Market Commentary and Strategies
Ever since mid-1998, the
financial markets have been in turmoil. The stock and markets gyrated wildly with
losses that every lender experienced. The drop in stock prices caused a rally in the bond market
with rates dropping to generational lows across the board. Even with rates at these lows. it will still pay to be
extraordinarily sensitive to rates so that you can lock in at the best time.
Mortgage rates continue to be about 1% lower than they were for most of last year,
and most of the loans we are doing are in the 5% range, with 5 year loans in the 4% range.
To see what the bond market has done VERY recently, check here. 
Here are some further comments and ideas.
Long term view - my perception is that we have entered a period not unlike the 1950's,
characterized by low inflation, steady job growth, and growing prosperity both at home and
abroad. Luckily, this time we do not have the Cold War with the threat of nuclear
annihilation hanging over our heads.
While the future has a way of surprising us and predicting the future is the most
dangerous profession I can think of, I'm willing to go out on a limb and suggest that in
this environment, it is likely that interest rates will remain in a range which is much
lower than we have experienced in the last 30 years, with the with 30 year Treasury bond
being in a 4% to 6% range.
What this means for mortgage rates - Just so you can see just how good you have
it today, take a look at what mortgage rates have been for the last 40 years. I hope that makes you feel better. You are living in
extraordinarily good times and my view for mortgage rates is that they will continue to be
in a very favorable range with 30 year fixed rate Conforming loans being in a 5.5% to 7%
range. What this means to you depends upon your situation. For further on this
topic, keep reading.
Short term view - as this is being
written, the yield on the 30 year bond is at the lowest point they have been in generations. This mirrors the world situation as rates are still incredibly low in Japan and Europe.
What this means for mortgage rates - My view is that rates will stay in the current range until the economy starts improving.
At that point, money will flow out of bonds and into stocks and rates will rise.
Loan Type Strategies - The price of long term rate protection is very low and, compared with other times,
would favor getting longer term mortgages. As always, I urge you to consider buying protectin for as long as you are likely to own a property.
But there are still many alternative
tactical opportunities to examine, so let's look at some.
For Conforming Loans, you should always look first at a 15 year loan if you are
comfortable with the payment. If not, the more risk averse borrower should get a 30
year loan. Even at these levels, they are still terrific by the measure of the last 30+
years.
Those who are less risk averse should consider 5 or 7 year fixed loans. These loans are
cheaper for those who are not going to own their homes for more than, say, 5 years. For
those who are only committed to the property longer can still benefit from getting this type of
loan but paying zero points. For those who are going to own their homes for the full 5 or 7 year term, paying points will be advisable.
Rate Strategies - In times like this, it is extremely important to
have the right mental attitude. In my view, you should establish a target that is
reasonable, and when rates hit that level, lock. Do NOT get greedy!
The market does not know or care that you are trying to get a loan and it has a habit of
punishing those who always want a rate which is 1/8th% better than whatever they are
today. Look at the graphs again of you need to be reminded of that.
The situations are different for people who are purchasing versus those who are
refinancing.
Purchasing - Even with rates having dropped so dramatically lately, I would
put off locking in your rate until you get within 30 days before closing.
Refinancing - This depends on loan size and your current interest
rate. Almost everything we have done for over few months was in the high 5% range so
unless your loan is 6.5%, it won't pay to refinanace now. I think the important thing is not to
focus on the fact that you missed the boat last year and to thrash yourself at not having moved a
year ago. The past is past! What is important is to add up the costs and add up the
benefits of a possible transaction today. If it makes sense, DO IT! What you do not
want to do is see rates go to 7% and realize that you passed up an opportunity because you
were "hoping" rates would go lower. I'm big on faith and hope, but those
are spiritual qualities, not ones on which to base a business decision.
If you are going to be in your home more than a few years and
- Have an ARM, your current rate (index + margin) is probably below 5% but it may still
make sense to refinance just to get off of the merry-go-round. Even if there is no
immediate benefit in lowering the rate, the cost of a refinance into a loan at the same
rate can be viewed as the cost of an insurance policy that protects you from rate
increases. If the cost is $2,400 and you're in the home for another 10 years, amortizing
that cost over 120 months means that it costs you just $20 per month. That's cheap
insurance!
- Have a fixed rate mortgage, your rate would have to be over 6.5% to justify refinancing
now.
If you have any questions, please ask them by going to the question page.
Otherwise, feel free to roam around the
site and tell others about it. Thanks again for buying my book.
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