Wednesday, April 10, 2013

Come and get it

This isn't the first time I've called the low in mortgage rates, but it could be the last. The chart below shows the nationwide averages according to BanxQuote: currently 3.49% for conforming, and 3.68% for jumbo loans. Jumbo rates briefly dipped to as low as 3.55% last December. That could well prove to the be lowest level in my lifetime. All it takes for rates to move higher is continued economic growth, even if it's relatively sluggish. That would bring the Fed closer and closer to the end of its QE3 program, and the Fed is already hinting that they might well discontinue it before the end of this year, or as early as mid-year.

The Fed now owns about 11% of the nation's $9.5 trillion of home mortgages (data in the chart only goes up to the end of last year, but the Fed is still buying $40 billion of MBS per month). This is not likely to increase much before QE3 ends. I don't think that Fed purchases of MBS have resulted in any meaningful reduction in mortgage rates, but I could be wrong. In any event, the end of QE3 means that the Fed thinks the outlook for the economy is improving, and that should help dissuade the market from continuing to pile into and/or hold long-term, fixed-income securities that are trading very near all-time lows.

For investors it's a warning shot across the bow. For home buyers, it's "come and get it!"

And if I'm wrong and mortgage rates continue to decline, it's relatively easy and cheap to refinance.

UPDATE: I should add that with the deductibility of mortgage interest and inflation, a 30-yr fixed-rate mortgage is essentially free money. The CPI has averaged about 2.5% for the past 15 years, and most folks with a jumbo loan should be able to deduct about 35% of the interest. The after-tax interest cost would be about 2.5%, and subtracting inflation of 2.5% gives you zero.

There are of course downside risks. You would be exposed to a further decline in housing prices, another recession, and/or a bout of deflation. But if any or all of those happen, interest rates are likely to decline further, leaving open the possibility of refinancing.


Benjamin Cole said...

We may be seeing the new normal when it comes to interest rates.

The 30-year-secular trend in rates in developed nations has been down, down, down until they hit bottom, and then stay there, ala Japan.

The world is awash in savings, and savings (or at least capital) appear to swelling, despite interest rates. People and businesses save for retirement, to buy houses, for college, for security---and need to do so, regardless of rates.

Scott Grannis is right when he says he called the bottom in rates too early, and I think that is because most of us in the USA still think about rates going down and then going back up.

Back when I worked in the thrift industry, we said we need a 200 basis point spread (between bowing costs and lending rates) to survive (1980s). Now, I imagine they can get by with less, such as 100 basis point. Banks carry a lot less employees and fat than they used to.

So, if short-term rates stay near zero, I should think mortgages rates will drift down further.

Benjamin Cole said...

BTW, Ken Rogoff says low rates could be with us for a while.

"My best guess is that when global uncertainty fades and global growth picks up, global interest rates will start to rise, too. But predicting the timing of this transition is difficult. The puzzle of the global savings glut may live on for several years to come."--Rogoff

Rogoff may right, several years. Or he could be wrong, and we are talking a long cycle, as in decades.

The real policy question is: Can the Fed/U.S Treasury take advantage of this to permanently delevereage US taxpayers?

I think they can. I think the Fed can buy US debt, and hold it until maturity and shuffle the proceeds to the Treasury.

Rates are stuck at ZLB anyway for along time.

There is not a business guy on earth who would not leap at the opportunity to cut debt permanently.

But then, business guys do not run D.C.

Public Library said...

Leverage exposes people to massive losses from "tail" events that can/will occur in their lifetimes. Only banks get bailed out. People get “bailed-in”. Better to do the opposite. Have an unlevered balance sheet and strong positive cash flows.

Gloeschi said...

"There has never been a better time to buy a house" - straight from the NAR hymn sheet. said...

Benjamin, tell this spread story to my banker. I've got a prime commercial loan. You KNOW they have been getting fat off me since 2008. 3.25% with f.f. at a quarter of a point.

theyenguy said...

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And Peak Mortgage Recovery has been achieved as Jeff Macke of Breakout reports Mortgage recovery has peaked: Whalen says Chris Whalen, managing director of Institutional Risk Analytics, says there's turmoil under the surface for big ban.

Jesus Christ is working Dispensationalism to pivot the world from Liberalism into Authoritarianism, Ephesians 1:10.

Liberalism featured the fiat money system where sovereign nation states gave the seigniorage, that is moneyness, of investment choice to credit and currencies, producing prosperity

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