Friday’s Rates
Rhonda Porter on 06 1, 2007
This afternoon’s rates are essentially the same as last Friday. In fact, the only difference is that the 40 year fixed rates (conforming and Jumbo) are both slightly higher. Since that’s the only significant change…I’ll pass on re-doing the Friday rates this week. 
With the economy doing well, you can expect mortgage interest rates to continue their upward trend. When the stock market performs well, investors tend to pull money out of bonds (mortgage backed securities) and invest in stocks. The reverse is true, as well. When investors are looking for “safety”, they seek the shelter of bonds and the result is lower mortgage interest rates.
My advice is always to lock in your rate if you’re within 45 days of closing. There is typically too much to risk by “floating” your rate, especially in our current market.
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Last year too in the summer rates went up, and came back down to the end of the year.
I am just guessing here, but looks like inflation isnt taming. Neither is the housing mess going to go away any time soon. I saw IBM, Dell, Motorola layoffs in the news this past week. May be the data now isnt representative? And the economy isnt expanding much? There is a lot of contradictory data out there today to digest.
Question for Rhonda: What impact if any does the fed funds rate have on mortgage loans?
Ardell: Could I request you to post stats for May please? I am wondering if sales and appreciation is still strong.
Sandy,
The Prime Rate is based on the Fed Funds Rate. HELOCs (home equity loans) are based on the prime rate (as are other types of debt).
Mortgage interest rates may and do react to what the Fed says and does (increasing or decreasing rates). Often times, the adjustments to rate are built in based on speculation and only make changes if what the investors were speculating is different that winds up happening.
Is it often that the yield on the 10 year bond jumps 1/10 of a point and fixed rate mortgages stay flat? For the past few weeks they’ve been moving almost in step so I’m kind of surprised.
With GDP revised down to .6% for the first quarter it looked like the economy was slowing considerably – but maybe this rise in rates means a Q2 rebound is in the cards. (Either that or foreigners are pulling out of US treasuries)
Please pardon me for being a buttinsky…
It is my understanding that the Fed Funds rate is not directly connected to bond rates or mortgage rates. The FED sets the amount money that banks have to keep on reserve and that pulls/pushes money in the system.
The FED has been keeping rates artificially low in recent years to monatize debt and speculation. This is known as the “Greenspan Put.” By setting the rates low, the FED has to continue to print more money (by temporary operations or permanent operations – repos and coupon passes) to DEFEND THEIR INTEREST RATE!!!
In order to keep bond yields low, the FED needs to chase money into that market. Lately, that has been what is going on. As long as the bond buyers don’t sniff inflation, they will buy “guaranteed” US debt.
The problem with printing money is that it is inflationary. That’s why you and I can’t engage in our own “monatary policy” (counterfieting).
The Chinese and Japanese central banks have been inhaling US debt like Lindsey Lohan takes in alcohol. That keeps our interest rates low, encouraging HELOC activity, which results in our buying their dreck at Wal Mart and Home Depot.
Inflation…anyone wonder why the gov’t says inflation is 2%, when food, energy, and housing go up 10-20% per year? The gov’t does not count food, energy, or housing in their inflation models. They keep the reported rates low as not to spook the bond market. If inflation was a common threat, the FED could not do anything with the bond market. This is called “pushing on a string.” It is what they fear the most.
So, it all works as long as: foreigners keep buying our debt, and people keep believing that inflation does not exist. Take out one of these, and “poof” you have a cratering economy overnight.
That is why we “free-trade” with slaves and peasants. That is why every government econ report is a lie.
Borrow, speculate, outsource…repeat as necessary.
So, NO the FED does not set the mortgage rate.
E – you’re correct.. The Fed does not set the mortgage rate (that’s what my comment said).
The Prime Rate, which HELOCs are attached to, follows the Fed Funds rate.
Bill, my rates are “skinny” and based on certain criteria that I have posted above. I wouldn’t be surprised if on Monday morning, they’re no longer valid.
Rhonda,
I can see what you are saying. Correct.
