June 12, 2008
The One To Watch With Respect To Most Mortgage Rates Ticks Up
“Treasuries fell, pushing the yield on the benchmark 10-year note to the highest level this year, after a larger-than-expected gain in retail sales bolstered the case for the Federal Reserve to boost interest rates....Futures on the Chicago Board of Trade show odds of 22 percent the Fed will raise the target rate for overnight lending between banks by at least a quarter-percentage point to 2.25 percent at its June 25 meeting. The probability of an increase by year-end is 100 percent.”
[Editor’s Note: In case it wasn’t clear, it's the 10-year Treasury that's the one to watch.]
First Published: June 12, 2008 9:15 AM
Comments from "Plugged In" Readers
Of course, adjusted for inflation, retail sales were actually down year over year. But why let the facts get in the way of a good story.
I will add that I've recently heard anecdotes of people who are/were on the fence, now looking to buy, only because they want to lock in a lower rate in case mortgage rates rise. Faulty logic, in my opinion. Given most Americans are payment buyers, any rise in rates will eventually need to be offset by further declines in home prices. Plus, if you overpay for a house to begin with, you're stuck with that purchase price forever. Buy low with a higher-rate mortgage, and you can always refi later.
Posted by: Dude at June 12, 2008 9:52 AM
I agree with Dude's concept of focusing on purchase price rather than monthly payment. In the long run this is the winning strategy. Financing is fluid but the purchase price (and the associated taxes) are locked in at COE.
In addition to using a refi to bring the payments down later, many buyers can restructure their investments to take the bite out of a high mortgage rate. My adjustable has a cap of 12.5% (!!) though I'm not scared because long before it ever gets there I'd liquidate some other assets and pay the principle down.
Posted by: The Milkshake of Despair at June 12, 2008 10:00 AM
Yes, the Fed has signaled that now that they have done what they can to bail out the banks, they are back to tackling inflation, which is driving rates higher to begin with. Mortgage rates are at an 8-month high even before the coming round of rate hikes and further inflationary pressures. If you have a re-set coming (either a normal ARM or an Option ARM with the intro "option" period ending), you would be wise to lock in a refi now. Rates are only going up from here.
One further addition to Dude's point that buyers are still generally better off with higher rates and the offsetting lower purchase price is that property taxes will also be lower for the life of the ownership. It's counter-intuitive, but higher rates are going to be felt more by sellers than buyers.
Will the higher re-sets cause even more inventory to hit the market? Who knows -- but it will further dampen demand, and if it further increases supply as well that will just be a double whammy.
Posted by: Trip at June 12, 2008 10:05 AM
Calculated Risk (http://calculatedrisk.blogspot.com/) offers much insight today into the retail sales increase in May:
"U.S. retail and food services sales for May were $385.4 billion, up from $381.6 billion in April. That is an increase of $3.8 billion - a small amount compared to the $48 billion in stimulus checks."
I just can't see why this would encourage anyone to jump into the real estate market about now based on concern about pending increases in lending rates.
Posted by: Christopher Carrington at June 12, 2008 10:06 AM
I may be in the minority, but I highly doubt that we will see any Fed Raise anytime soon. I don't rule one out by the end of the year, but we won't get one at the next meeting.
This is just the Fed Jawboning, trying to convince us that they care about inflation. If they cared about inflation we wouldn't be here in the first place. Instead, they care about inflation expectations. they are thus trying to change inflation expectations by using mere words. but it's just words. call me when they ACT.
Some very important banks (WaMu and Lehman) are on the ropes right now. A Fed funds increase could put the nail in the coffin. there is massive political pressure to keep the economy chugging... thus the fed will do what it almost always does: sacrifice price stability for "growth". even if they are honestly considering a rate hike that will all but disappear if/when the next job report comes in weak. the only thing that will force a rate hike is if foreign investors stop buying our government debt. so far they seem willing to buy (although at reduced levels from the past)
on a side note, I think mortgage rates will go up whether or not the Fed raises. the banks continue (and will continue for some time) to take it on the chin based on previous loans. thus, you will continue to see lending tighten and you will continue to see higher downpayment requirements and higher mortgage rates due to higher risk premiums.
Posted by: ex SF-er at June 12, 2008 10:15 AM
Bond traders have been on top of the inflation issue since mid March. And risk is definately on the upside. Here's a nice little graph:
I'm wondering though, with credit so much tighter and borrower's buying now actually have to be qualified buyers with 15% to 20% down plus some reserves, will that type of buyer really be as affected by the higher rates? When you had folks buying at 0% to 5% down that lied about their reserves, any increase in payments directly affected their day to day lifestyle. They basically backed into purchase prices based off the loan payment when really that's how you determine a loan, not determine purchase price. So perhaps the affect of higher rates on prices will be somewhat diluted due to a pool of more qualified buyers? Or am I just full of crap? Ideas? Comments?
