 Rates Jump Over 5%, heading to 6%?Friday, May 29, 2009 - Article by: David Monroe -
Some of these long term trends are easy to see. The forces at work are powerful and inevitable. At some point those buying our bonds will worry that the value of their investment will decrease due to either a drop in the value of the dollar, or to inflation, or simply to reduced demand. Since the value of the dollar is relative to other currencies, and most of the other major currencies are not doing so well because their economies are also struggling, that would not account for the increase in rates. Inflation is not yet a problem, so that would not cause rates to rise either. However, there are many people who anticipate inflation will increase, and some think it will be sooner rather than later and are moving money into commodities like Gold and Oil. Some of that money must be moving out of bonds. Also, the stock market has been doing well as of late, with money moving into stocks as well. The Fed has also slowed the rate at which it has been buying up Treasuries, further reducing demand. The Fed cannot continue to buy up Treasuries forever, since to overdo it would stoke up inflation. Remember, when the Government buys bonds from itself, it does so through what is alternately called monetization or quantitative easing. Laymen would call it printing money. You just do not know exactly when these things will play out. Mortgage Rates have been slowing trending up, but they really spiked up in the last two days. Even before this event, mortgage applications dropped 8.6% last week according to the Mortgage Broker's Association survey released Wednesday. I don't understand why. Not only were rates as low as most adults have ever seen, a trending up would lead many homeowners to say "hey, I better lock into these good rates while I can." I have been emphasizing the fact that rates have been at historic lows not seen in the 38 years that Freddie Mac has been tracking mortgage rates. I have been surprised at how many people have not understood the significance of this enough to act on it, especially with the expanded loan approval guidelines recently instituted by the Obama Administration allowing for creditworthy homeowners to borrow up to 105% of their home values to refinance down to lower rates. Is this something that is too abstract for someone outside of the industry, or someone who does not have a "head for numbers," to grasp based on that statement alone? I have even worked the numbers for some people, showing them how they would save $200 to $300 per month, EVERY MONTH, by refinancing at these incredible rates. I'm talking about middle class people, so that's a significant, recurring savings. In some cases it seemed like I was just talking to myself. |
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