The FED funds rate INFLUENCES but is not CONNECTED to the mortgage rate. It is possible to have the two move in different directions, and I believe that will happen within the next year.
E
I usually get phone calls whenever prime has been adjusted thinking that mortgage rates are going up with it. Often times, when prime (or the Fed Funds) has been increased, mortgage rates may decrease and vice versa.
Sandy,
Missed your comment #2 up there. I only get an email notifying me of your comment if you post it on any of my posts, not the posts of others. I happened to notice it when I was digging for a spam email.
Give me an area and price range you are tracking, as I don’t have time to do the all over stats I did a couple of weeks ago. But would be happy to do them if you can narrow the field a bit. Redmond? $550,000 to $650,000? Withn 3 miles of Microsoft in Bellevue & Redmond. Seems that is the area you have been talking about, but confirm where you want me to go and I’ll try to do appreciation plus regular stats.
I haven’t done much with appreciation because I need to find apples to apples, which isn’t easy. But narrow the price and geographic and I’ll target that for you in a post this weekend.
Eleua, Can you expand please on whatyou meant in comment #7? I dont understand the part about what will happen in the next year.
Sandy,
It is possible to have the FED moving rates down (in an effort to juice the economy via printing money), while at the same time bond traders fear the very inflation the FED is causing and refusing to buy bonds at higher prices. This moves the bond yield higher to compensate for inflation losses in the underlying currency.
As long as the FED makes the general investing public believe the economy is in good shape and that inflation is low, interest rates can follow the FED’s lead. Once people lose faith in the FED, or believe inflation is a bigger threat than economic contraction, you will see a divergence between bond rates and the FED rate.
Example for illustrative purposes:
Let’s say the FED drops rates to 1%, and money starts shooting all over the place. If it has nowhere to go (stocks, housing, beanie babies), it will wind up in commodities, as the dollar will be weaker against other nations’ currencies that are also buying stuff we use (oil, steel, rubber). If your currency is losing 10% against Canada, Japan, New Zealand, China, Europe, Britain, etc., you are not going to tie up your money at 2%. You will demand 10%-15% to tie up your money. The more inflation rages, the weaker the dollar, the higher bond rates (in theory) will be.
The last few years, other nations destroyed their currencies (like Japan and China are doing today) to keep rates low in the US relative to theirs. They would take their excess dollars and invest them here, and drive rates low. This would cause Americans to spend more on their dreck, which is reflected in the $863B trade deficit we have. This works as long as people in foreign lands put up with inflation in exchange for a robust export market – which is precicely what Japan and China are doing right now. They are sucking the wealth right out of our country by refusing to float their currencies against ours. They are pegging their currencies to keep us consuming their stuff.
Once this unwinds, the US will have IN YOUR FACE inflation like you will not believe, and we will not be able to consume as much of their trinkets as we presently are. They will also go into recession. Theirs will be deflationary and ours inflationary.
It was a bit of a long answer. I hope that is what you were looking for.
Eleua, I have to wonder what your exit strategy is. Someone in your position can work anywhere in the world so why are you sticking around here? I’m not in quite the same position, but my foreign business is doing better than anything in the US thanks to the currency difference. Personally, I would like to stay here but BC is looking attractive since the economy is so much stronger than anything in the US.
You’re not tied down here, so why not leave? I keep asking myself the same question.
Eleua,
When the IN YOUR FACE inflation takes place, what will happen to people who are paying rent instead of having a fixed, secured payment such as a mortgage?
I’m assuming (I know you’re going to give me your views) that rentals will be the first to go. A property owner will increase rents first, then when/if they need to bail on them, they will do that before their primary residence. So wouldn’t someone (the average person) who is paying rent vs. owning a home be in a worse position?
Bill,
My exit strategy has more to do with culture than economics. Western Civilization is being overrun by peasants and freaks from the Third World, so my exit strategy is to be in non-US denominated assets and gain residency in a nation that doesn’t have a huge immigration problem.
It’s pretty vague, but quite frankly I don’t want my wealth in a currency with a minimum of a $40T net liability or in a country that will be a dictatorship within 40 years.
