We keep getting phone calls from clients telling us mortgage interest rates have dropped 1.5% because prime rate has. I seem to spend hours explaining how prime does not always affect mortgage rates. In fact falling prime rates can actually increase mortgage interest rates!
A friend of mine, Lou Barnes (www.BoulderWest.com) had an article published in the industry online "paper" Inman News this week. This article really explains what is happening in the market this week. He is way smarter than me, so I will not try and plagiarize him. Pasted below is the article in it's entirety.
Contrary to the conviction of deeply confused civilians and reports by lazy news media, mortgage rates are unchanged, about 5.75% for the lowest-fee 30-year paper.
If you don’t believe me, visit www.freddiemac.com and its weekly survey. It is unbiased by sales jive, although it suffers from “survey lag” (early-week data released on Thursdays always misses real-time reality), and assumes a fractional origination fee. Last week’s “5.48%” captured the one-day hysterical bottom when the industry could not log onto rate-lock websites. Yesterday’s “5.68% plus .4% origination” is still about right, and all but identical to the prior week’s “5.69% plus .5%.”
Yet, the media refer constantly to “dramatically lower mortgage rates.” They are better, but... drama? Freddie’s average for the whole of 2007 was 6.34%. A half-percent drop is nice for buyers, and a help to a few refinancers, but no fire sale.
“How can it be the same...!?!” says the client, after a cumulative 1.25% cut at the Fed in only eight days? Answers follow.
Brand new January economic data are not that bad. Says here not bad enough to justify the Fed’s panic, let alone to anticipate more cuts. Payroll growth slipped to flat in January (negative 17,000 is within the huge range of error and revision), unemployment down to 4.9% in a workforce statistical quirk -- soft, but hardly a recession. The purchasing managers reported their first gain in six months, likewise soft, but with persistent strength in foreign orders. 4th quarter GDP grew by a mere .6%; however, aside from a temporary drawdown of business inventories grew at 2%.
The Fed’s form is disturbing to long-term investors. Central banking is not figure skating, but Mr. Bernanke has departed his predecessor’s 17 years of gradualism for lurching on the rink. A Fed that will lurch down will lurch up.
Investors bought long Treasurys and mortgages at these levels 2002-2004 because Mr. Greenspan said after every meeting into 2006: Excessive monetary stimulus most likely will be “removed at a measured pace.” Translation: you’re safe for now, and we’ll give you time to get out before we kill you.
In those late Greenspan years, deflation was the problem. Today, inflation is rising all over the world. Australia, 16-year-high 3.8% core; Europe 14-year-high 3.2%; UK 2.6% core; China 6%-plus, and an economy completely out of control beginning to export inflation to us. Each time the Fed has lurched to a catch-up ease, all the way back to August, it has rescued stocks, commodities, oil, gold, and tanked the dollar.
I have chewed on the Fed for its inaction and credit-wreck oblivion. However, this situation is NOT a monetary problem: it is a banking-system near-insolvency that may morph into a recession, each making the other worse. The crying need for six months has been transparency of credit loss and bad-asset firewall. Cuts in the overnight cost of money may intercept recession, but inflation means that the these cuts cannot be maintained or removed at a measured pace.
A central bank chairman must be prepared for the ultimate sacrifice: no tough inflation problem was ever solved by slow growth. It takes a recession. It takes higher unemployment and crushing the commodity spiral. To get long-term rates down, Mr. Bernanke must get the good out of this slowdown: he must let it get ugly. Instead he has rescued inflation-pushing markets again and again.
Two non-Fed forces holding up mortgage rates: credit fear about Fannie and Freddie has the spread between mortgages and the all-defining 10-year Treasury (3.57% today) over two percent for the first time ever. Second, somebody by accident may arrive at an effective credit-wreck bailout: the giant bond insurers, Ambac and MBIA may be resolved in days. If no collapse, then credit fear will give way to inflation fear.
The Fed’s cuts have had a dramatic effect on ARM adjustments, and should revise estimates of housing doom to the better -- also reducing bond-market fear. This month, common one-year Libor-floating loans will adjust DOWN to 5.125%.
Reproduced in full with the kind permission of (c) Lou Barnes www.BoulderWest.com