Over the last few months we have had 2 $10,000 reductions of the QE or Quantative Easing by the Federal Reserve.
From $85B a month in bond and mortgage backed securities purchases, to $65B. Janet Yellen has now taken the Chairman seat from Bernanke, and she’s expected to maintain the same basic approach and policies. Lets take a look at a chart of the 10 year treasury. It’s direction most closely correlates with 30 year mortgage rates.
You can see last May was the bottom of the rates for this cycle. Then it started jumping up hard. May is when there were some pretty good economic reports, and there were hints that the Fed was going to scale back on the QE, so bonds started selling off. Over a few months the rates went up about 1 ¼%. They bounced around a little, but have subsequently dropped about a ½% since the beginning of the year. So what’s going on that’s affecting the rates?
There are economic and currency issues in emerging markets. US economic reports have been weakening. The stock market has been selling off, so the money that’s coming out of the stock market, is going into bonds which is seen as a safe haven. Due to new Dodd Frank regulations applicable to mortgages, it’s making it harder for borrowers to qualify for the loans. When there are fewer loans made, so the demand for money from the secondary market drops, and the result are lower rates. Since the Federal Reserve hasn’t directly messed with increasing the discount rates, short term mortgage rates have stayed low, even though the 30 year fixed has gone up. You can see in this chart, visually, the Adjustable rate mortgages have stayed low, while the 30 fixed has gone up.
When I say ARM, it could still be fixed for 3,5, 7 or 10 years. I always recommend a 30 or 15 fixed, if a properties is going to be retained long term, lets say at least 7 years. But if there’s a probability that the property is going to be sold or refinanced in a shorter time frame, you have to crunch the numbers. You might be able to use that spread to your advantage. I always say bribe me.
If the rates are the same for a 30 fixed as an ARM, you have to go fixed. But if you’re talking about a 1 ½% difference, that’s a lot of money that may be guaranteeing a rate for a time frames that may not even applicable to your scenario. The real estate market is slowing down. The rates are very economicnews & report driven. The employment report this Friday can have an effect on rates.
If you are in the LA region, and have any specific questions, always feel free in contacting me through my website, or my email address or phone number shown below.
Ron Henderson GRI, RECS, CIAS
Multi Real Estate Services, Inc
Gov’t Affairs Chair – California Association of Mortgage Professionals
Real Estate market, Mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley