If Mortgage Rates are Not Going Below 5%, Where Are They Going?

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.

Filed under: BUYERS, INVESTORS, LENDERS , MARKETING, Rates

Point / Counter-Point

Michael Cook wrote a thought provoking post earlier entitled What Happens to the Early Worm.  So thought provoking that I found my comments drifting to post length.  So how about a little point/counter-point?

Michael, a very detailed and thoughtful post. I would not disagree with you that cautiousness is a safe strategy (although not always a profitable one) and I certainly do not disagree with your assessment of the people here on BHB.  But I do have some other questions:

The income / price equation did not get out of whack overnight, so buyers and sellers should not expect it to correct itself overnight either.

All real estate is local and that is never more true than now. In some areas we have seen real estate go through the support level of fundamental value (that value which would allow an investor to purchase a property and cash flow). This is no different than the Dow last week. It was oversold and many companies could be purchased below their fundamental value. So are you suggesting that rents are going to decrease in these areas?  Otherwise, the correction has already occurred in some areas.

You are looking at some of the best real estate agents in the business here. So when they write that their business has not dropped off, it might lead the casual reader to believe that the real estate market is not in a tailspin or even that real estate is close to a bottom. Do not be lulled into a false sense of optimism. This group is adaptable, smart and most of all well above average.

Michael, to whom are are you writing this post?  If it is agents then I suggest the new market has caused an industry-wide house cleaning.  Those that do not belong have seen business disappear and those that do have been rewarded; but this does not necessarily reflect a worsening real estate market.  If, on the other hand, you are writing to consumers then I suggest they read you closely when you say that the top agents have found “their business has not dropped off.”  It has not dropped off for a reason and would behoove those buyers and sellers to search out the agents that remain busy; again, because the market does not seem to be as bad for them.

Consumer spending is down – Much of it fear-based
Manufacturing is down and declining – As the credit crunch alleviates, this should soften
Jobless claims are up and rising – DEFINITELY A STAT TO WATCH
Housing remains weak – This begs the question
Housing inventory remains well above average – But dropping in many areas.  Plus, programs like Hope for Homeowners may put a significant dent in the rate of increase of REOs
Dow Jones has dropped nearly 40% over the past six months – This is significant, as you said. But may be good for real estate. The markets can go to zero but a house is still a place to live

…decline in the stock market. This represents a decline in confidence in the global economy. This level says that investors believe business could be in for sustained economic distress

There are a couple of great articles addressing this over on Coyote Blog.  Don’t Panic discusses what stock pricing represents and how it does not always address company value (especially in the comments). There is also a great graph in Good News, Really along with this summary: “(i)n fact, the current level of the stock market is screaming normalcy.”

housing still has room to decline because the historical ratio of median housing prices to median income is still too high

Past is not always prologue.  I find problems with the affordability index and have discussed them here.

In the end I agree that people should not try to “catch the knife” (I was wondering if you would make use of that colorful term from the equities market).  But neither should people try to time the market.  I have asked this before but I will ask it here:

What do you fear more: buying now at $350,000 and seeing in six months that you could have paid $325,000 OR waiting six months for the price to reach $325,000 and finding interest rates have moved up two points and you can’t afford any home?

Interest rates negatively affect affordability much more than pricing.  If you are making a long term investment (which is what real estate should generally be) then buying now makes great sense in the areas that are fundamentally sound.  Just make sure to work with someone as “adaptable, smart and … above average” as the agents found here.

(This post was first pubished here.)

Filed under: BUYERS, POLITICAL & ECONOMIC FOLLY, REALTORS, SELLERS , Economy, government, Rates, unemployment