Today marks the one week anniversary of the end of the Mortgage Backed Securities Purchase Program (MBSPP). This monster $1.25 TRILLION stimulus program began in Early January 2009 and held rates under 5.00% for most of the year. So, what happened?
THE GOOD NEWS is, so far the change in the market has been TAME with rates rising only .250% from a week ago. Considering that the stimulus program caused rates to FALL over 1.00% at its onset, there were fears the opposite would occur at its end. The modest increase is just what we need to keep the momentum in the housing market.
SO NOW WHAT? Our top industry analyst Barry Habib has forecast interest rates for 2010 ranging from just above 5.00% to potentially as high as 6.5% (I did say potentially). Here are three key factors that will influence this range:
INFLATION will be the NUMBER ONE factor in determining how and when rates will rise. Currently, inflation is very low, but rising oil prices or an improving economy could change this trend.
DEMAND for Mortgage backed securities in the US and Worldwide is always a factor. This is exactly why the MBSPP stimulus program worked…it increased demand. Current demand is still strong as evidenced by the modest change in rates following the MBSPP. Historically, when investors are uncertain about the equities market, the have a healthy appetite for Mortgage Bonds. Also investor confidence in the US economy helps maintain demand. Watch for signs that either of these may change.
VOLUME 2009 brought HUGE volumes of new mortgages, especially re-finances. With rates gradually rising, re-finances will decrease as we move thru 2010. Lower volumes of new mortgages require less demand…and could help mortgage rates remain low, or rise gradually.
A COMMONLY HELD MISPERCEPTION among our clients is that rates will remain low “because the Federal Reserve said they won’t raise rates anytime soon”. We hear this daily from your clients. Just a reminder that the Federal Reserve controls a short term rate called the Federal Funds Rate. There is little correlation between this rate and the direction of mortgage rates. You will see mortgage rates rise even while the Fed’s keep the Fed. Funds Rate low. Don’t let your clients be fooled by listening to the media on where rates are headed.
BE AN ADVISOR TO YOUR CLIENTS Armed with the above information we hope you can help your clients who are trying to “time the market” realize that with regard to rates, NOW is a great time to make a buying decision.