Why Do Mortgage Rates Have to Rise?
by Evan Vanderwey on 15/03/10 at 8:49 am
Mortgage Rates – Why Do They Have to Rise?
Well they don’t have to. We cannot know the future. New and unknowable information creates the future for us, and even though we are told that certain things are going to happen, we don’t know for sure that they will until they do.
Let me give you an example. Most people are sure that rates will rise this year. But if you asked them to bet their $1,000,000 retirement account double or nothing on it, they wouldn’t do it. So are they really sure? They must not be or they would make that bet and double their money.
Yet we can make prudent decisions based on what we do know.
We know that the price of Mortgage Backed Securities determine interest rates.
We know that when the prices on MBS rise, rates go down.
We know that there have traditionally been two main buyers of Mortgage Backed Securities – Wall Street Investors and other countries (China mostly).
We know that in the past, when the Stock Market is struggling, market timers on Wall Street have an appetite for Bonds and MBS.
We know that in December last year the US Government, through the Federal Reserve, began buying them too as way to drive the prices up and bring the rates down. They became a third buyer of MBS.
We know that this worked – over the last year, rates have been very low.
We know that the US now owns more than 1 trillion dollars in these debt instruments, and we know what they have been saying about that.
They’ve said that they will continue to buy but slow down that effort.
They’ve also said that over time they will want to get rid of them. That means that they will flip from being a buyer to being a seller.
So right now, the MBS market has three buyers that all have a hefty appetite. The prices are very high and rates are low reflecting this reality.
Soon, we will likely lose one buyer altogether as the Fed stops buying.
And when the Stock Market heats up, the emotional public will make investments there again rather than in the MBS side of things. Who knows when that will happen?
China threatens, but so far has not made any substantive changes in their buying patterns.
The US will likely become a “seller” rather than a buyer.
So the long story short – the current demand for these MBS could turn into an over-supply and falling prices, causing the rates to rise.
That said, I think as consumers, we ought to make decisions based on what we know now. Rates are very low today. 5.25% is available with no points and no origination fees if your home’s value is higher than what you owe and not much worse than that if the value is less than what you owe.
Mortgage processing is bearable again too. If this works for you, then you should take action now rather than waiting.
Any day now, high demand could flip to extra supply, and rates would rise if that happened.
Oh, and pay off your credit cards and car notes too. You will want to have extra cash around if that happens. And those who do will have very good investment opportunities available to them.
