How long -- REALLY -- will interest rates stay low?!?!? This is a question I'm asked almost daily.
It's probably safe to say everyone agrees one of the primary reasons why mortgage rates have stayed so low for so long is the commitment the Fed has to buying Mortgage Backed Securities from Fannie Mae and Freddie Mac. This artificial, temporary demand has kept prices for MBS higher (which means rates are lower) than if we hadn't had the MBS purchase volume coming from the Fed.
By the by -- "the Fed" in this instance refers to the Federal Reserve Bank of New York, which is carrying out the MBS purchases. You can view their Web site here.
By the by the by -- "MBS" refers to Mortgage Backed Securities.
The total amount the Fed is committed to spending by the end of 2009 is $1.25 trillion; to date they have purchased $849 billion, leaving roughly $400 billion to purchase by year-end.
With 15 weeks left it puts the Fed purchasing schedule at approximately $26 billion per week, which they are on-track to accomplish based on their weekly purchasing history.
Here's the kicker: as we get closer to the end of the Fed MBS purchasing, mortgage rates will rise. Let that sink in because we are already 2/3 of the way through the Fed purchasing MBS and we only have 3 1/2 months left in 2009!
There are two reasons why rates will climb:
A) MBS Investors (other than the Fed) know that current high-demand is very temporary and if they wait until after the Fed stops purchasing, they will get a higher return on their investment (often referred to as the 'yield'); and
B) Mortgage lenders know if they commit to a rate of 5% on a $200,000 loan for Bob and Betty Buyer or Russ and Rachel Refinacer but don't sell that loan (called the NOTE) to Fannie Mae or Freddie Mac before the market rate goes up to 6% (the timing of this is often referred to as market risk), they lose money on that loan -- $2K for the first year to be specific.
A loss of $2K may not seems like much, but imagine a lender losing 1% on $100 million dollars' worth of loans (a 1% rate increase could easily happen if demand drops off quickly), then they just lost a million dollars in the first year alone. That's a lot of 'market risk' and lenders will start 'padding' their rates to try to mitigate potential losses as much as possible.
I am asked the following daily:
Q: James, what do you think is going to happen with interest rates?
A: My guess is they'll start rising in the next 30-45 days and be above 6% by the end of the year, based on my above assessment. And if they don't hit that mark then I owe fellow ActiveRainer Paul McFadden a cup of coffee.
Don't get me wrong -- low rates is good for business. I would very happily be wrong about this (and Paul, I won't even wimper if I end up shelling out for coffee. But when I ask my Magic 8-ball the question: Will interest rates stay low? It gives me the same answer, nearly every time:
James, don't hold your breath.
And by the way -- because rates will be going up very shortly in my honest opinion, if you've been waiting to refinance then it's time to put the pedal to the metal; due to great values and the first-time home buyer tax credit that expires after November 30th, if you're waiting to buy then let's kick it into high-gear.
And Paul, I'll take a double-tall vanilla latte, no whip.
Thanks for reading! --James Wirth
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