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Over the last four weeks, there has been a major move in mortgage rates – up almost 1%. After a move like this, the market generally finds and settles into a trading range. That trading range is usually within a 1/4% range. I do not think the market has yet found that range, but I think it is close. For planning purposes, it is important to know and accept – regardless of our view on the matter - that bond traders presently have a bias towards higher long term interest rates.
The Fed and the Treasury are in a pickle, and it’s a sour one. Housing sales are critical to economic recovery. Low mortgage rates stimulate housing sales. Their ability to maintain low rates has been materially impacted by their need to finance huge federal deficits, with no end in sight. The growing supply of treasury bonds is putting considerable pressure on the long end of the yield curve. Their plan to support the market with the purchase of mortgage backed securities has been trumped by a rapid rise in treasury bond rates – especially the 10 year and 30 year bonds. Yesterday, China announced it is moving some of its reserves to the IMF and out of US Treasuries. It seems that some of our international benefactors are starting to question the safety of U.S. Treasury bonds – due to the huge supply and our fiscal deficits. Look for a lot of talk and “jawboning” on both of these subjects. They are the topic du jour and pose great danger to the economic recovery.
Sound scary? A little I guess. I offer it only as information and to assist with planning. Certainly, refinance activity will subside – already has. But there is still plenty of purchase activity and rates are still low. 4 ½% a month ago sounds great. But housing prices were still falling. Buying a house at 4 ½% is not quite so attractive when combined with the prospects of a drop in the value of the house you buy. Today, it seems housing prices are stabilizing. I think 5 ½% with a stable or increasing house value is better than 4 ½% wt a falling value. One can still buy a home for less than replacement cost. If you are a first time home buyer, you can get an $8Ktax credit as a bonus. Pretty sweet!
The Fed and the Treasury are in a pickle, and it’s a sour one. Housing sales are critical to economic recovery. Low mortgage rates stimulate housing sales. Their ability to maintain low rates has been materially impacted by their need to finance huge federal deficits, with no end in sight. The growing supply of treasury bonds is putting considerable pressure on the long end of the yield curve. Their plan to support the market with the purchase of mortgage backed securities has been trumped by a rapid rise in treasury bond rates – especially the 10 year and 30 year bonds. Yesterday, China announced it is moving some of its reserves to the IMF and out of US Treasuries. It seems that some of our international benefactors are starting to question the safety of U.S. Treasury bonds – due to the huge supply and our fiscal deficits. Look for a lot of talk and “jawboning” on both of these subjects. They are the topic du jour and pose great danger to the economic recovery.
Sound scary? A little I guess. I offer it only as information and to assist with planning. Certainly, refinance activity will subside – already has. But there is still plenty of purchase activity and rates are still low. 4 ½% a month ago sounds great. But housing prices were still falling. Buying a house at 4 ½% is not quite so attractive when combined with the prospects of a drop in the value of the house you buy. Today, it seems housing prices are stabilizing. I think 5 ½% with a stable or increasing house value is better than 4 ½% wt a falling value. One can still buy a home for less than replacement cost. If you are a first time home buyer, you can get an $8Ktax credit as a bonus. Pretty sweet!
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