Amo Blvd #220, Torrance CA 90503
Direct 310 697-7033 Cell 310 508-5832 Fax 310 371-7469