Posted by: Boo at June 12, 2008 10:29 AM
@ Boo: I think we're already seeing part of that. The higher-end is still holding steady while the lower end is getting clobbered. But the overall pool of buyers has been reduced. And as Trip alluded, inventory is climbing in the meantime.
I would also add that many of those qualified buyers probably already own and, if they want to move up or even laterally, need to sell an existing home to do so. A platoon can only move as quickly as the slowest soldier.
In other words, I've heard that each first-time real estate purchase prompts 2-3 move-up transactions. So if the first-time buyers are priced out or on the sidelines, the higher end should eventually suffer.
Posted by: Dude at June 12, 2008 11:02 AM
Okay so here is a question for all of you who are much more knowledgable than me-have a 3 year fixed interest only ARM (at 6.125%)for $599,000 that will reset next May. I also have a HELOC at currently 5% for $75,000. Paid $975,000 in May of 06 for Parkside fully detached home. Zillow, for what it is worth (not a lot in my mind), is saying home is worth $1.1.
Do I try to refinance now or wait to see how things shake out over next 9 months?
Posted by: Socketsiteaddict at June 12, 2008 12:01 PM
Are you planning on staying in the house long-term? If so, I would refinance now (based on those numbers). I'm in a somewhat similar situation (Parkside home, IO ARM resetting next year, etc.) -- difference is that my ARM is a 5-year, so my rate is 4.3875%. We may sell -- so, I've decided not to refi for now.
Posted by: mk92 at June 12, 2008 12:15 PM
They will be taking me out in my coffin-so yes we are planning on staying in the house long term! Thanks for the advice.
Posted by: Socketsiteaddict at June 12, 2008 12:42 PM
SS addict -- Are you going to refi the 1st and the HELOC into a single loan? Curious to know what rate you get.
Posted by: mk92 at June 12, 2008 1:06 PM
Refi now but I'd recommend the 5/1 instead of a 30 because I think you'll have another opportunity to refi in the next 5 years at a decent rate. 30 year fixed loans are runnig up high right now. Why pay for 25 years you'll probably never use. Heck, you only kept this loan for 3 years right?
Posted by: Boo at June 12, 2008 1:06 PM
SSAddict -- "conforming jumbos" (between 417k and 729k) are actually at decent rates now (to my surprise -- Fannie is buying and holding them), relative to full jumbos, although I've heard they are not that easy to qualify for. Sounds like this is the size you are looking at and I assume you could qualify as you had a nice downpayment. They disappear after January 1, and while the odds are that new legislation will continue them into 2009 and beyond, there is no guarantee. One more factor that might lead one toward a refi now rather than waiting as your rates will be even higher if enabling legislation never comes about.
By the way, if you really plan to stay in this place until the end -- congratulations! You really can just ignore all the debate about market trends and just focus on a loan package you can afford that includes the amount of rate risk you can stomach. Nice position to be in!
Posted by: Trip at June 12, 2008 1:19 PM
Just an anecdote to pass along since I just refi'ed today at noon. I refi'ed from a 5.875% 5/1 IO Jumbo ARM to a 4.25% 5/1 P&I Conforming Loan. In order to get the conforming loan, I had to put in $60K to bring it down to a $417K loan (I locked before the banks embraced the $729K mark). The title agent said to me:
"You're the first one this YEAR to refi and put money in instead of taking money out."
WTF? Haven't people and banks been paying attention to this whole mess. We're in June now...that means 6 months have passed with people still treating their houses like ATMs and continuing to contribute to this problem. I'm sure a few are just pulling out $$$ and waiting for the foreclosure cause they know prices are gonna drop even further. But why haven't the banks wised up?
I, for one, am glad the rates are gonna rise. I hope it curbs some of this senseless ATM withdrawals.
Posted by: Zap at June 12, 2008 4:08 PM
Zap, don't worry about locking prior to the $719k jumbo change. As far as I can tell, that change really just benefits the banks, not the borrower's. Well, I shouldn't say that. The borrowers benefit in that the banks can still make those loans. I've been quoted 5.875% on a 5/1 for a $466k from Chase and BofA. And from talking to other random agents and mtg brokers I sort of get the feeling that even though it's no longer jumbo, really all that means is that now FNMA will buy these loans from banks when previously they wouldn't. That frees up capital for the banks to make more loans and eliminates their exposure. Since there's no secondary market these days its' the only way they'd get it done. But it's not like you're getting $417k rates on loans over that. Anyone find any different out there?
Oh, and Zap, nice work on that 4.25%! That's good stuff. And when things settle down again you call pull out that $60k if you need to.
Posted by: Boo at June 13, 2008 8:20 AM