Market Outlook

In the last couple of weeks the mortgage market has been very quiet. Rates trickle up and down a little and applications have slowed down substantially. From what my customers tell me, there are a lot of people still waiting anxiously for the rates to drop so they can follow through on their refinance. In the meantime with all the news of federal stimulus plans and related speculations of how it will affect the market (specifically how it will affect the mortgage rates) have put many borrowers in the hold mode.

A constant theme being reported in the news is that mortgages rates will dip to 4.5%. The different reports have indicated either this is a stated goal or a mandate of some sort by the government. Personally I don’t read it the same way. I see reviving the housing market is a big part of the government’s economic recovery plan. The entire fiscal stimulus plan have far reaching goals and impact affecting employment, capital market, credit market both consumer and business, infrastructure, advancement in education and technology and many other components of the economy driven by government spending.

How much direct impact to mortgage rates remains to be seen. Long term mortgage rates is still a market function today, until the government dictates the actual mortgage rate, the capital market determines the mortgage rates. An active investment community with many sellers and buyers tend to drive long terms rates down.

Using treasuries as the underlining guide, mortgages backed securities will trade within some range of the treasury index. Unfortunately today we have fewer participants in the mortgage backed security (MBS) arena, and can’t quite get the participants back in the game yet. The government has indicated that they will continue to use a variety of methods to revive the market by actively buying and offering guaranties on these securities, but I can’t see them solving the problem by themselves. This is evidenced by the fact that loans over the conforming limit still have no market. I believe in the short term, meaning less than three years, we will have sporadic opportunities for the rates to dip to as low as 4.5% on 30 year loans. Some lucky borrowers will get that rate, most of you will lock in to something between that and 5%.

But when the rates drop the next time, don’t wait. I also believe, eventually, long term mortgages rates, while they maybe low, and will come with many conditions. Conditions being higher loan to value requirements, tighter credit score requirements and maybe prepayment clauses, among others.

Reviving the housing market is definitely a key to reviving the economy. Lower interest rates are definitely a big part of that equation. Since it looks like all the burden is put on the new administration and everyone is waiting anxiously, let’s hope all the planning and implementation will lead us to lower mortgage rates.