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Your Interest Rate Update

May 27, 2009

"As we know, there are known knowns. There are things we know we know. We also know there are known unknowns. That is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know." - Donald Rumsfeld, 2002

He might have been on to something. And, after today's market activity, where fixed rates jumped about .375% higher, and ARM and Jumbo rates barely moved, I think it's pretty clear, his point can be well taken in the world of economics, too.

Some of our known knowns include:

We know we've been through the bursting of both the housing and credit market bubbles
We know that economic growth has been dealt a severe blow, both domestically and across the globe
We know that unemployment is around 9% nationally, and if you count the "under employed" that's closer to 15%
We know that the United States has just moved through the largest era of consumption ever, highlighted by a negative savings rate (where consumption drove over 70% of our Gross Domestic Product) to what appears to be a more frugal lifestyle, with savings rates rising back to the 5%+ range.
We know the US and global economies will recover, at some point

Things we know, we don't know, include:

We know we don't know whether this recession will mirror previous recessions and whether milestones we think we've seen before signal specific turning points, similar to those of previous economic cycles, or if they're just markers on a new road
We know we don't know whether US consumption can resume and/or continue as the driver for world economic growth
We know we don't know whether the massive amounts of money the US - and other economies around the globe - are pumping into the system (and financing) will lead to hyper inflation, or whether the deflationary pressures of two popping bubbles will keep that at bay
We know we don't know exactly when, and how the US and global economies will recover, nor do we know what that will look like

Lastly, the unknown unknowns include:

Well, if I could list them, they wouldn't be unknown, would they? But, we can speculate...

So, why did we see such a knee jerk reaction in the Mortgage Backed Securities market today? Was it in fact knee jerk, or prescient moves by investors? Did anything fundamentally change in our economic picture?

If you've been paying attention, you've noticed that Treasury yields have been steadily rising for the last several weeks, while mortgage rates have remained at historic lows. So what happened today?

It really boils down to the same two drivers of mortgage rates, inflation (or fears of inflation) and supply/demand.

Investors (and remember, it's just investors who set mortgage rates) fear that the ongoing economic stimuli and burgeoning defecits will lead to inflationary pressures (some people even think Zimbabwe-like inflation of 1000s of percent). They feel - and there's data to support - that the deflationary impact of the credit and housing implosions have been muted. So, when all the stimuli take hold, we could overly hot inflation, if not outright hyper inflation. Since that erodes the long-term return of a fixed investment, they want to charge more up front.

These investors are also concerned that as the US continues issuing Treasuries and Government Bonds in unprecedented quantities to finance our spending, buyers' appetite for those bonds will wane, despite very strong participation in recent Treasury auctions, so yields will need to rise further to entice continued investment. That would mean higher mortgage rates, too.

And lastly, there's discussion/rumors that much like the UK is facing possible credit downgrades, the US may lose it's AAA credit rating, which would certainly drive Treasury yields, and mortgage rates higher.

Whether any of that will actually happen, I'd call a known unknown. But, markets like to react that way - as a hedge.

So what will the Fed do? As I've been reporting, their purchases of Mortgage Backed Securities have focused on coupons between 4.5% and 5.5%, which translates into loans with rates in the 5.5% to 6.5% range. Will they now dive into buying MBS in the 3% to 4% range to spur that market along? Will it work? We'll see.

Whether they do or not, will depend on how they read their tea leaves and evaluate their known knowns, known unknowns and unknown unknowns.

Either way, I believe that although our economy may show signs of recovery in the second half of this year, we're in a pretty protracted economic downturn, which is likely to depress stock market gains for some time. That's good for lower interest rates because they can provide a less risky, and more stable return. Meanwhile, since there's such an overhang of supply and capacity in pretty much every economic sector, more companies will continue to go away as their sales will not support their bottom line. And lastly, as the US Consumer continues to retrench, we'll likely retreat from driving over 70% of GDP back down to the mid 60%'s. To me, that all spells long contraction and slow recovery. As such, I really do think mortgage rates are likely to stay pretty low for some time (some time being 6-12 more months).

But, that spike we saw today - whether by gradual progression, or sudden fits and spurts- will eventually happen. And, it's unrealistic to think that there's no horizon to the sub 5% (and even sub 6%) mortgage rates we're growing accustomed to.

So, as I always say, if everything has lined up for you, it's always good to take a bird in the hand. You never know how long it'll be there.

And that's my two cents. As always, if you, your family, or friends have any questions about financing residential or commercial real estate, please call or email me. Here are your rates for the rest of this week. Cheers! E

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	8.000%	1	8.240%	$300,000.00	$ 2,086
30 yr fixed mortgage	5.125%	1	5.365%	$300,000.00	$ 1,633
15 yr fixed mortgage	4.375%	1	4.575%	$300,000.00	$ 2,276
3/1 ARM	4.000%	1	4.190%	$300,000.00	$ 1,432
5/1 ARM	4.375%	1	4.585%	$300,000.00	$ 1,498
5/1 ARM Int Only	4.625%	1	4.885%	$300,000.00	$ 1,156
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	7.625%	1.5	8.885%	$550,000.00	$ 3,893
15 yr fixed mortgage	6.500%	1	6.755%	$550,000.00	$ 4,791
3/1 ARM	4.500%	1	4.680%	$550,000.00	$ 2,787
5/1 ARM	5.500%	1	5.720%	$550,000.00	$ 3,123
5/1 ARM Int Only	5.750%	1	6.000%	$550,000.00	$ 2,635
Rates subject to change without notice.
These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why. Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates. Licensed by the CA Dept of Real Estate, #01760965. Equal Opportunity Housing Lender. If you'd like to be removed from this list, please reply with REMOVE in the subject line. You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line. To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.