We see interest rates at 4% before we see them at 6% on a 30-year mortgage

[usctrojancpa]

With the mess going on in Europe and the slowdown in China, we are heading towards 4% flat on a 30-year fixed mortgage (conforming and jumbo conforming).  The mess in Europe will not be solved for years to come because there are some huge structural problems over there with the huge unfunded pension liabilities.  I will not be shocked to see a 3 handle in the mortgage rates before the end of the year or sometime next year.  One of my buyers locked in a rate of 4.50% with 0pts on Friday.

 

[irvinehomeowner]

Man... it's like OArms except your rate is fixed!

No wonder so many people are looking to buy now. And I still contend that even if rates do go up... the drop in prices will NOT be proportional.

The mantra of "You can always refinance your loan but you can't adjust the sales price" sounds nice... but it ignores the fact that people don't list their homes downward based on what your interest rate lock is. Home pricing mentality is like anti-gravity... it's easier to send it up than down.

 

[usctrojancpa]

Man... it's like OArms except your rate is fixed!

No wonder so many people are looking to buy now. And I still contend that even if rates do go up... the drop in prices will NOT be proportional.

The mantra of "You can always refinance your loan but you can't adjust the sales price" sounds nice... but it ignores the fact that people don't list their homes downward based on what your interest rate lock is. Home pricing mentality is like anti-gravity... it's easier to send it up than down.

Prices are sticky, that's for sure.  The only thing that will push prices lower is higher distressed inventory (REO and forced sellers like divorce, death, and/or relocation).  I was telling people that rates weren't going to go up by much.  There's no inflation because there is too much slack (especially in terms of employment) in the system for inflation to spike up.  If deflation really sets in, don't be surprised when we see a 30-fixed mortgage rate of 3.xx%.  My opinion is that we are heading for the dead decade of Japan 2.0.  Keep in mind that you can get a 30-50 year fixed mortgage in Japan in the high 2% to low 3% range today so rates can move lower from the current 4.50% mark,

 

[LAtoOC]

Bill Gross calls it the "new normal" where the US is basically entering Japan stagflation.

 

[Irvine2Irvine]

Man... it's like OArms except your rate is fixed!

No wonder so many people are looking to buy now. And I still contend that even if rates do go up... the drop in prices will NOT be proportional.

The mantra of "You can always refinance your loan but you can't adjust the sales price" sounds nice... but it ignores the fact that people don't list their homes downward based on what your interest rate lock is. Home pricing mentality is like anti-gravity... it's easier to send it up than down.

I completely agree that the price drop will not be proportional when the rates go up, especially when there are so many cash buyers and people with 50%+ down payment.  With the house pricing actually going up last few months, I don't see the flood of distressed inventory coming to the market.  The banks are taking their time and are not giving a big discount like 1 year ago.

 

[usctrojancpa]

I had an interesting conversation with my mom's boyfriend last night after the Lakers game.  He is a small business and very old school when it comes to how he does things (he's in his 60s).  He hates debt and has no personal debt (including 2 paid off homes in Irvine) and some business debt (mainly for working capital).  He pays for almost everything in cash and only has 2 credit cards which he only uses to pay for flights and rental cars.  I asked him the question, "So would you do a cash-out refi on your homes if rates got to 4% or 3%?"  He said that if rates got down to 3.50% or lower he would seriously consider doing a cash-out refi on both because that's the level of interest rates where money is essentially free of real interest.  When I asked him if I should pay off my 1.5% fixed 25-year student loans he said HELL NO.  haha

 

[sgip]

While I concur that we'll see extended 4.xx rates for some time, it's important to know a few things about mortgage rates as you look for a deal to close on:

1) "The Bottom" was in Q1 2009. Lenders priced a 4.125% sub $417k loan at about 1.0 point. We are approaching the bottom pretty quickly.

2) That 4.125% rate lasted for about 48 hours. During the next few months rates floated back above 5% and stayed there through the fall. Change comes quickly so if you are trying to get the deal of the century, you need to be nimble.

3) If the cost of money is roughly 1.0% (Zero rate, plus overhead), if the cost of servicing is 1.0%, and if the cost to manufacture the loan is 1.0% (3% total) you'll have to believe that investors are going to be willing to accept a 2.0% or less ROI for a mortgage at 4.0%. This assumes zero inflation and 100% payment of the mortgage backed security by all homeowners. What does this mean? 30 fixed rates below 4% are not likely. Note, not impossible, or never, just not likely.

If you can get a rate in the sub 4.5% rate range, lock it and don't look back. If you want to try and time the market, or hope that rates go below that threshold, you're playing with fire and need to be careful.

My .02c

Soylent Green Is People.

 

[usctrojancpa]

While I concur that we'll see extended 4.xx rates for some time, it's important to know a few things about mortgage rates as you look for a deal to close on:

1) "The Bottom" was in Q1 2009. Lenders priced a 4.125% sub $417k loan at about 1.0 point. We are approaching the bottom pretty quickly.

2) That 4.125% rate lasted for about 48 hours. During the next few months rates floated back above 5% and stayed there through the fall. Change comes quickly so if you are trying to get the deal of the century, you need to be nimble.

