"Bubbling Up"

Mortgage Rates, Gas Prices on the Move

One of the signs that's something afoot in the financial markets -- as it is now -- is that interest rates re-set several times in one day.

(More typically, they re-set every few days.)

Although the increments have all been small, that's been happening all week in the credit markets.

Think of the re-sets -- all up, by the way -- as a series of 2.0 and 3.0 seismic (financial) tremors.

Meanwhile, local gas prices, which had been unchanged seemingly for weeks locally at around $2.89 a gallon, suddenly rose twice in the last two days to $3 (or more).

"Hurry! These Rates Won't Last!"

Lack of Buyer Urgency

I was taking advantage of a welcome -- and too brief -- lull in my schedule the other day to cull the accumulated detritus on my desk (and on my office floor, and chairs, and . . .), and saw the following postcard: 'Hurry! These Rates Won't Last!"

The date?

October, 2009.

And therein lies the problem.

Broken Record

Home Buyers -- and presumably, mortgage borrowers -- have seen low rates for so long now that that's all they know.

All the postcards, phone calls, email's, etc. screaming that they'd "better act now" or risk losing out are simply falling on deaf ears (and blind eyes, in the case of emails).

Which leaves Buyers whose sense of urgency comes from within -- specifically, newly married, a new baby, an expiring lease, a job transfer, etc.

Call that "organic" housing demand, which is driving the housing market at the moment (along with "organic supply": downsizing, relocation, divorce, health issues, etc.).

Which, come to think of it, isn't so bad . . .

Flight to Safety = Rate Drop

Market Melt-Down Creates Refinancing Opportunity

No, it's not good when already volatile markets lurch downward like they've done the last couple days.

However, astute financial observers know that such turbulence is also accompanied by a "flight to safety" -- in this case, U.S. debt.

Doesn't the U.S. have a $13 trillion (and counting) deficit, and many more trillions in unfunded obligations?

Doesn't really matter, at least for the moment; in the land of the financial blind -- that would be the Eurozone at the moment -- the one-eyed man is King.

What does that mean for the the housing market?

A weaker economy -- if that's indeed what's ahead -- isn't great news.

However, the silver lining is that anyone who's on the cusp of refinancing can do so at rates that are temporarily "on sale."

What Are Mortgage Rates? Get Your Calculator

Blend of Two Variables

Answering the question, "what are prevailing mortgage rates?" seems simple enough.

After all, the answer should be "5%," "5.25%," or something similar, depending on one's credit scores, and the mortgage product in question (fixed, 5 yr ARM, 10 yr. ARM, etc.).

In practice, it's a little more difficult, because rates are really a function of two variables: the quoted mortgage rate, and the lender's origination fee (also called "points" -- essentially, their commission).

So, whereas a week ago rates may been quoted at 5.25% and .75% points, this week they might be 5.375% and 1% origination.

To make an apples-to-apples comparison, you need to get out a spreadsheet and tweak the mortgage rate by the imputed rate of return on the lender fee (or at least, I think that's what the MBA-types would say).

Contrarian Real Estate Bet

Which Way Mortgage Rates?

According to a certain (contrarian) school of thought, whatever everyone expects to happen . . . won't.

In the housing market, there seems to be almost universal agreement at the moment that mortgage rates are going to be higher -- perhaps dramatically -- in the second half of 2010 and beyond.

That's based on: 1) the expectation that the Federal Reserve will be removing the foot it has had firmly planted on the mortgage market "scales" the last year, as it purchased $1.2 trillion of mortgage securities on the open market; and 2) concerns about excessive liquidity -- courtesy of the Federal Reserve again -- reviving inflation.

Is everybody wrong?

It wouldn't be the first time . . . (and if they are, you'd guess that Nov. elections might have something to do with it).

Opting for Loans with No Closing Costs

"Discounted Present . . . . What??"

I'm hearing from numerous lenders -- and observing with my own Buyers -- that more people are opting for loans with higher interest rates, in exchange for paying no closing costs.

So, instead of, say, getting a 30-year mortgage at 5% for $200,000, and paying $6,000 in closing costs (that's the typical 3%), Buyers are opting to borrow at 5.25% and "save" the $6,000.

Is such a tactic smart?

It depends on how much extra you have to pay for the mortgage.

If you wanted to be rigorous about it, you'd have to calculate the discounted, present value of all those incrementally higher monthly payments, then compare that to what you saved on closing costs.

In turn, that requires choosing the appropriate discount, or interest rate.

FYI, for the no-closing cost choice to be a good deal, the discounted present value number should be less than the avoided closing costs.

Just a hunch, but somehow I doubt that every Buyer heeding the siren call of "no closing costs" is doing that calculation . . . .