The Quick and Expected Climb to 6% Mortgage Rates (How To Stay Dry When The Fed Throws Water At You)

Mortgage and Lending with San Diego VA Home Loans/858-777-9751

Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009.  For the past two months I've been warning that this will eventually happen. It's not because the economy is recovering; it isn't recovering.  The reason mortgage rates will rise to 6% or above, soomer rather than later is because that is the "natural" market.

maggie surfingAbout a year ago, The Federal Reserve announced a $1.25 Trillion mortgage rates subsidy,by purchasing mortgage-backed securities in the open market, through March, 2010.  Right before that subsidy was announced, mortgage rates were at or above 6%.  The subsidy was referred to as Bernanke's "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.

One year and 12 months into the 15-month game, we're at $1.07 Trillion spent on this open market MBS purchase progran.  This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right?  After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.

sandMarkets are discounting mechanisms meaning that traders anticipate how potent the Fed can be.  The Fed's just about out of bullets and MBS traders know it.  Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar REALTOR, on the beach this summer.

I had my daughter (Maggie) get me ten cups of water from the ocean.  Then I drew six lines in the sand, equidistant from each other, and labeled them 6% (on the right) through 4.5% (on the left). I had Maggie stand at 6% and explained that this represented Dec, 2008 mortgage rates.  I announced that my intention was to throw water at her until she moved to the left, away from 6% and towards 4.5%.  I grabbed two cups and threw one at her, then at the line marked 5.5%; Maggie quickly darted to the left. 

Then, I threw a cup at her every time she inched to the right.  I explained that Maggie was acting EXACTLY like the MBS traders, naturally gravitating towards the "natural" market.  Each time I chucked a cup full of"stimulus", Maggie moved back under 5% and closer to 4.5%.  Once, she got real daring (like the MBS market this past summer) and I threw three cups at her.

At the beginning of December, The Fed had two cups of water.  Now, they only have 1.5 cups of stimulus left. 

triMaggie, knowing that I only had 1-2 cups left, knew she could afford to get a bit wet in her dart towards 6%.  She faked me by jumping like Rickey Henderson dances off first base; I threw a half cup of water at her.  Then, she defiantly and purposefully walked towards 6%, knowing full well that I would throw my last cup of water at her.

Maggie knew she might get a bit wet but that I was utterly and completely out of water.  She got sprinkled but was safely standing at 6% and I was as bone dry as the Sonoran desert in July.

That's what I think is happening today.  The MBS traders are purposefully selling mortgage-backed securities, knowing that the Fed will buy every last bond they offer until they are "bone dry".  Everybody is running towards the finish line (6%) now and they don't care how wet they get along the way.

Mortgage rates are headed to 6% and it probably won't take until March, 2010 for them to get there.

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Comments (96)

Randy DeLaMare
Realtypath LLC - Salt Lake City, UT
Helping friends Realize their Real Estate Dreams

I didn't make it to the end of all of the comments, so I apologize if someone else hit on the same thing. I always think what will my clients get from a post like this. I hope that buyers understand how much a 1.5 to 2% rise in interest rates will effect how much house they will be able to afford. If they are already looking at the high end of the spectrum they can qualify for many of the houses may be beyond their reach if they wait to long. Great post and I enjoyed the analagy. I am also reblogging this.

Dec 24, 2009 07:32 AM
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

I've loved reading each and every one of your comments.  A few thoughts before I sign off for the holiday:

1- Kaye Thomas is right when she says that higher rates reduce qualifications by almost 10%- that could soften prices up a bit next year.

2- I think it's time to realize that we can't rely on the Fed or Congress to prop up housing anymore (it doesn't work, long-term anyway).  If the result is 6.5% rates and prices 5-10% below where they are today, y'all will still sell homes.

3- 2008 was a challenge for all of us.  2009 was a melee of confusing, maniacal, bittersweet victories.  Congratulations to those of you left standing.  I admire your commitment.

As always, it's been my honor and privilege to do business with those of you whom I met on Active Rain.  It's been an honor to meet so many of you from other states, offline as well.

Merry Christmas, Happy Chanukkah, Merry Solstice, and Happy New Year.

BB 12/24/2009

Dec 24, 2009 07:54 AM
Beverly of Bev & Bob Meaux
Keller Williams Suburban Realty - West Orange, NJ
Where Buying & Selling Works

Maggie, Maggie, got wet and so are we. This is going to be an interesting year as artificial catches up to reality. Thanks for the explanation.

