St. Louis Real Estate - Mortgage News - Going Down

Lock and Load! by Chris Scheer, Branch Manager, Cornerstone Mortgage, O’Fallon MO

Well the Federal Reserve has lowered short term interest rates once again and if you believe the written statement coming out of the meeting, they are finished lowering interest rates. The “inflation” boogeyman is haunting them as well it should be. Mortgage rates have not gone as low as they should have, for a majority of reasons:

1. RISING OIL PRICES
2. Falling value of the dollar.
3. Mortgage Backed securities are not an attractive investment.

Rising oil prices are the single biggest concern with our economy. This nation is so dependent upon oil that most everything that we do involves some use of oil or oil byproducts. Why the U.S.’ Oil Dependence is Bad for the U.S. Economy. Prices for all consumer goods are being affected by the rising price of oil, making it less likely that the consumer will have extra money to spend on non essential items.

The falling value of the dollar does have a positive; it makes it more attractive to foreign nations to purchase American goods. Unfortunately, we have become less of a manufacturing nation than we were 40 years ago. The Dollar’s Decline and Its Implications.
Along with purchasing goods, we may see foreign investment in US Real Estate since we also have declining value in real estate.

The Sub-Prime Mortgage Crisis has put a stain on all mortgage backed securities. Most investors have been trying to rid themselves of mortgage backed securities. Even though short term rates have fallen, interest rates on mortgages have not followed. This trend is brought about by the simple law of supply and demand. As the demand for mortgage backed securities has lessened, their price has gone down. When the price on a bond goes down, the yield (interest rate) goes up. Until we see demand for the mortgage backed securities increase, which would drive the yield down, we will continue to have interest rates well above where they should be.

So why do I say lock and load? The Federal Reserve is almost out of bullets to stimulate the economy. Some are predicting that the economy will soon recover. Once the Fed sees signs of a recovering economy, they are going to want to start raising rates to slow the economy. And even more importantly, reload their own gun. We have now seen the Fed lower short term rates from 5% to 2%. They would like to have some room to work again with interest rates. If they need to get some room to work, raising rates is the easiest thing for them to do. For buyers looking to purchase a home or owners wanting to refinance, it means that rates are no longer going down and now will only go up. So find your house, lock your rate and start saving your pennies. We are going to be fighting inflation for a few years! Chris Scheer can be contacted at chrisscheer@stlouisrealestatevoice.com

Tags: St.+Louis+Real+Estate, Mortgage+News, Buyers, Federal+Reserve, inflation

This entry was posted on Monday, May 5th, 2008 at 5:30 pm and is filed under For Buyers, Mortgage News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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Actually, banks haven’t dropped their rates and the Fed has been aggressively lowering rates because of reserve requirements more than anything else.

The “spread”, the difference between discount rate and market rate, is largely determined by only two things, inflation and profit. If the fed charges them 4% and inflation expectations are 1%, they have to charge at least 5% to break even, so you’ll see 6% at the bottom for profit. If they fall behind in cash reserves, they need more of a profit margin to maintain business functions. Bonds do play a role as a gauge for profit expectations, but they don’t single-handedly determine market mortgage rates, they are just a measure for profit margins.

Inflation was reported at about 4% last year, and many are expecting 3% this year. This is why you see 2% fed rate and 6% market rate. It’s not the oil demon or anything other than basic fundamentals. The fed has lowered rates to give the banks more room for a spread and keeping rates at a level that people can accept while the election is going on.

After the election, when there won’t be immediate political fallout, expect rates to go up to both fight inflation and spreads to increase to rebuild capital reserves. This will continue the downward pressure on prices.

Comment by Bryan — May 15, 2008 #