Monday, July 27, 2009

Mortgage rate update (3)

Conditions in the bond market continue to normalize. As the second chart shows, the spread between 10-year Treasury yields and the yield on mortgage-backed securities is well within the range of "normal." As the first chart shows, the spread between jumbo and conforming mortgage rates has come down from a high of 200 bps last November, to a bit less than 90 basis points today. The net result is that borrowing costs for homebuyers are relatively low, and they have not risen materially in the past several years. Loans may be harder to come by (qualification standards are higher, minimum down payments are higher), but those who get loans should be quite happy with the rate they get.

Regardless, with conditions in the bond market continuing to normalize, getting a loan ought to be progressively easier as time goes by. New lenders and lending channels are appearing, particularly for jumbo loans. That the conforming/jumbo spread is still higher than average is a sign that the market is still inefficient, but the existence of this inefficiency is attracting lenders to the jumbo market, since they can earn an above-average spread over Treasuries.


Dan said...


Do you have any insight into the commercial construction loan market and the availability of financing? My business is heavily related to commercial markets and my clients are telling me that orders are off significantly from Q2 '09 already, indicating that new projects are not being started and those that were funded pre-melt-down are being completed. How long does it normally take for commercial markets to catch up after a recession like this?


Scott Grannis said...

I'm just a macro-observer, unfortunately. The market seems very concerned with CRE, but if the broader economy is improving ahead of schedule (as I think it is), that will mitigate the damage in CRE.