3) If the cost of money is roughly 1.0% (Zero rate, plus overhead), if the cost of servicing is 1.0%, and if the cost to manufacture the loan is 1.0% (3% total) you'll have to believe that investors are going to be willing to accept a 2.0% or less ROI for a mortgage at 4.0%. This assumes zero inflation and 100% payment of the mortgage backed security by all homeowners. What does this mean? 30 fixed rates below 4% are not likely. Note, not impossible, or never, just not likely.

If you can get a rate in the sub 4.5% rate range, lock it and don't look back. If you want to try and time the market, or hope that rates go below that threshold, you're playing with fire and need to be careful.

My .02c

Soylent Green Is People.

I agree with you for the most part, especially when it comes to trying to time the market...that's always a losing proposition.  That being said, if things really hit the fan over in Europe in the next year or two you can throw out the handbook for mortgage rates out the window.  Remember back in late 2008 how the short treasury notes (I believe it was the 91-day note) had a NEGATIVE yield?  Markets can act very irrationally when their is a flight to safety and people want to preserve capital.  Chances are if and when mortgage rates make a 3 handle, it won't be there for too long.

 

[sgip]

When rates went negative return, it was because of a flight to quality. Zero concern for Return on Investment, but simply the Retturn OF the investment. I don't believe Mortgage Backed Securities will ever be viewed as 100% safe like US Treasury debt. It's a long term debt obligation whereas the US-T can been in weekly, monthly or 1 year coupons. Parking that much cash into MBS's that do not have certain guarantees is unlikely.

Would a sub 4% rate be great? Sure, we'd have a boat load of refinance business. A sub 4% mortgage rate is just as strong of an indicator of trouble as the 18% mortgage rates of the 1980's. If we go sub 4% we're in more trouble than we might think.

My .02c

Soylent Green Is People.

 

[annabanana]

With the mess going on in Europe and the slowdown in China, we are heading towards 4% flat on a 30-year fixed mortgage (conforming and jumbo conforming).  The mess in Europe will not be solved for years to come because there are some huge structural problems over there with the huge unfunded pension liabilities.  I will not be shocked to see a 3 handle in the mortgage rates before the end of the year or sometime next year.  One of my buyers locked in a rate of 4.50% with 0pts on Friday.

Wow. Was that for an agency jumbo? What was the lock period?

 

[usctrojancpa]

With the mess going on in Europe and the slowdown in China, we are heading towards 4% flat on a 30-year fixed mortgage (conforming and jumbo conforming).  The mess in Europe will not be solved for years to come because there are some huge structural problems over there with the huge unfunded pension liabilities.  I will not be shocked to see a 3 handle in the mortgage rates before the end of the year or sometime next year.  One of my buyers locked in a rate of 4.50% with 0pts on Friday.

Wow. Was that for an agency jumbo? What was the lock period?

It was for a 30-year jumbo FHA loan around $600k with a 30-day lock.

 

[iceman]

I just don't know if we will ever see mortgage rates in the 3% range for a 30year fixed loan.  We are more than happy that we got an interest at 4.75% at zero points.

 

[usctrojancpa]

I just don't know if we will ever see mortgage rates in the 3% range for a 30year fixed loan.  We are more than happy that we got an interest at 4.75% at zero points.

Are you sure about that?  One of my buyers just locked a 30-year fixed mortgage with a 4.25% at 0 points.  We will see a 3.75% to 3.875% mortgage rate for a 30-year fixed mortgage in the next 3-9 months.

 

[octrends]

I just don't know if we will ever see mortgage rates in the 3% range for a 30year fixed loan.  We are more than happy that we got an interest at 4.75% at zero points.

Are you sure about that?  One of my buyers just locked a 30-year fixed mortgage with a 4.25% at 0 points.  We will see a 3.75% to 3.875% mortgage rate for a 30-year fixed mortgage in the next 3-9 months.

wow, what's the loan amt? is it more than 417k or less?

 

[usctrojancpa]

I just don't know if we will ever see mortgage rates in the 3% range for a 30year fixed loan.  We are more than happy that we got an interest at 4.75% at zero points.

Are you sure about that?  One of my buyers just locked a 30-year fixed mortgage with a 4.25% at 0 points.  We will see a 3.75% to 3.875% mortgage rate for a 30-year fixed mortgage in the next 3-9 months.

wow, what's the loan amt? is it more than 417k or less?

His loan amount is $417k but a loan up to $729,750 is just slightly higher in pricing.

 

[sgip]

We are seeing sub 4.0% 30 fixed rates available for loans under $417k, but the high cost area jumbo conforming loans really haven't budged lately. Lenders are expecting borrowers with 4.75% or so loans to refinance quickly if rates go below 4.125%, the point where it makes good, reasonable sense to refinance. This wave of pre-pays takes marginal, near loser loans at 4.75% and turns them into zombie loans at 4.125%. This is not something that banks can afford to do, but the market is eventually going to force it to do so.

There are many people on the "eventual inflation" side of the argument on rates. If this does happen and costs rise, those banks with 4.125% rate mortgages on their books are going to likely be FDIC takeover candidates. I see us in a long term low rate Japanese style economy and do not expect rates to rise for some time. They should, as it would shake the market up and flush out a great deal of dead wood as the Volker rate increases did in the late 70's, early 80's did. In the mean time, get what rate you can in this refinance market and enjoy the low payments while you can!

My .02c

Soylent Green Is People.