Posts Tagged ‘bonds’

When volatility became normal

April 11, 2018


Welcome to 2018. The year where daily 400 point swings on the Dow became normal. In the words of Théoden, King of Rohan, “How did it come to this?”

 

There are a few economic events playing into the recent volatility seen on Wall Street. In no particular order:

  1. Stocks are a little more nervous about inflation.
  2. Stocks are unsettled from rumors of trade wars coming with countries imposing tariffs on one another.
  3. Stocks seemingly rebound after big drops because the numbers on the economy itself are still sound.
  4. The Republican tax plan may also be encouraging businesses to spend.
  5. Businesses are expecting more overall to some of the regulations imposed on them.

Those are some good reasons for stocks to be bouncing back and forth – sometimes literally daily swings in the 100s of points.

This being a mortgage blog, our readers want to know how the volatility impacts mortgage rates. Normally, when stocks have a rough day and lose hundreds of points, mortgage rates improve. How have mortgage rates responded over the past 6 weeks?… they’ve been flat.

Mortgage rates haven’t really improved on days stocks tumble, or got worse on days stocks have rebounded. This is a sure sign the market is expecting volatility and not overreacting to a single day. Will this continue? If stocks drop below 20,000, I would expect mortgage rates to improve (and vice versa should stocks get better). For now, rates have held firm and not overreacted to the craziness on Wall Street. The only damage to mortgage rates to this point has been the half point rise to start the year.

Out looking to purchase a home in the spring market? Needing to get prequalified? Contact me today! If in the state of Georgia, we can have you ready to purchase a home in no time!

Rate projections for 2011

January 19, 2011

The new year has started, Atlanta has thawed out from Snow-pocalypse 2011, and work is finally getting back to a normal rhythm. That means it is time to get going with blog posts in the New Year!

It is January, and typically the purchase market is down this time of year. The number of people looking to buy a home and starting the process is usually down because of the holidays. Now that doesn’t mean this is always the case – it is just a trend.

Recently someone asked me about rates for the beginning of the year, and he figured rates would drop because banks would need to lower rates to encourage more people to go out and buy homes.

That is an interesting theory, but it is one that is not true. Thank goodness interest rates are not based on a whim or need of a big bank, government or another entity. Interest rates are based on the value of mortgage backed security bonds (or MBS bonds). As the value of MBS bonds increase, interest rates decrease – and vice versa.

It is no coincidence that in a year that saw some of the highest levels of MBS bond values on record, we also saw historically low interest rates. They do go hand in hand.

That means the question isn’t “what will rates do in 2011?” Instead, a better question is “what impacts the value of MBS bonds, and how might things play out in 2011?”

There are several factors that influence the value of MBS bonds. Just like stocks can increase/decrease in value on a daily basis with earnings reports, economic outlook, etc., the same can be said for bonds.

Looking at it from a macro-level, the state of the economy tremendously influences MBS bond prices.

  • As our economy enters a down cycle (like we are currently experiencing), jobs are lost, stocks become riskier investments, investors are looking for “safer” places to invest their money, and the investment dollars turn more toward bonds (including MBS bonds). This increases MBS bond values and decreases interest rates.
  • As an economy enters an up cycle, jobs are being created, people/businesses are spending money, inflation becomes a concern, investors begin taking more risks with investment dollars and turn more to stocks. This pulls money out of bonds, and hurts their value. This causes interest rates to rise.

There are other factors that can come into play such as the technical aspects of trading, economic troubles in other parts of the world (think Euro Zone), wars and rumors of wars, dramatic price changes in commodities such as oil, the federal funding rate… I could go on and on and on, but the two bullet points above provide a good starting point for discussion.

Where will rates go from here in 2011? In my opinion:

  • until the economy takes a turn for the better, we should still expect to see traditionally lower interest rates. When the downturn began, rates were right around 6.000%
  • that said, the range can vary with no guarantee of rates staying below 6%. In 2010, interest rates for a 30 year fixed mortgage ranged from 3.625% to 5.500%. That is quite a range, and they are currently in the mid to upper 4’s.
  • don’t forget that there are always unexpected events that could help (Euro troubles) or hurt (unexpected growth seen in job reports) rates

For those of you out there considering whether now is the time to buy, I would definitely say, yes, it is the right time to buy a home. There are great homes available, interest rates are still near historic lows, and buyers can qualify for mortgages with as little as a 3% down payment. Instead of continuing to watch and hope for lower and lower rates or home prices, it might just be time to get moving!

If this is the year you are ready to move up to a larger home for a growing family OR 2011 is the year you finally purchase your first home, OR any other reason that brings you into the market to buy a home, I would be happy to help you get started with the prequalification process. It only takes a few minutes, and planning ahead is they key to a smooth home buying experience!

Rates still on the rise

December 2, 2010

A few posts ago, I mentioned interest rates were on the rise but they may not break out of their current trading range in the low 4’s. Well, they have now and moved into the mid 4’s. The question everyone asks is (of course) why?!?

