Interest Rates

halfnote19_IHB

halfnote19_IHB

New member
In the past few months the fed has dropped the interest rate.

I understand the rate that the fed dropped was the rate in which banks can borrow money.

So if the banks can borrow money cheaper then why are mortgage rates going up?
 
<p>Inflation expectations are rising half. That drives rates up, especially long rates like 30-years. When the Fed eased, short rates dropped markedly, but have started creeping back up a bit as well. </p>

<p><a href="http://www.marketwatch.com/quotes/quotes.aspx?symb=TNX&sid">http://www.marketwatch.com/quotes/quotes.aspx?symb=TNX&sid</a>=</p>

<p> </p>
 
Mortgage rates = risk + investor demand. Currently, risk is high, people are defaulting like crazy, and you can get a better guaranteed overall rate of return in a lower Fed rate. Investors don't want our crap, so there is no demand, and what demand is there, is for a higher rate of return.





So... high risk + little demand = higher mortgage rates.





All the bulls talk about the high defaults in Santa Ana and Anaheim, but investors do not have a clue what the difference is between Irvine and Santa Ana is.
 
<p>halfnote - Everything said above is accurate. Interest rates are a commodity. There is a bid and an ask and the price is determined by the bidders and the sellers. Market interest rates are not set by anybody. They are determined by market forces. Supply and demand.</p>

<p>The most likely reason interest rates are rising even though the Fed set the Fed funds rate lower is that the people or institutions who have money to invest in longer term bonds do not have as much faith that the payout will be worth as much as they thought a few months ago. Whenever you want to figure why the price of something like interest rates is rising or falling, put yourself in the market participants shoes and figure what you would do in someone else's position. Ex. - Right now, if you were looking for a long term investment, what rate of interest would you be willing to invest at?</p>
 
The reason is that somebody who sells a mortgage will have to borrow not only now, but for the next 30 years. The fed has low rates now, but only for short-term loans, but they may not stay that way. The fact that mortgages are higher means banks expect they'll have to pay more to borrow in a few years. Mortgage rates have to be high enough for them to make money over the entire lifetime of the loan, not just now.
 
<p><strong><em>All the bulls talk about the high defaults in Santa Ana and Anaheim, but investors do not have a clue what the difference is between Irvine and Santa Ana is.</em></strong> </p>

<p>About eight miles?</p>
 
The ten year note is the basis of the banks term premium. It is long enough for the 30 year term but short enough to compensate for the fact that the borrower will not have that loan past 7-10 years. Although people love the 30 year fixed, history shows that the borrower will refinance or sell the house in a 5-10 year window.
 
The ten year note is not a good indicator of mortgage rates, when they have completely different risk levels and investor demand.





I have gone over this several times here. I am not trying to be a jerk, but a search will find the threads. There was a great one from 2006, that northirvinerealtor and I had a debate on about the subprime mortgages. And, not to brag, but I was right, and NIR was humble enough to admit that I was. Now, if I could just be more humble about it...
 
<p>The graphs of 30-year rates and the 10-year look quite similar in terms of trend, at least until recently:</p>

<p><img alt="" src="http://www.ipoplaya.com/big.gif" /></p>

<p><img alt="" src="http://www.ipoplaya.com/int-basic.gif" /></p>
 
10-year yield is a great indicator of where mortgage rates are headed. Since they're very similar investments, and the 10-year is considered 'risk-free' the mortgage rates are risk-adjusted. You can invest in a 10-year 'risk-free' bond or a mortgage.



I was happy when I saw mortgage rates tank in January, but they have been climbing ever since. I'm about to lock in a rate on a mortgage and now I'm thinking I can't lock it in soon enough, cuz these rates could climb and not stop.
 
<p>Mortgage rates are affected by many things but there is a reason that the ten year note is known as the "benchmark" of the 30 year fixed loan. Subprime mortgages were based upon other indexes including but not limited to the libor, CODI, COSI, COFI, CMT indexes.</p>

<p>I dont have time to go look it up right now but the correlation between the ten year note and the 30 year fixed loan is outlined and described in detail in federal reserves resources.</p>
 
<p>"So if the banks can borrow money cheaper then why are mortgage rates going up? "</p>

<p>Three primary reasons:</p>

<p>1. The Fed sets the short term interest rate. The long term rate can do whatever it wants. The longer term rates have more to do with expected future rates and inflation.</p>

<p>2. The risk premium. Spreads between treasuries and other credits have increased at all of the longer maturities. That translates into people thinking private sector defaults are more likely, or that people already holding such investments are dumping them (e.g., MBS). </p>

<p>3. The Fed is not the primary borrowing source for most banks. They typically are getting a lot of longer term capital elsewhere. Remember that the Fed Reserve is, and is meant to be, very short term.</p>

<p> </p>
 
30 years fixed with zero point currently at 6.5% right now. Would mortgage interest continue to go up?



What would happen when interest continue to go up, but house price is not dropping where it is affordable? And buyers continue to sit on the side line?
 
tulip



That is likely not to happen unless sellers decide they do not need to sell or buyers decide they do not want to buy. Interest rates will continue to climb and sellers have two choices (lower the price or pull their homes off the market and wait for a long period of time).
 
mino 2126,



I am seeing the price of home haven't drop that much in our area, but yet interest was 6.5%. I remember we brought our second home in 2000 with interest rate of 7.25%.
 
<p>I just ran a little afforability scenario. Took a home at value of $520K and with 20% down and $416K borrowed, mortgage payment on a 30-year rate of mid to late January of 5.75% works out to $2427 per month. Now, with rates up .75 since the January lows, a house would need to be 8% cheaper ($382K borrowed) for the payment to be essentially the same.</p>

<p>Anyone think that home prices have fallen 8% since mid January?</p>

<p>Short-term affordability is getting much worse with rates climbing. If prices fall 15% over the next year, but rates go up by another point, affordability in terms of the monthly mortgage payment will still be around the same, i.e. median buyers will be no better off. If prices don't fall that 15% or rates move up even further, affordability will be worse than it is today...</p>

<p>Those January and early Feb buyers that locked up 30-year conformings in the mid to high 5% range and jumbos around 6.5% might have been the smart ones. Prices had fallen by 10-12% in only a few short months and mortgages were at super cheap maybe historical lows. It's possible we will never see those rates again...</p>

<p>My guess is that homes will be much less affordable a year from now, i.e. the negative impact of mortgage rate increases will outpace the positive impact of price drops. Now IR will say you can always refinance but he'll have to agree that it's possible we may never see 30-year fixed rates in the mid 5% range again.</p>

<p>Or to look at it another way, let's say at the bottom a couple years from now we are down another 25% or so and the median home is running around $360K. If mortgage rates are up 2 points from where they are today (8.5 vs. 6.5), the median buyer is only $200/month better off than they are today...</p>
 
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