Dec 24, 2009 09:39 AM
Rand Miller - Northport, NY

Very good, I agree rates have been stretched like a rubber band and they will snap back to a higher, safer and more easily sustained range, but this is not going to cause the real estate market to tank. I've compiled some figures just to quantify a little:

  • rate      100k         200k       300k [loan amounts]
  • 5%       536          1073       1610
  • 6%       599          1199       1798
  • diff.      +63          +126      +187 [increase in p/mo]

Now to see the past 5yr approx 30 yr FNMA rates. [there were spikes and valleys]

  • 12/04 = 5.8%
  • 6/05 = 5.8%
  • 12/05 = 6.2%
  • 6/06 = 6.8%
  • 12/06 = 6.3%
  • 6/07 = 6.8%
  • 12/07 = 6.6%
  • 6/08 = 6.8%
  • 12/08 = 5.9%
  • 6/09 = 5.6%
  • 12/09 = 5.4%

This is just to encourage you, a 1% increase isn't that bad. We are talking about buying a house  and the difference between $100k on a 30yr fixed is $61-63 per month. That is not much when you think of it. A 2-3% increase will slow down the market maybe but not just a 1%.

Rates at 5% to 6% are great. Yes, I remember 1983 at 13%, and when I got into the mortgage biz in 1987 rates started in Jan from 9.2% and ended at 10.2%. This was my intro to the mortgage biz and most of my biz was purchase loan biz. People were still buying.

Merry Christmas, remind people to enjoy what we have, we have plenty to be thankful of.


Dec 24, 2009 06:59 PM
Ty Lacroix
Envelope Real Estate Brokerage Inc - London, ON


Our government in Canada is contemplating raising the minimum down payment froom 5% to 10-15% and shortening the amortization period from 30-35 year to 25 year maximum.

The fear is that  those with 2-2.5% variables will be hit soon (summer 2010) with 5-6% mortgages which in turn doubles their monthly payments.

It also will cause more 'Orphan Mortgages'


Dec 25, 2009 01:40 AM
Eugene Adan
Adan Properties, Carlsbad, CA (760) 720-9710 - Carlsbad, CA
Carlsbad Real Estate


Sometimes people will pass on making a move until everything is in alignment.  Even waiting for rates to move back down to 4.50%.  Next!

Dec 25, 2009 01:53 AM
Rick Hendershot
BlogEasy for Real Estate Agents - International, IT


Nice analogy,. Not to be too pedantic, but I'm not sure I completely get it. If Maggie is standing on 5% and you throw water at her, she could move either way couldn't she? I don't think that's what either you or Ben want. Or perhaps you're throwing it just slightly right of her. Or maybe thrown-water-induced jumps to the right are not allowed in your little game.

On a slightly different note, this may be very good advice, but I think potential buyers have good reason to be skeptical of interest rate advice from realtors and mortgage people, most of whom paint the situation in terms that encourage "Buy Now", no matter what the circumstances.

Dec 25, 2009 04:35 AM
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

Or perhaps you're throwing it just slightly right of her.

You understand the analogy, Rick.

I think potential buyers have good reason to be skeptical of interest rate advice from realtors and mortgage people, most of whom paint the situation in terms that encourage "Buy Now", no matter what the circumstances.

So do I.  I'd like to think I've developed a reputation for objective analysis and prescient advice but I'm a salesman, just like you. Hopefully, consumers read my track record and discern whether or not I'm credible.

Dec 25, 2009 08:24 AM
Rick Hendershot
BlogEasy for Real Estate Agents - International, IT

Right. I agree. I guess one test of our objectivity would be how often we advise potential clients NOT to buy now: "Mr Client, I've looked at what you want to do, and I don't think this is a good time or way to do it."

Dec 26, 2009 12:53 AM
Susan Edwards

Thank You, Brian, for the important information on rates.  I have been hearing that rates are going to rise further, but your analogy is a good one to share for all to understand. 

Among some of the buyers that I am currently working with, I am working with a couple who is deciding whether to build (will take 6 months) or to buy a resale.  I want the best for my clients, and will share your information which will help in their decision.  The build will cost them more money ultimately.

Happy New Year!