There are a lot of different factors in play:

  • Stocks have rallied in a major way over the past couple of weeks. With better news of the job front and better than expected retail sales, Wall Street is jumping for joy and taking advantage of the good news. As typically occurs, while stock values increase, bonds values decrease and interest rates suffer.
  • Wall Street is also appreciative of another round of bailouts in Europe to stabilize the Euro zone. While this problem (liquidity issues in Greece, Italy, Spain, Portugal & Ireland) isn’t going away any time soon, Round 2 of the bailouts encouraged investors to turn more to stocks (higher gains but riskier investments) than bonds (lower gains but safer).
  • Bond prices have been ridiculously high this year, which caused our historically low rates. As investors bought bonds at lower prices, they are now looking to sell those bonds at higher prices for year end “profit taking.” A larger than normal sell off hurts bond values, which also hurts interest rates.

Where do we go from here? That is a great question, and the answer is the same as always… no one knows for sure. As I’ve said a few times in The Mortgage Blog, until the job market recovers (unemployment rates moving closer to 5% than its present levels of 10%) and the economy gets back on its feet, interest rates will more than likely remain low.

Combine that with the Federal Reserve’s plan to continue buying bonds (typically increasing their value and helping interest rates improve), and you will notice the mixed signals. Some signals indicate rates could improve while others point to rates getting worse.

How does one respond?

  • If you are looking to purchase a home, get out there and shop while rates are still in the 4’s! While you are looking, be sure to work with a mortgage professional who can offer a float down option on a locked interest rate. With the float down option, you can lock in knowing you can float down to a lower rate should interest rates improve during the loan process.
  • If you are looking to refinance your current home, find a target rate (one that makes sense for you to refinance) and be ready to move when it becomes available.

How do you get started with the mortgage process to buy a home OR find out your target interest rate? Consult with your mortgage professional. They will know what to do. If the property is in the state of Georgia for your purchase or refinance, I might just know someone who can help you get started!

How Horrible. Rates on the rise!

November 16, 2010

Interest rates are on the rise. Over the past two weeks, rates for a 30 year fixed mortgage have risen half a point to their highest levels since the start of the summer. Don’t get me wrong, interest rates are still in the low 4’s. It’s not like we are talking about rates in the 6’s or 7’s, but why the sudden increase?

The main reason – good economic news, or at least news that is somewhat good, is finally available for stock traders and they are taking advantage of it! For example:

  • last week the job market added just over 150K jobs when the expectation was only 75K would be added.
  • retail sales data came out higher than expected from a recent report
  • traders are taking advantage of the perceived good news and stocks are enjoying the gains (which means money is flowing out of bonds and into stocks causing interest rates to rise)

In all honesty though, who are we fooling? Unemployment is still at 10%, and the economy isn’t back on its feet just yet. Until those are straightened out, don’t expect interest rates to permanently leave their historically low levels.

Interest rates have indeed been on the rise. While the trend isn’t likely to continue for too much longer, it does leave me with some mixed emotions. It feels wrong… almost evil if you will. It is hard to put it into words, so I’ll let Dr. Horrible (played by Neil Patrick Harris) explain it.

Anytime you can work Neil Patrick Harris into a post, you must do it!

Rates holding at historic lows

July 3, 2010

Interest rates are high, aren’t they? The experts predicted higher rates by mid year, and I even mentioned that would happen here, here, here, here, here, and here (if not more). If you read those posts, you will see there were several reasons why I (and essentially everyone else) thought this would happen. These reasons primarily revolved around the Federal Reserve ending their buying mortgage backed security (MBS) bonds.

* – definitely read the first lined post to get some more background information on that program from the Federal Reserve

SO… why are interest rates at their lowest point of 2010? Why did rates not dramatically rise when the Federal Reserve ended their program of buying bonds?

Thanks to the debacle in Europe (along with our own economy that isn’t back on its feet), investors in the US and around the world are back to buying our debt (bonds) and not those of Europe. It was the heavy investing in Europe and the Euro that caused the precipitous drop in the value of the Dollar, which motivated the Federal Reserve to begin buying MBS bonds in late 2008 and increase their value.

Why is this important? – As the value of MBS bonds rise, interest rates fall. This cause and effect pattern, heavily influenced by the Federal Reserve over the past 18 months, led us to these historically low interest rates. When the program ended this past March, everyone assumed rates would rise. Well, they obviously didn’t and there were plenty of other investors more than willing to step in and buy bonds to keep rates low!

Now for the question we would ALL love to have answered, “What’s next for rates?”

In the past when interest rates got to these low levels, they almost immediately went back up. This seemed to be the self-imposed floor. Today? Not only have rates held, but they have slightly improved. They might actually get lower this time because:

  • The US economy is definitely not back on its feet and private sector hiring is down
  • The problems in Europe are just getting started as Hungary’s credit rating was down graded and Portugal, Spain, & Italy all share similar problems
  • Analysts are mixed whether or not the bailout for Greece will actually work

Regardless of what interest rates do (and it is anyone’s guess at this point), now is the time to speak with someone to get prequalified to buy a home OR to review your current mortgage to refinance. By doing so, you would be in a prime position to take advantage of interest rates at their current levels OR ready to move at a moments notice if rates continued to fall.

If that is you, I would enjoy the chance to speak with you and get everything in order for your new mortgage.