Mortgage rates go up again

I tend to read Mish's blog and I find it enjoyable, thought-provoking and often spot-on, but I think he tends to be overly gloomy and he finds a way to spin every positive piece of economic news into a negative.
 
Yesterday was a very bad omen. Artificially low mortgage rates have come to an end. No one wants the long bonds and everyone wants the safety of the short end. This is the weed-killer for all those green shoots.
 
I got mine already.... and moved into the new house...

Now, my sister is still hanging out with only two days left on her lock... and they have been stalling for the last week... hope it closed today...
 
bsmup said:
Yesterday was a very bad omen. Artificially low mortgage rates have come to an end. No one wants the long bonds and everyone wants the safety of the short end. This is the weed-killer for all those green shoots.
Click to expand...

Yes, it does look worrisome. I'm trying to figure out what the consequences might be but I'm just spinning my mental wheels. I hope that the stock market doesn't tank again.

Here's more analysis
http://www.nakedcapitalism.com/2009/05/bond-carnage-muddled-inflation-thinking.html
"The move up in yields isn't simply a problem for companies that might have wanted to raise longer-term funding in the newly optimistic environment; it's a huge spanner in the works for the Fed's efforts to keep mortgage rates artificially low. Recall that while the Fed has been intervening in the markets, it has gone to great lengths to stress that it not doing quantitative easing, but influencing spreads. But with the long bond at 4.65%,, it can't keep yields on mortgages as low as it wants them to be (not much north of 5%). "
 
I've learned that trying to figure out long term trends from all the short-term volatility just gives me a headache. My "defense" is to try to diversify to survive as many possible economic trends as possible and hope for the best. It won't provide me world-beating returns, but it's also less likely to ruin me utterly.
 
I'm supposed to sign my refi papers tonight. The rate lock is long gone. No idea what the rates and points will be now. This should be interesting. I signed up for 4.375% with about 1.7 points on 3/26/09 with a 30 day lock. That offer has been pretty stable up until yesterday (5/27/09). 5/26/09 they offered 4.375% for 1.8 points. Yesterday they wanted 3.963 points for 4.375%, or my original 1.7 points were good for about a 5% rate. This morning 4.75% was the lowest rate showing and they want 1.7 points for that. A little less than that right now.

So, depending on when they finalized the papers, my rate could be anywhere. If it's at the top of the spike I'm not going to sign. I'll have to think about 4.75%. That's still historically nice, and I feel pretty much like the bond market does. Only an appraisal and a subordination fee sunk so far.
 
Low interest mortgages does nothing to solve the long term picture. Sure, it allows the current home owner to more easily afford the current "expensive" mortgage, but unless rates stay low forever, future buyers will not be able to afford the expensive house prices when rates go up. I guess if our economy goes into Hyper inflation, Mortgage mess will be solved!
 
Hmmm, well. I disagree with that. I believe that the low rates are making a lot of real estate sales possible, which can only be a good thing IMO.
 
DAYDREAMER said:
Low interest mortgages does nothing to solve the long term picture. Sure, it allows the current home owner to more easily afford the current "expensive" mortgage, but unless rates stay low forever, future buyers will not be able to afford the expensive house prices when rates go up. I guess if our economy goes into Hyper inflation, Mortgage mess will be solved!
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In the long term, true. In the short term, it helps. In the intermediate term, a gradual transition from historically low mortgage rates to relatively average/inline rates would probably be the best outcome.
 
DAYDREAMER said:
Low interest mortgages does nothing to solve the long term picture. Sure, it allows the current home owner to more easily afford the current "expensive" mortgage, but unless rates stay low forever, future buyers will not be able to afford the expensive house prices when rates go up. I guess if our economy goes into Hyper inflation, Mortgage mess will be solved!
Click to expand...

For some perspective, I bought my current home in 2000. Rate was 8.25%...
 
HFWR said:
For some perspective, I bought my current home in 2000. Rate was 8.25%...
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My first purchased home was a small condo in San Jose in 1989. The rate? 11%.

We refi'd it twice -- to 8.25% and then to 6.375% -- before selling it in '97.
 
First home (1984) was at 10.25% with 2 points
Second Home (2001) was at 7.25% with no points
Third Home (2001) was at 6.125% with one point
Looking at ~5% this time around... a half-point rise isn't a big deal, since we are looking at repos/foreclosures/ bank owneds at 50-60% of appraisa/lender value... still a great time to buy a house.:)
 
Any thoughts on whether there will be a corresponding increase in CD interest rates?
 
Oldbabe said:
Yes, it does look worrisome. I'm trying to figure out what the consequences might be but I'm just spinning my mental wheels. I hope that the stock market doesn't tank again.
Click to expand...

The grim consequences:

1. Lower home values as more buyers become priced out of the real estate market (yes, even lower than current prices).
2. More company failures as the cost of borrowing goes up. Many companies are already having trouble raising funds, higher interest rates will accelerate this problem.
3. The consequences for your investment portfolio are as follows: stocks lower, all but the shortest term T-Bills (avoid all corporate, agency and municipal bonds) lower, commodities lower. Moral of the story: get into short term T-bills.

