December, 2009 mortgage rates have been quite volatile. We started the month out with conventional rates as low as 4.5% (with an origination fee) and today, that same loan is offered at 5.0% Throughout 2009, I reported that this was a classic overreaction, by the MBS traders and changed my posture to float rather than lock rates in at application. That worked for 2009 but won't for 2010.
For those of you who have followed me on Twitter or Facebook, you've seen that I have been recommending borrowers to lock-in rates at loan application rather than "playing the market", for the past six weeks. This rapid rise can be attributed to one thing; it's an answer to a comment investments broker, Jeff Brown made yesterday. Jeff said:
I don't think it's the beginning of the climb yet. Uncle Ben is still doin' his thing with much vigor.
Jeff, Uncle Ben ain't got no mo' vigor; he's out of Viagra. I tried to explain this phenomenon over on Active Rain, last night:
Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be. The Fed's just about out of bullets and MBS traders know it. Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar REALTOR, on the beach this summer.
I had my daughter (Maggie) get me ten cups of water from the ocean. Then I drew six lines in the sand, equidistant from each other, and labeled them 6% (on the right) through 4.5% (on the left). I had Maggie stand at 6% and explained that this represented Dec, 2008 mortgage rates. I announced that my intention was to throw water at her until she moves to the left, away from 6% and towards 4.5%. I grabbed two cups and threw one at her, then at the line marked 5.5%; Maggie quickly darted to the left.
Then, I threw a cup at her every time she inched to the right. I explained that Maggie was acting EXACTLY like the MBS traders, naturally gravitating towards the "natural" market. Each time I chucked a cup full of"stimulus", Maggie moved back under 5% and closer to 4.5%. Once, she got real daring (like the MBS market this past summer) and I threw three cups at her.
At the beginning of December, The Fed had two cups of water. Now, they only have 1.5 cups of stimulus left.
Even if the Fed announces an extension of the MBS purchase program, bond traders might view this an inflationary (printing money to buy money) and reject the Fed's efforts to control mortgage rates. If bond traders push up yields on US Treasury securities, because they believe the Fed and Congress are borrowing and printing money irresponsibly, no amount of support will work. The only weapon left in Uncle Ben's arsenal will be a form of wage/price controls; that didn't work 35 years ago and won't work today.
I might be early but I think the risk of a quick jump in rates is MUCH greater than the opportunity of slightly lower ones. My bias is towards locking all loans at application. We may see an opportunity to float in the next few months, if markets overreact but I doubt it.