Thursday, November 20, 2008

What is going on with Mortgage Rates?

The Fed minutes from the October Fed Meeting were released on Wednesday November 19, 2008. The minutes expressed concern over the health of the economy and their future targets from employment and growth were lowered. But the big news was the word “deflation.” The Fed, after years of being concerned with inflation, now says they are concerned about deflation. The news shocked the financial markets, pushing Stocks sharply lower while directing enormous money flow into ultra-safe Treasury Notes. Now if you are watching conventional news sources then you would assume that this move would be improving mortgage rates. However, this is not the case. The Treasury Notes does not directly affect mortgage rates. Mortgage rates are directly affected by Mortgage Backed Securities.
While T.V. and print news would have you believe that the 285 basis point jump in the Treasury note arena is a phenomenal move for mortgage rates, it just isn’t true. The Mortgage Backed Securities Market has only seen a 12 basis point increase. That means that rates are good right now, but that they are holding steady and not improving by leaps and bounds.
Deflation is when prices drop, mainly due to decreases in money supply and credit. With the economy slowing down, we are hearing some people say we are in for a deflationary recession. In a deflationary environment, investors flee into fixed instruments like Bonds because the fixed payment received would actually buy them more goods and services over time.
A similar event took place back in the Spring of 2003 when Alan Greenspan uttered the deflation in a statement. Mortgage Bonds rallied at that time and set off the refi-boom of 2004. The market is much different now than it was in 2003; tighter lending guidelines and reduced equity.
For homeowners who have not utilized a refinance since the last “boom,” may be able to lower their rate in the near future. Being connected to a mortgage consultant that watches the market and knows how to interpret what is happening, is the best first step any homeowner or future homeowner could take.