If you’re a First Time Homebuyer, the recent spike in interest rates has put the “money chip” squarely in front of you.
Should you lock now or wait and hope that rates come back down?
Here’s some help for your decision making.
1. HOPE is not a strategy!
2. Predicting interest rates is a fairly simple thing to do, if you know your options. Interest rates are only going to do three things going forward: They can go up, They can go down, or they can stay the same. In only one of the three can you get better than what is offered today. In the immortal words of Harry Callahan (sorry another pop culture reference): “Do you feel lucky? Well do ya’ ****?
3. Las Vegas is a perfect example of how this interest rate game works. If you’re floating your loan, it’s your money on the table. The question is when do you take your winnings off the table (lock)? Take a look at this picture of Las Vegas. Do you think they built everything here because the gamblers (you) took their money off the table at the right time?
4. Nobody knows what rates are going to do. Your neighbor doesn’t know, neither does your brother-in-law, co-worker, Uncle Fred who has never owned a home, your parents, your spouse, your barber, manicurist or masseuse don’t know. It’s easy for them to have an opinion because they aren’t playing with their money, it’s yours.
Grab one now, or hope for lower rates?
Floaters got sunk this week. Anyone who is in the market for a new mortgage, be it a straight-up purchase or refinance, and was letting their rate float in hopes of locking in at a lower rate instead got smacked with a near quarter point rise in the 30-year fixed rate. According to Bankrate’s latest weekly survey (conducted Wednesday morning) the 30-year fixed average was at 5.45%, up from 5.23% That’s the highest level since February, and more than a half point above the 4.9% borrowers in early April could snag.
So what’s a floater to do now? Well, if you’ve lost your betting mojo, lock in and be happy. Yes, happy. Let’s remember that 5.45% is still seriously good. It was only one year ago that the average 30-year fixed rate was 6.1%. And long term, it is all but assured that a 5.45% fixed rate is going to look darn nice. It may take some time before the Fed gives up the fight and has to let rates rise to attract buyers for all the debt we now have to pay off, but it will happen. So while today’s 5.45% is high relative to a month or two ago, it is likely to be one you will boast about in the coming years.
Okay, enough of the long-term perspective. What if you’re still in betting mode and wondering about the next few weeks and months? Well, that’s one big crap shoot. The recent spike has been caused by action in the 10-year Treasury market (the 30-year fixed rate tends to follow movements in the 10-year note.) Late last week the bond market started worrying about inflation and servicing the federal deficit, and one thing led to another and the 10-year Treasury yield shot from 3.4% last Thursday to above 3.7% during trading yesterday (Thursday) before closing lower at 3.67%. Plenty of market watchers are expecting the trend line on the 10-year Treasury to keep moving up. But here’s where it gets interesting: there’s not as clear a picture if a continued rise in the Treasury will automatically cause the 30-year fixed to also rise.
The big wildcard is Ben Bernanke and his merry band at the Federal Reserve. The Fed has been actively buying up long-term Treasuries and mortgage backed securities in an effort to help keep yields low. When rates started rising the past few weeks the Fed signaled it wasn’t too concerned; in fact it seemed to be cheered by the notion that those slightly rising rates were a sign the economy was gaining a bit of strength. But now there’s a sense that the continued rise-capped by the big spike this past Wednesday-could refocus the Fed’s effort to push yields down; it has yet to use up even half the money it has allotted for the buyback programs, so it’s got plenty of gunpowder ready.
That could be good news for rate floaters; assuming the Fed is still worried that rates rising too quickly and too far will put the kibosh on the already anemic credit market recovery, it’s a decent argument to assume the Fed will soon ramp up its repurchases in an effort to push yields back down after their recent spike.
As David Rosenberg, the former Merrill Lynch economist now at Gluskin Sheff noted on Thursday morning:
“It’s one thing to have a Treasury yield backup when mortgage rates are still declining, but that is no longer the case. The yield on the 30-year fixed-rate is already up 20 basis points from the lows; 1-year ARMs have jumped 17bps. This is not what the Fed wants to see.”
Indeed, the recent rate uptick has sent a chill through the still frigid housing markets. According to the Mortgage Bankers Association, mortgage applications dropped 14.2% this week compared to a week prior.
The bet’s yours, floaters: lock in now at what still qualifies as a terrific interest rate, or put your money on the Federal Reserve pushing yields down in the coming weeks. Which way are you leaning?
– Carla Fried
