This is some information that was provided to me by one of Austin's top mortgage brokers:
As you may have noticed, interest rates on 30-yr fixed mortgages have really shot up over the last few days. We have gone from 4.5% with 1 point on Thursday morning of last week, to 5.25% as of late this afternoon (Wednesday, May 27)! I have never seen anything like this!! Several recent events have contributed to what we are seeing:
- Thursday, May, 21, on the heels of Standard and Poor's announcement that it was reviewing the triple-A credit rating of the United Kingdom because its debt burden was to rise to 100% of gross domestic product, bond guru Bill Gross of PIMCO said that there is a fear that the U.S. may lose it’s AAA credit rating. This has shaken confidence in the U.S. government's ability to service it's ever-increasing debt. It is important to note, however, that no one at Standard and Poor's and no one else has mentioned this - only Bill Gross. But when he talks, people listen.
- That same day, banking giant Credit Suisse said that the Federal Reserve will probably slow its rate of mortgage backed securities purchases this year in an effort to keep home loan rates near their lows throughout 2010. This has huge implications. If the Fed slows down the rate at which it purchases mortgage-backed securities, prices will go down which causes mortgage rates to go up. But if this happens, all things being equal it also means that this below-true-market rate environment will last longer. It is important to note, however, that so far this is only speculation of the part of Credit Suisse - the Fed has made no such announcement. But as we have seen many times in the past, markets are priced on rumors, not facts.
- Consumer Confidence, a leading indicator of future spending, came in higher than expectations on Tuesday. This sounds like a good thing, and it is, unless you are a holder of a fixed income security such as a mortgage-backed security, because it points to inflation down the road. And with all the cash that has flooded the market over the last 6 months, inflation could turn into a real issue if and when the economy improves.
- Existing home sales barely beat expectations today. This added more fuel to the inflation-expectation fire!
The problem is these events all happened in rapid succession over only 4 business days. It has created a perfect storm for the panic selling that we saw today in the MBS markets, a storm created by rumor, innuendo and a couple of factoids in the form of small inflationary indicators.
But right now what you really want to know is, what do you tell your buyers who have been watching rates or have just been told that the rate they were quoted last week is no good anymore?
Here is what my gut is telling me: we have probably seen the last of 4.5% with 1 point. But, I do think we will see a bounce back in the MBS market, so we should see some improvement in rates - probably back down to 4.75-5%, historically speaking is still awesome! So right now I am telling my borrowers that it's probably OK at this point to wait and see if we get some improvement.
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