Before I provide the plausible scenario in which mortgage rates go even lower than the current historical lows, consider a NY Times article from April which proclaimed “Interest Rates Have Nowhere to Go but Up“. Now that sound pretty authoritative, especially coming from one of the most prolific financial publications in the world. Unfortunately, many people may have acted irrationally on that advice and rushed into home purchases, refinancing arrangements and undertake other decisions that they wouldn’t have had they just waited for the spread to widen even more. At the time of publication, the average 30 Year Conventional Mortgage stood at 5.31% according to the article. Today, it’s closer to 4.6% (see Current Rates in a new window for your particular area). Guess who the writer relied on for their prediction? None other than…the Mortgage Banker’s Association. Here’s what they said:
“The Mortgage Bankers Association expects the rise to continue, with the 30-year mortgage rate going to 5.5 percent by late summer and as high as 6 percent by the end of the year.”
5.5% by the end of the summer? Wow, they were only off by a full 100 basis points. Can I just tell you that the MBA will ALWAYS make predictions and statements that implore buyers to rush in and buy now. It is so frustrating to see ANY journalist or blogger give any credence to anything the MBA says, especially the NY Times. Personally, I lean toward a negative correlation. Whatever they say, do the opposite.
I repeat, rates are 70 basis points LOWER than when the NY Times stated that they can ONLY GO UP. So, with that in mind, and considering how much more credibility and esteem you convey upon the NY Times compared to me, keep that in perspective (so I could be even more off than that! but bear with me). So, I’m not in the business of making predictions, but I do debunk predictions of others that convey too much assurance without ample evidence of historical success or likelihood of future accuracy.
Here’s Why Rates Could Drop Even Further
What occurred this week was a pretty strong signal that rates aren’t going to higher because the Fed just won’t allow it. During Bernanke’s testimony this week, not to be outdone by Alan “The Riddler” Greenspan, Bernanke stated that the economic outlook was “unusually uncertain.” I have yet to figure out what that means so I won’t dwell on it. What I will dwell on is the following:
- The Fed will act to ease monetary policy FURTHER if economic recovery is weak
- Bernanke raised the spectre of reinvesting mortgage bonds that are rolling off its balance sheet or even engaging in additional debt purchases
- He also highlighted the ability to further drop the discount window rate
- Bernanke stated that he did not view deflation as a serious threat, which lends further credance to potential rate lowering manipulation without fear of stoking deflation
While the markets sold off Thursday on his testimony, I view his statements as rather telling in that a) he’s admitting the economy is in jeopardy of not recovering and b) the Fed has more tools and will use them under this scenario. So, my hunch is that the economy is NOT looking at even a mild recovery primarily due to the complete train wreck of an administration that seems virtually intent on destroying the American free market system. Without turning this into an anti-Obama post, I’ll simply highlight what any business owner is screaming from the rooftops – Businesses HATE Uncertainty – and that’s all we get from the administration. Every 2 months, it’s a new “historic” piece of legislation which pretty much screws business even further and advances veiled social justice experiments via redistribution of wealth and vilification of financial success. Frankly, if I’m a business, I would NOT expand in this environment and I don’t blame business owners for holding back. I’d be waiting for the tinkering to stop, for a new balance of power in the Congress post-elections or for an all-clear from the administration that they are honestly done tinkering. Raising taxes on small business certainly isn’t going to help, but Geitner highlighted his intent on hitting “the fortunate” if you can believe his poor choice of words (since only lucky people are successful right? and lifetime welfare crowd just happened to have bad luck) by allowing the Bush tax cuts to expire which will essentially sap many medium and small business owners of a new employee’s worth of salary each year – so why would you hire another? With this backdrop, I envision a scenario where business continues to stagnate, unemployment actually starts rising again and the Fed has to throw its remaining muscle into further easing – which means lower rates for homeowners!
If you followed, great.
If not, just come back in 3 months and see who was closer, me, or the Mortgage Banker’s Association.