Mortgage rates, prior to June, were stabilizing after a volatile first quarter. Potential home buyers and existing homeowners were settling in to the fact that a 4.5% conventional mortgage rate could be had; some days you had to pay a couple of points, some days only one. FHA and VA loans were about an eighth of a percentage point higher.
Brighter days in the real estate market seemed inevitable.
Volatility hit the mortgage rates market like an unexpected tsunami. Here’s how it unfolded:
- Upwards pressure quietly started about a week before Memorial Day. We figured the mortgage bond traders were taking some profits. No big deal; we recovered and rates came back down to the 4′s.
- The triangulated attack came from a California politician, a California bond fund manager, and the Chinese. I thought the bond market was overreacting. Rates jumped up as high as 5.375% but came back down to 5%. I felt comfortable that the Fed would intervene, keeping mortgage rates below 5%.
- I was optimistic about this prospect of lower mortgage rates and cautioned that only one thing could rain on that parade.
- Last Monday, I awoke with a pit in my stomach; that “one thing” happened. I cautiously locked every loan in my pipeline; all at 5%. While I believed in my heart that rates would drop again, the risk seemed too great to play around. I privately thought the mortgage bond traders were just playing chicken with the Fed.
- Last Thursday, I reversed a six month bias towards lower mortgage rates. Since December, 2008, I believed that the Fed would artificially keep rates below 5% in order to spur economic activity. I privately thought this “money printing” would ruin the economy with hyper-inflation but I expected that sometime in the Fall of 2009. Still, I never fight the Fed.
- Friday, I wondered if the better unemployment numbers, which drove retail mortgage rates to 5.5%, might be the final blow in this massacre. Nuthin’ doin’. We haven’t peaked just yet.
What does this mean to you, the professional real estate agent?
- Buyers in escrow, who haven’t locked-in a mortgage rate, are facing a monthly mortgage payment that is hundreds of dollars higher than they expected. (based on a $300,000 loan amount). You’re going to have to do some tap dancing to keep them in the deal.
- Home shoppers, not in escrow, are going to read the Sunday paper, call the mortgage broker on Monday to discover what existing home buyers now know, and crawl back into a cave. You’re going to have to lure them out of that cave with the prospect of lower home prices.
- Customers with listed homes are going to have to get aggressive with pricing, request to see buyer’s lock-in agreements, and demand removals of loan contingencies as early as possible.
The Federal mortgage rate subsidy, for all its intended good, appears to be have lost its efficacy. Mortgage rates that don’t receive federal subsidies (jumbo mortgages) were in the 6′s prior to the Fed’s support of conforming loan rates; expect the rest of the mortgage rates market to gravitate towards that level by year end.