2011 Mortgage Rates: Analysis From Darel Ansley

This is a Guest Post from Darel Ansley of Peoples Bank in Wenatchee

Darel Ansley

Executive Summary

 Mortgage rates finished last week around 4.75%. I think for the 2011 selling season we will remain in a range with 5.5% being an extreme high and maybe 4.25% as an extreme low with 4.5-5.25% being more likely.  I was expecting some good growth this year in sales volume to westsiders as their software jobs etc. have remained steady, and the price of a 2nd home over here has dropped.  However, I am concerned about all the recent news which projects uncertainty:  gas prices, earthquakes, Nuclear reactors, Mideast unrest, etc. driving people back to their 2009-2010 tight habits.

So low stable mortgage rates and nice low prices should be bringing the 2nd home buyers back, but we have to watch the news headlines to really find out.

Lengthy Analysis

Mortgage rates and the Stock market

Mortgage rates generally follow the 10 yr. US Treasury note, because investors who buy the packaged Fannie Mae or other Agency Mortgage Backed Securities (MBS) are buying a stream of mortgage payments, and most homes are sold or refinanced within 10 yrs.  The 10 yr. bond has been around 3.3% and the rate on a purchase mortgage is about 4.75% , so you can say that the difference is just the risk factor of MBSs over US Bonds.  Likewise, when cities, counties, states and foreign governments sell their bonds, they also are priced at a risk factor above US Treasuries. For instance, a 10 yr. bond backed by the government of Portugal is currently at 7.7%.  This means that the bond market (the net of all investors who buy bonds) has determined that it is much more likely that homeowners in the US will make their mortgage payments than the country of Portugal to make theirs. 

 Investors buy fixed income securities like bonds or MBS because the return is fixed and presumed safe.  Investors make the choice when they see the 10 yr. treasury yielding 3.3% , they decide how much of their money they want to lock in there VS the unpredictable stock market.  When it looks like the stocks will do well, people pull money out of bonds and put more in stocks.  When the future of stocks looks more risky, more money runs to the bonds.  The more people buy bonds, the lower the yield, and in our world, Mortgage rates drop.  The opposite happens when people think the stock market will do well; mortgage rates rise.  So in recent weeks, people are concerned about corporate profits if Japanese semiconductor supplies drop, and/or Japanese spending on US products drop.  Also, with regard to Mideast tension, if Oil and gasoline prices rise, people will have less money in their pockets to buy other consumer goods (especially as food prices have already increased).  So these two events caused investors to sell stocks and buy bonds, so mortgage rates dropped.

The cap on rates

I am not concerned about mortgage rates going to 7 in the near future.  While our government printing press has been working overtime in a fashion that might normally cause this to happen, I believe there is a cap to rates because of the following:   Mortgage rates are derived from US Treasury rates as explained above.  If mortgage rates get to even 6%, this would mean US 10-year Treasury notes would be paying roughly 4.5%.  But if that becomes true, Portugal will need to be paying about 9%.  If Portugal can barely pay its bills at 7.7%, it heir rate goes to 9%, they would have to lay off a ton of government employees and cut programs and spending just to pay their interest, if they do that, the laid off workers and the government starts buying much less from Germany, Spain and other European countries.  As there are many European countries currently on the ropes because of too much debt and spending, the whole European economy begins to contract rapidly, and they cut their purchases of US goods.  Plus the multinational companies like GE, McDonalds ,Microsoft, Starbucks, etc. that rely on worldwide sales for their profits would begin to see their volumes drop. 

So – stocks start to drop and look uncertain, so investors run back and put their money in the safety of US Treasuries which brings down mortgage rates.

 If this seems like a never-ending cycle; good analysis – it is, because if you remember it was a debt crises that got us into this recession, and all we have done is move the debt away from the big banks to the Governments (bailouts) and then we added to the debt (stimulus) and made it worse.

 Two last points.  First – my prediction that rates could get back down to 4.25% - this is because the terrible program from the FED called Quantitative Easing 2 (QE2) comes to an end in June.   The mediocre results we have been getting are with the FED spending hundreds of Billions; when that comes to an end, it may be like removing the life support from the stock market.

Second – Our good friends to the North, the Canadians; I used to tease my Canadian friends about their Socialist government policies, but I have since shut up.  All you have to do is look at their unemployment.  They didn’t go the route of a stimulus package, and their unemployment is back in the 7s where it was pre-crises.  We could maybe learn something there.

The bottom line may not help any of our incomes right now, but here it is: our population grows every day, so there is always an increased need for housing. Temporarily, 20 somethings might move back into Mom’s basement etc., but long term, the more people there are, the greater the need for housing.

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Comments

I have to comment on this particular post. For the first time in my 40+ years in the business, I have seen mortgage rates fall to less than 4%. This is great for those rare buyers with A+ credit. It is much harder to gain favorable rates for the average home buyer with a less than 700 credit score.

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