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

By
Real Estate Mortgage Broker 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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Re-Bloggged 28 times:

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  1. Jim Lee 12/23/2009 08:54 AM
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  5. Phil Caulfield 12/23/2009 05:52 PM
  6. Larry Brewer 12/24/2009 08:58 AM
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  23. Pam Turner, REALTOR®, e-PRO®, SFR 12/26/2009 01:06 PM
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mortgage rates headed to 6

Comments 96 New Comment

Anonymous #92
Anonymous
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.
December 27, 2009 07:49 PM
Rainer
9,933
Trudy Sarver
Montville NJ Realtor, Morris & Essex County New Jersey Homes
RE/MAX HOME CONNECTION

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.

December 27, 2009 08:26 PM
Rainmaker
192,165
Sandy McAlpine
Search Lake Norman Homes For Sale - Lake Norman NC
McAlpine Properties

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.

December 27, 2009 08:42 PM
Rainmaker
298,656
Brian Brady
VA Home Loans/San Diego
San Diego VA Home Loans/858-777-9751

To date, I was wholly incorrect on this prediction.

July 29, 2010 07:02 PM
Rainer
250
joe pierce

Buy To Let Mortgage Rates

 

 

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

December 15, 2010 06:05 AM
Rainmaker
298,656

Brian Brady

VA Home Loans/San Diego
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