In the past twelve months, new home owners and current owners who refinanced have taken advantage of historic low mortgage rates. Certainly lowering one’s monthly payment stabilizes a financial position. Low rates make homes more affordable. But how long will this environment last? I have been recommending homeowners and buyers alike take advantage of this opportunity, because it is coming to and end – soon.
You need to know some history to fully understand what is approaching us. Last November (2008), mortgage rates were pushing 7%. Now, we are hovering around 5%. What happened? Two words – federal intervention. The Fed came to the rescue of Fannie Mae and Freddie Mac (the major buyers of mortgages), as they were on the brink of bankruptcy. The federal government is now the largest (and only) buyer of mortgages. The Fed stepped in again, announcing purchase 1.25 trillion dollars of mortgages in the open market. That program is coming to an end March 30, 2010. I ask – who will be buying these mortgages once the government is done? Few buyers (or no buyers), will drive rates higher as investors will demand higher yields. That is how the debt market works.
We have also been enjoying a period of low inflation. That too may come to an end the first quarter of 2010. Take a look at the employment and GDP figures. They have been improving, and certainly the “spin” has been positive. Any whiff of the economy heating up will force the Fed to raise rates. Any whiff of inflation will drive mortgage backed securities lower, forcing rates higher. Inflation is the biggest enemy of low mortgage rates. The public needs to realize that this low-interest environment has been created by extraordinary Fed action. Without it, rates would be much higher.
We can expect rates to rise swiftly and significantly in the first half of 2010. The time to refinance at historic lows, or to purchase a home while the affordability index is at its highest is running out.