E
Rhonda,
Great question.
Rent HAS to track with incomes, as you can’t use kinky financing for rent. Home prices fluxuate with financing, speculation, and underlying fundamentals (incomes).
Inflation does not have to include incomes. This is what is called an inflationary recession or stagflation. With 60,000,000 peasants about to be granted US residency (that’s 60% of Mexico’s population), I seriously doubt that incomes will be increasing anytime soon.
If incomes are stagnant, but prices of food, energy, medicine, education, insurance, taxes, etc are going up, the amount of money left over to put to shelter will be reduced.
If overall incomes stagnate (or fail to keep pace with inflation) the amount of money available for rent/PITI will decrease. The amount of living units is still expanding. LLs can increase rent all they want, but if the house is vacant, they will lose money. Think of all the airline seats that had to be filled. Just because the airlines wanted to raise fares, they couldn’t.
LLs will bail on their investment properties first. Owners that can’t sell in this environment and are forced to move will attempt to rent. Right now, rents are covering about 50% of PITI. I expect that to continue to fall.
IMAO, renters will find more rentals at lower prices, which may or may not track the erosion in their incomes. I don’t see how renters get squeezed harder than owners in a down market, just as owners did better in up markets.
Owners who have ARMs, with under 4% intro rates that were written since ‘04 are estimated to have a 1/3 chance of foreclosure. I don’t see how renters are exposed to that kind of carnage.
If I didn’t answer your question, please let me know.
All the best,
E
Eleua,
“With 60,000,000 peasants about to be granted US residency (that’s 60% of Mexico’s population)…”
“Western Civilization is being overrun by peasants and freaks from the Third World…”
It’s extremely shocking to me that a seemingly educated and rational person such as you would lump millions of people into dumb stereotypes and frankly generalizations that smack of extremist right-wing terminology.
You want to move to a country that does not have a huge immigration problem, right? I can come up with an “economic” counter argument that if such country exists in the Western Civilization area, its population growth would be nil. Things might be fine now, but good luck in 20-30 years when the percentage of retired seniors is 50-60% of the population.
Immigration, with all its problems and challenges, is also a chance for western countries to have a rejuvenated work force and continue to develop and produce. Don’t forget that.
Rising Interest Rates in 2007 will mean a nasty downturn in the housing market. Will the Fed just sit and watch? Thats why i feel rates wont go up beyond some point. Thoughts?
Hi Ardell:
Can you do a roundup on appreciation, regular stats in Redmond, 6 miles from Microsoft. The folks at seattlebubble are predicting HUGE drops Thanks!
Hicham,
You are asking some questions that need to be answered. I don’t think the regulars at RCG want this to be a social/political forum, so I’ll reserve my answers to another place.
Just a quick response: Multiculturalism is a failed, but politically fashionable, policy. Dissent from multiculturalism is equated with being a member of some xenophobic/NAZI-esque group, regardless of the facts.
You said that I am “seemingly educated and rational” yet ponder the seeming paradox of not holding myopic, Leftist views on culture. I reject that someone has to be a rube in order to take a long view of history, culture, psychometrics, and governance. I think it is folly to conclude that the prevailing, politically correct, myopic view of culture is the only viable means of evaluating the times. This is where it becomes political. The Left has virtually quashed all dissent through PC thought orthodoxy. When anyone, or any medium, dissents, they are usually met with legal or violent resistance.
I’m getting too old to cower in the presence of PC thought orthodoxy. Perhaps if all the overeducated, annointed, busy-bodies actually left the college campus, the newsroom, or government, and had to live in society and take their data from observations, rather than endless point papers and books that descend from inbred, PC research, they would understand that it is their insular way of living that makes their Leftist views palatable. Reality does not ratify their theories.
It is no coincidence that in order to keep the resourceful and self sufficient in a socialist system, you need some means of force. The stupid, lazy, shiftless, and irresponsible embrace socialism and cultural decay.
