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Why Are Rates So Low?

Why Are Rates So Low?

Jeff Jensen is our local Connecticut Home Mortgage Officer who has years of experience in evaluating the mortgage markets. This is an interesting guest post from him:

It seems one cannot go anywhere today without hearing how mortgage interest rates are at their all-time lows.  “What controls interest rates?”, one might ask.  Some might answer the Fed keeps interest rates low and has pledged to continue doing so until 2013.   While is true that the Fed has kept the Fed rate low and has indicated a willingness to keep it low for months to come, that does not directly affect mortgage rates.  The Fed rate is the rate at which banks can borrow from one another.  The Fed rate is currently .25%.  The rationale for keeping the Fed rate so low is that banks will be encouraged to lend money and thus the economy will be stimulated.  Normally the prime rate is three points above the Fed rate.  Correspondingly if the rate at which a bank’s best customers can borrow (prime rate) is only 3.25%, small business should be encouraged to borrow money and expand.  Let us take a brief look at what does make interest rates move in one direction or another.

Mortgage interest rates are affected by geo-political events, economic reports and technical levels created by prior market history.  All these elements, sometimes in concert and sometimes individually affect the underlying bonds which actually determine interest rates.  The bonds are called mortgage backed securities (MBS).  They are securities because they are comprised of individual mortgages that have been securitized (bundled together and sold as bonds by Wall Street firms).  We normally follow bonds with coupon rates about 75 basis points (.75%) less than the prevailing interest rate for 30 year conforming bonds as that is the fee firms charge to package the securities.  Currently with the 30 year mortgage available around 4.25%, we are watching the 3.5% coupon bond.  Each 50 basis point move in the price of a mortgage backed security equates to a .125% change in the interest rate one might attain.  Because these bonds are traded in a live market similar to the way stocks are traded, a rate quoted at any particular moment is live and, as such, subject to change at any time.

Normally, but not always, bonds trade in the opposite direction from stocks.  Bonds tend react well to bad news while stocks react well to good news.  One of the reasons that bonds have done so well recently is due to the financial unrest regarding European sovereign debt and fears that a recession in Europe could cause a second recession here.  This is bad news and creates what stock traders hate; uncertainty.  As a result, this creates a safe haven trade during which money flows out of stocks and into the perceived safety of American Treasuries and mortgage backed securities.  We saw this exact reaction in early August as 30 year rates were as low as 3.875% for a few minutes.

Alternatively positive earnings rates from American companies or a positive jobs report might cause money to flow out of bonds and into the stock market.  This happens frequently and, although the pricing on mortgage backed securities is rarely available in the news, if you hear that stocks are up or that Treasury bonds are down, most times this will mean that MBS bonds to will be down and correspondingly interest rates will be rising.  Sometimes there is no economic or geo-political event to influence a market place.  During these times, markets react to historical levels we call technicals.  Market watchers keep track of trends called moving averages.  Charting the market normally involves watching the 25, 50, 100 and 200 day moving averages.  One average might act as a support level below which a bond may not fall without outside influence.  Another moving average might act as resistance preventing a bond price from advancing higher.  Stochastics are measurements of a market being overbought or oversold and Japanese candlesticks provide analysts with information on the direction in which markets are trending.

All of these influences and tools are utilized in pricing and predicting what our interest rates will be.  Those in the market for real estate today are fortunate indeed to have such low interest rates available at the same time as homes are available at a deep discount.

Contact Jeff Jensen for additional information:

Jeffrey M. Jensen
Certified Mortgage Planner-NMLS # 109616

Connecticut Home Mortgage
NMLS # 15831

Mortgage Bankers

Mobile (203) 981-8282
Email jjensen@cthm.com

Posted in CT Real Estate, Fairfield County Real Estate, Weston Connecticut Real Estate, Westport Connecticut, Westport Connecticut Real Estate, Wilton ConnecticutComments Off on Why Are Rates So Low?

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