Dec 26, 2009 01:18 AM
SarahGray Lamm
Allen Tate Realtors Chapel Hill, NC 919-819-8199 - Chapel Hill, NC
Realtor - 100K Hours of NC Real Estate Experience

Fantastic way to illustrate the point! I have my 'elevator speech' to accomplish the same thing but yours is WAY more fun! I feel a reblog coming on and I'm obviously not the only one! Thanks!

Dec 26, 2009 01:40 AM
Tonda & Steve Hoagland
Keller Williams Realty - Greenwood, IN
Real Estate - Greenwood Homes for Sale - Central I


Thanks for such a nicely illustrated explanation of a very confusing topic.  I've already re-bloogged!

Dec 26, 2009 01:42 AM
Jenny Durling
L.A. Property Solutions - Los Angeles, CA
For Los Angeles real estate help 213-215-4758

I have been telling my potential buyers that rates will go up when the Fed stops buying MBS- it's only a matter of time before they realize that i was right.

Dec 26, 2009 04:03 AM
Dottie Carter

Thanks for the analogy. Now, if I can only get a a couple fence sitters to see it too.  Dottie Carter

Dec 26, 2009 01:11 PM
Mari Montgomery
Mari Realty - Huntsville, TX
Mari Realty

This is awesome.  It clarified it  to me  and is really going to help me explain it to clients.  In fact I intend to use it today.  Thanks!

Dec 27, 2009 08:16 AM
Concerned Fella

You guys have to remember there are multiple points of view and you're only looking at it from the realtors perspective saying jump, jump off the fence and make a move. While a 1% rate hike may be another reason for you to market to buyers to buy now, I don't think it's really that big of a motivator when they see the economy is still tanking and no legitimate positive info coming from the Feds these days. Too much number fudging from the Whitehouse and releases of outright false and misleading info from this administration, people just aren't trusting our Government at all, even less than they already did. When people lose trust in the government, they lose control.

I see many buyers who have more cash to put down saying, I'll wait... I'd rather pay down more on principal after prices drop more due to higher interest rates, more inventory and foreclosures on the horizon than to "jump, jump now" when prices are bound to fall more.

Consumers are coming out of the woodwork now with the mentality of "I'd rather pay 6% on $100,000 than 5% on $200,000 when I can use the down payment money to pay down more of the principal on that $100,000 before taking the loan and getting an even better deal". I can't argue, we all know someone who bought in the late 70's with rates in the teens at sub $100,000 prices. Well could those prices be nearing again? Doubtful but consumers seem to think so and the longer they think that, the more it will become a reality.

We still have ahead of us a big mess to deal with in 2010 and beyond, We've still got coming.... 

  • A huge commercial real estate mess ahead with much larger commercial loans coming due. 
  • High redefault rates on modified loans and additional rises in unemployment which will deter any positive momentum experienced thus far
  • We have 2nd giant wave of mortgage issues ahead of us which will lead to even more foreclosures and housing problems. A huge number of Alt-A and Option-ARM mortgages are due to reset from the second quarter of 2010 through the fourth quarter of 2011.
  • National home prices are being estimated to fall an additional 10% in 2010 provided of course everything else in the economy looks up. Um.... I can't see how the Obama's administration is going to fake this one out or push it off for 2 more presidential election cycles.
Dec 27, 2009 11:49 AM
Trudy Sarver
Montville NJ Realtor, Morris & Essex County New Jersey Homes

Brian,  What at great post.  I agree with those who say rising rates will put a damper on the real estate market just when in some areas the market seems to be stabilizing.  Affordability will be affected.   Sellers will have to reduce their homes further if they want to move.

I have buyers today saying it doesn't pay for them to risk their money to buy when they may have to sell their home within 3- 5 years.  They feel it is safer to rent.

Sure rates were higher in the past, but look at the prices of homes. It all comes down to being able to afford the monthly payments and appreciating home ownership.

Dec 27, 2009 12:26 PM
Sandy McAlpine
Search Lake Norman Homes For Sale - Lake Norman NC

The buyers need to get off the fence and take advantage of the rates now. The generation above me still talks about the 18% rates in the 80s.

Dec 27, 2009 12:42 PM
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA

To date, I was wholly incorrect on this prediction.

Jul 29, 2010 12:02 PM
joe pierce

Buy To Let Mortgage Rates



fantastic way to illustrute the point......

Dec 14, 2010 10:05 PM