Volatile mortgage rates frustrating to buyers
Since mid-September, mortgage rates have gyrated wildly, often going up or down in as much as half a percentage point within 36 hours or less.
This has left borrowers often frustrated and confused as to when to lock to get the best rate, or wondering if they should just sit out the current crisis (or better termed the crisis of the hour) before doing anything.
For those who wish to purchase and take advantage of the buyer’s market right now in real estate, they often have contract deadlines to meet and do not have the luxury of waiting. For those who are refinancing, trying to hit the bottom of the interest rates is a game that will have far more losers than winners.
The forces behind these rate swings are tied to the unprecedented mess the global economy has found itself in. The rates on mortgage money have nothing whatsoever to do with the rates charged by the Federal Reserve or the prime rate.
In fact the two are often inverse of each other ” when the prime goes down mortgage rates go up, and vice versa. Rates are set by the demand for mortgage-backed bonds. If the demand for bonds is high the rates drop, if the demand is low rates rise.
In the past, rates were somewhat predictable from watching various indicators of the economy, such as unemployment or consumer confidence. Generally, rising unemployment or dropping consumer confidence meant rates would fall as investors sought the relative safety of mortgage-backed bonds.
But these days the market swings have occurred on days when there was no economic news to speak of, and often when announcements did come out the effect was opposite of what we would have expected. For example, this week consumer confidence dropped like a rock and mortgage rates went up.
So what is causing all the commotion? It is really due to the fact that some very large players with probably multi-billion dollar positions in the mortgage bond markets need to unwind some very complicated deals and restructure their holdings and raise liquidity. They have to trade regardless of the apparent trends of the market.
Many times these same players have large positions in the stock market ” and a similar scenario is taking place with the huge swings of the stock market. While many of us probably don’t even want to look at our 401k balances, there are companies out there that are strung out on a myriad of longs and shorts, futures and credit swaps that they need to restructure and in many cases, raise cash. On the other side there are buyers who are looking for deals or who may have sold short when the stock went up and have to buy at any price to cover their trades.
In addition, mortgage-backed securities are some days less appealing to investors because they are generally longer term bonds. With extreme volatility and the need for quick cash to either cover losses or scoop up bargains, many investors are parking their excess cash in shorter-term Treasury bills which have more liquidity. This trend increases mortgage rates.
The combined volatility of the stock and bond markets means we will continue to see huge swings in the markets. For homeowners and buyers looking for a rate, my suggestion is don’t try and wait for what you see as the bottom. If it works and it’s reasonable, take it. You will likely sleep better at night and I figure that’s worth at least one-quarter percent, even if rates drop after you lock.
Keep in mind that rates in the high 5 and low 6 percent range are quite good historically. If rates move dramatically lower you can always refinance in the future. If they move dramatically higher and you didn’t lock and have to close on your purchase, you will probably be kicking yourself.
And remember, a cut in the prime does not mean long-term rates just dropped!
Chris Neuswanger is a loan originator with Macro Financial Group in Avon and welcomes mortgage-related inquiries from readers. He may be reached at 970-748-0342.
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