Mortgage Rates Have Bottomed

This was one wild week as I detailed before. It was so wild in interest rates, that a flurry of refinancing calls kept me on my toes.

The good news is that it brought some much needed business in this, the traditionally slow time of the year.

The bad news was, rates this Friday were the EXACT same as what they were last Friday.

The rates are still very good, still the best that we have seen in the last couple of years. But they are now about a half percentage point higher than what they were on Wednesday. If only for a very small window of time.

If you tried to lock on Wednesday on your mortgage rate, you had roughly three hours window to hit the best rates. Most borrowers decided to wait because of the Fed's "promise" to cut rates next week. And that is the most common mistake I have seen when trying to time interest rates. Too many hopes are pinned to the Fed, when long term mortgage rates are indirectly influenced by what they say.

But the title of this post says, "Mortgage Rates Have Bottomed". I have 3 reasons why.

1) The treasury markets over-reacted to the emergency rate cut and futures markets that started to price in another .50% rate cut next week. Combine this with the rush for a financial stimulus package by the government sent traders looking for quality as if the sky was falling. To some extent, this has now reversed itself as the treasury markets have had a little time to digest the news and happenings. And finally came to their senses.

2) The European Central Bank kept rates steady. No one seems to really be talking about this, but I feel this is a big deal. If the ECB is standing pat trying to stave off inflation while the world's largest economy is slashing rates like it was a knife manufacturer doesn't hold some weight, you're nuts. A slowdown here will have a global impact, no matter what the ECB thinks. So either things aren't as bad as they seem or inflation is really a major, major factor. In reality, I think it is a healthy dose of both.

3) The result of these rate cuts and the government stimulus package will equal one thing and one thing only....inflation. Higher prices for goods and services. We all know it's there. Go to the pump, the grocery store, your cable bill, health care, and whatever else you want to name. Inflation, even though the Fed says it's not, is a major player right now. And inflation is the mortal enemy of treasuries. With the good job numbers we have seen and are forecast to be seen next week, treasuries will continue to sell off and push mortgage rates higher.


And here is my own personal take based on what I have seen in the past. When the "boom" was happening in the first part of this decade there were multiple "refinance booms" within it, driven by falling rates. Each of these refinance booms had a bottom rate which borrowers tried to gamble and predict. They all had similar characteristics at the bottom. One, was a swift drop in rates over a period of a couple days based on news, mostly from the Fed. Two, rates declined to a point where everyone's guess, even those who know how rates are effected predicted that they would fall further. Three, the real bottom for rates were market by an extremely low rate that was offered for a only a few hours time. Four, once the rates hit this short-term bottom they would rise as swiftly as they had fallen as the treasury markets reversed themselves.

This is exactly the action we saw this week. It was eerie. I thought to myself, "I have seen this before." And I had. I predict that if or more likely when the Fed's cut the rate next week, you will see a muted or negative response in the treasury market. Rates are going up for the time being. Don't be surprised.