Think return OF capital and forget return ON capital for a while. The value of your dollars will appreciate relative to all other assets classes which is the same thing as getting earning interest.
 
There was a time when I would make light of these 'gloom and doom' posts. Now I find myself thinking, "That won't happen...will it?" :)
 
REWahoo said:
There was a time when I would make light of these 'gloom and doom' posts. Now I find myself thinking, "That won't happen...will it?" :)
Click to expand...

Same here REWahoo . But when faced with reality one can adapt or ignore. Unfortunately, people are finding it harder and harder to ignore.
 
"
Hmmm, well. I disagree with that. I believe that the low rates are making a lot of real estate sales possible, which can only be a good thing IMO."

Not. An artificially low interest rate drives prices higher as most Americans buy the payment rather than the price. Any increase in interest rates will negatively correlate with housing prices. And artificially elevated housing prices make putting a reasonable amount of money down exceedingly difficult, which doesn't affect house traders nearly as much as those buying their first house. Consequently, we've seen no or low down payment mortgages go negative equity almost immediately with rate changes or bumps in localized markets.
 
Animorph said:
I'm supposed to sign my refi papers tonight. The rate lock is long gone. No idea what the rates and points will be now. This should be interesting. I signed up for 4.375% with about 1.7 points on 3/26/09 with a 30 day lock. That offer has been pretty stable up until yesterday (5/27/09). 5/26/09 they offered 4.375% for 1.8 points. Yesterday they wanted 3.963 points for 4.375%, or my original 1.7 points were good for about a 5% rate. This morning 4.75% was the lowest rate showing and they want 1.7 points for that. A little less than that right now.

So, depending on when they finalized the papers, my rate could be anywhere. If it's at the top of the spike I'm not going to sign. I'll have to think about 4.75%. That's still historically nice, and I feel pretty much like the bond market does. Only an appraisal and a subordination fee sunk so far.
Click to expand...


I got the 4.375% rate and points with papers signed last night. Just need to wait through the money transfers. I was told the martgage was already purchased by GMAC.

I'm thinking that's the bottom of the mortgage interest rates, but I'm not sure I'd read too much into a spike and small step up in rates.
 
I hope everyone is re-amortizing their mortgages for NO LONGER than they had left before, right? :)
 
randyman65 said:
"
Hmmm, well. I disagree with that. I believe that the low rates are making a lot of real estate sales possible, which can only be a good thing IMO."

Not. An artificially low interest rate drives prices higher as most Americans buy the payment rather than the price. Any increase in interest rates will negatively correlate with housing prices. And artificially elevated housing prices make putting a reasonable amount of money down exceedingly difficult, which doesn't affect house traders nearly as much as those buying their first house. Consequently, we've seen no or low down payment mortgages go negative equity almost immediately with rate changes or bumps in localized markets.
Click to expand...


You are right on the money Randy. This is a poor attempt by the feds to prop up a failing philosophy about mortgages. The housing prices must reset, but people buy payments, not caring what the cost of the house is. Wait till interestest rates jump to 8% or more (which is not unreasonable). Not too many people can qualify for a 500k house at an 8% mortgage on an average salary.
 
For what it's worth, long Treasury yields are plummeting today. Could this be the fixed income equivalent of the Plunge Protection Team at work? :)
 
"You are right on the money Randy. This is a poor attempt by the feds to prop up a failing philosophy about mortgages. The housing prices must reset, but people buy payments, not caring what the cost of the house is. Wait till interestest rates jump to 8% or more (which is not unreasonable). Not too many people can qualify for a 500k house at an 8% mortgage on an average salary."

Locally, rates with 20% down, 30 year fixed are 4.75% with no points and a $1650 fee (credit union). Lets say our theoretical couple who earn $120k combined put 20% down on a $500k house today, and end up with a P&I payment of 2086.50 and a total PITI of about $2900/mo. In five years they want to sell the house and move out of state. Assuming prices, taxes, and wages have remained unchanged in that time (possible), but the interest rate the new buyer can obtain is now 7.5%. To this new buyer who can still only qualify for the same monthly payment as the original buyer, and who puts 20% down, the house would have to be priced at $375k to make any sense to the buyer. The seller would have to either find someone willing to pay more for the house or drop their price. The increase in interest rates, in the absence of a corresponding increase in real incomes, would essentially wipe out all of the seller's equity, and in this hypothetical case the seller could possibly be underwater five years out.

I applaud the return to normalcy in the mortgage market, but many, many people are going to be unhappy that they won't be getting what their houses are "worth". Their houses are worth precisely what someone is willing and able to pay for them, not a penny more.

I can't predict what the bottom of housing prices will look like. With so much theoretical wealth tied up in their primary residence, those who don't need to sell often take their houses off the market until it "comes back". Rather than a steep decline that marks to market housing prices with real incomes, prices may stagnate until real incomes catch up, essentially allowing inflation to catch up to the house price. On the other hand, in markets that were all fluff, and with a lot of lian loans and pay option ARMs, we would expect to even see an overcorrection as the flood of foreclosures and fire sales overwhelms the local market. That is already happening (and will continue to happen) in the worst four states for housing right now (CA, AZ, NV, FL).
 
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