It is hard for me to hold back my tongue when I think about mortgage interest rates right now and the mortgage rate predictions that we recently heard in the news in late 2008. With what I know about the current interest rate forecast suggests that mortgage rates should be lower than the low 5's where they currently sit in March 2009.
The typical behavior of the stock market and mortgage interest rates work generally opposite of each other. The market behavior looks like this: stock market goes down - mortgage interest rates go down - stock market goes up - mortgage interest rates go up.
In the years that I have been in the mortgage business I have seen the stock market - mortgage rates trending relationship inverted only a few times - where the stock market went down and mortgage interest rates went up. If I recall the last time this happened was back in the early 2000's. And now it is happening again here in the early part of 2009.
In this article we explore a few reasons why this is happening to help shed some light on what mortgage interest rates might do in the future and what you might choose to do about purchasing a home or refinancing your mortgage.
News Hype Of Lower Interest Rates Slows Mortgage Lending
Back in the closing months of 2008 there was a lot of news hype about mortgage rates going down to 4.5% or lower sometime soon in 2009. At that time, mortgage rates were already in the upper 4's. A lot of people waited to refinace their mortgages because of this media hype over what rates were going to be doing in the short term. And now it seems like the window to refinance with those really low rates has passed at least for now.
Here we sit in Spring of 2009 and rates haven't dropped, and it looks like rates are heading back up from their lows of late 2008.
Let's take a shot at explaining, at least one reason, why rates have not gone down as hyped. Understanding why might lead those of you who are waiting on the sidelines waiting on rates to go down to taking some action in moving forward with refinancing your homes while rates are still attractive in all fairness.
For those of you who are waiting to purchase a new home because of the famed rumor about interest rates dropping into the mid 4's sometime in the near future, this article might serve as a call to action on your part to get in the buyer's market. There are a lot of great deals to be had on homes, and we still have near record low mortgage interest rates. Waiting might not be such a smart move if you are serious about buying a home.
The Normal Relationship Between The Stock Market And Mortgage Interest Rates
We're not going to fully explain how mortgage interest rates are determined as it takes quit a bit of explaining. Let's boil it down this way: under normal conditions mortgage interest rates respond to the purchase or sale of U.S. Treasury Bonds. As more bonds are purchased, mortgage rates go down, as Bonds are sold, rates goes up.
The New York Stock Exchange - the "DOW" - otherwise known as the stock market, is where investors buy and sell stocks. When investors are buying stocks - the stock market is going up. This also means that investors are not buying Treasury Bonds. In the reverse - if investors are selling stock - they are buying Treasure Bonds. Thus, when you hear that the stock market is down, you could assume that mortgage interest rates are getting better - going lower. This, in general, is how the stock market and mortgage interest rates trend together under normal market conditions.
However in abnormal times like now in 2009, the cash from the big stock market sell off isn't finding its way into the mortgage bond market. We'll take a look at why a little further into the article. For now, we need to discuss why this is relevant the housing market.
Does It Really Matter That Mortgage Interest Rates Are Not Going Down?
There are many explanations as to why mortgage interest rates are not going down as the news hype suggested they would. Does it really matter? Truth is, if you decide to refinance now or buy a home now and interest rates do go down to 4% as once suggested in the media, you can always take another look at refinancing again if market conditions play in your favor and it makes sense financially for you to do so.
If rates do go down and the resulting market action causes an increase in home purchases, then it's possible that home values might stop declining and perhaps make some type of reversal. If this happens then refinancing might be possible for many more folks who cannot do so at the moment because they are upside down on the home values and their mortgage balances.
Why Investors Are Not Buying U.S. Treasury Bonds To Lower Interest Rates
In late 2008 the U.S. Government bought a fair amount of mortgage backed securities, which means the U.S. Government became mortgage investors - something they have never really done before - at least not to this level of participation. With the U.S. Government buying these securities, investors who pulled their money out of the stock market are having a hard time swallowing the idea that the Treasury Bonds - mortgage bonds - are a good idea at the moment.
Why, because there is a lot of uncertainty about the future of the mortgage securities that the U.S. Government is buying. What happens if many of these mortgages go bad? The answer is that the U.S. Government and U.S. Citizens/Taxpayers lose money. This loss of money by the U.S. Government will most likely make the Treasury Bonds they have sold to investors go down in value. With this as a strong possibility investors are not willing to part with their cash to invest in such a risky investment environment until some time passes to see how things work out. So we wait...
For Now We Wait To See If Interest Rate Loan Modifications Work
We wait...for rates to go down, or we see what the Obama Housing Recovery Plan causes as it is played out. The Obama Housing Recovery Plan advocates that banks should increase their loan modifications in the form of interest rate reductions for troubled mortgage delinquent homeowners to stave off the foreclosures. To incent lenders and servicing companies to perform loan modifications the U.S. Government is offering to pay the bank for each mortgage the lender modifies.
If the plan works - pretty good plan, if it doesn't - the U.S. Government loses a lot of money with the real effects on the U.S. economy being unknown. One thing is for sure, the money in our pocket is worth less which means it gets more expensive for day to day living.
Should I Refinance Now Or Buy A House Now?
Well, I can't really say what you should do for liability reasons. But, if we don't see any lower interest rates and rates slowly creep up over time, then the opportunity you had to refinance or buy a home slip away. You have to live with that consequence. If you take action now and rates go down, well then there's additional actions that you might be able to take to get a lower rate than the already low rate that you have.
This is my explanation for why mortgage interest rates are not going down as they play out on your decision to refinance or buy a home - take it for what it is worth. If it makes sense to you, great - perhaps it will lead you to a decision about whether you should refinance or buy a home sooner than later. Either way, it is up to you. You make the call.
