You have no idea how many calls I get every day from customers who just listened to some ad on the radio telling them that the Fed has just blasted mortgage rates through the floor. They’re ready to take that 5% 30-year fixed rate with no closing costs!
I’d take it too, if only it were true…
In over 28 years of banking, this is the most volatile I have ever seen rates.
We hit a low point on January 28, 2008, when a conforming 30 year fixed rate hit 5.5% with no loan fee or points charged. It lasted for literally about three hours, then started to climb. And climb it did. Over the next three weeks, rates increased a full percentage point!
The most common question I get is “why are fixed rates rising when the Fed is cutting?” My first answer is that there is not a direct correlation between Fed cuts and mortgage rates. The Fed is cutting a very short term rate, basically what banks charge each other to borrow money overnight. Long-term mortgage rates are driven by the bond market; investor’s willingness to purchase mortgage-backed securities. Fed actions will eventually influence long-term rates, but not directly.
Why aren’t they dropping? There are several reasons, but the main factors keeping rates up are:
1. Fear of Inflation: Inflation erodes the value of a bond, causing bond prices to fall, and rates to rise. Current high oil prices are having a negative affect on the bond market.
2. Too much supply: Banks are currently selling lots (and I mean lots) of mortgage-backed securities on the secondary markets. This is flooding the bond market with supply. And, right out of Econ 101, when supply exceeds demand, prices fall (causing rates to rise).
The Fed is in a real tight spot right now:
* To combat inflation, they should increase rates.
* To combat a slowing housing market and the risk of a recession, they should cut rates.
On top of that, Europe is all over us to boost the value of our dollar. How do you do that? By increasing rates.
What is my forecast for rates? Nope, not gonna do it. As economists like to say, “a person who forecasts rates is on a fools errand.”