Culture has consequences. If you want to read about how I view this whole mess, check me out at
http://the-wtf-files.blogspot.com/
Give me a day or two to put together an article. Feel free to comment as you deem appropriate. I anxiously look forward to your thoughts and hope we can engage in a meaningful dialogue.
BTW, I have more disdain for GWB than your average Seattlite, so it is not a neo-con site.
Sandy,
The FED may not be able to get rates down. If the selloff in the dollar keeps going, they will have to raise rates to defend it. Either that, or you are paying $6 for gas.
The FED is trapped. No matter what they do, they are screwed. Once the general public loses faith in the FED, you will see some real fireworks.
Bottom line: You just can’t borrow your way to prosperity. Living beyond your means has consequences. This is true on the individual level and on the world scale.
In economics there is no amnesty – just a stay of execution.
Hi Sandy,
6 mile radius is a bit far to be a cohesive representation. I’ll break it down for you. I can tell you that the market within 3 miles in single family homes around $600,000 give or take has been strong, with many multiple offer scenarios and property selling a little higher than it should. I’ll see if I can track some appreciation in apples to apples comparisons for you.
The house behind me that sold for over $1.6 million flipped straight to a second buyer without skipping a beat when the first one fell out at inspection.
I won’t likely do all over stats again until end of June results are in. It’s feeling more like January than June. Lot of activity around new listings while others are sitting. Usually that changes in May, but I think interest rates going up caused some sluggishness.
When we had the big rise in 2005 it was because interest rates went down the week of June 9th. But I don’t expect that with Bernanke vs. Greenspan. Without incentives, I think rates would have been closer to 7% back then. I’m hoping to see rates back at 5.75% to 5.875 by mid to end of June. Without that, we could see this market staying about the same for the balance of the season.
I’m seeing appreciation of about 14% generally so far this season, so we could easily hit the 15% to 25% by September that I expected.
I love just about everything that comes from Eleua. It is articulated in such a fashion that I could only aspire to.
Eleua,
I don’t want this to turn into a political discussion either, I was just shocked by the terms you used that I felt compelled to respond.
I have no problem whatsoever with your argument as stated in your reply to my comment: “Multiculturalism is a failed, but politically fashionable, policy…”. That is a totally legitimate opinion that one can agree or disagree with.
On the other hand, “peasants and freaks from the Third World…” is a bigot statement no matter how you slice it.
Other than that, I really do enjoy your posts and look forward to reading your article.
Eleua,
I know you view it as a personal attack on your rights to be heard, but RCG is simply not the place for your bigoted opinions. I’ve deleted your last comment which is only meant to inflame the discussion and will happily delete similar discussions in the future (as I’ve done in the past when you try to turn the conversation towards these issues…).
Dustin,
Actually I would prefer not to discuss things not related to economics and RE on this forum. If you think I have crossed a line, please delete them.
Someone asked for my “exit strategy” and I said it is more cultural than economic. Another posited that rising wages would lift RE, and I said the modern reality makes rising wages unlikely due to current events.
I would prefer to discuss things of this nature elsewhere.
I do contest that what I said was bigoted. Politically incorrect for a ultra-sensitive, insular place like Seattle – yes, but not bigoted.
Delete away. I hold no grudge against you or anyone else.
As promised, for those interested in my response to Hicham’s (and now Dustin’s) charge of bigotry, I have my response at
http://the-wtf-files.blogspot.com/
Dustin,
Thanks for not deleting my previous posts. I did think it was necessary to defend myself against a baseless charge.
For everyone else, let’s steer the non-economics discussions to an appropriate forum.
Let this be the last word on this forum on this subject.
All the best,
E
Anyway…back on subject…
Has anyone seen the action in the 10 year bond? (it’s the bond that is the most influencial regarding mortgage interest rates)
http://finance.yahoo.com/q/bc?s=%5ETNX&t=5d
Warning! It is not for the feint of heart.
This has implications for the overall equity market as well (for you Boomers out there that need both your house and 401(k) for your golden years). When you get a speculative, leveraged buy-out fervor driving your market (like we have had since March), this has the roughly analogous effect of dumping 5 gallons of water on a small campfire.
Anyway…back to the action.