There was an interesting post yesterday asking Why Won’t Mortgage Rates Drop Below 5%?. Brian Brady answered the question with a supply and demand analysis and as usual, I cannot disagree with that reliable old tool (the supply and demand analysis… not Brian 
). But I wonder, is there more at work here than supply and demand? Reading his post reminded me of something I have been telling my clients lately and meaning to share with everyone else: Belief runs the show. I suggest that Belief & Fear have supplanted Supply & Demand as our modus operandi.
The markets of late are moving as much on belief as they are on fundamentals. Don’t get me wrong; I’m not complaining. At least fundamentals is a player again. For the last couple of years the markets based their valuations on leverage, blind optimism and a smug sense of higher intellect – all the while recording profits in the sand. It is kind of nice to see some fundamental analysis come back into vogue. But we do not relinquish old habits easily. If I believe that ABC Company will (or should) profit ten cents per share, I will pay a price based on that belief – almost as if the profits were already announced. This, of course, is what leads us into the strange world of Wall Street where a company’s shares can get whacked even after they announce record earnings IF their earnings turn out to be less than I thought they should be.
What does all this have to do with mortgage rates? The fed has hinted at buying down mortgage rates using various tools at their disposal. The market has now partially priced this belief into the mortgage backs. Rates are down, at least to some degree, because the market believes they will drop even lower. Once again, we equate assumptions with knowledge. I don’t mind it up to a point; and here’s the point: lately I have had more than one client elect to wait on their purchase (or at least their purchase mortgage) because they want a piece of that sweet, 4.5% pie we all know is coming. But what if we are wrong? What if the fed wakes up tomorrow and says “Hmmm, after reviewing the utter failure of every stimulus idea we’ve tried to date; we decided that buying down mortgage rate is no longer on our Brilliant Things To Do list.” What might that do to rates? I suggest a nice increase would be in order. Wouldn’t that be a kick in the pants? Everyone is holding out for a pie that was never in the oven in the first place AND burns their fingers on the stove while waiting for it.
In the world of marketing, nothing tops a perfect pair. That’s what I call it when you have something of value to share AND it comes with a time pressure to act. The Perfect Pair. When you talk to your clients over the weekend, remind them that the low rates we have now are a product of belief in even lower rates to come. Then ask them how confident they are lately in the government following through on the various trial balloons it sends up. Then ask them why they aren’t pouncing on the artificially low rates we have right now! Because they haven’t found the right house yet? Good answer. That means the ball’s back in your court.
