Korene's Blog

Opportunity is knocking fairly loudly for many considering homeownership. Home prices have declined in many markets around the country and tax incentives and other inducements have first-time home buyers and others weighing the possibilities.

Home affordability, as defined by the National Association of Realtors’ Housing Affordability Index, stands near all-time highs, thanks to declining prices and historically low mortgage rates. Yet, while some consumers hold off on purchases as they attempt to catch the home-price bottom, they could miss the mortgage-financing opportunity of a lifetime.

Consider the weekly average yield spread between Fannie Mae’s 6.5-year bond to the “benchmark” 10-year Treasury note, a classic relationship that involves the cost of making mortgage loans to consumers. Before disarray in the financial markets, the spread ran about 1% above Treasury bonds, reflecting investors’ confidence that owning debt of bonds backed by Fannie and Freddie is nearly as safe as owning government bonds.

The spread began widening in July 2007 as the global financial crisis unfolded, then spiked to above 2% during the 2008 year as the U.S. economy seized and credit grew scarce. It grew to a startling 2.5% late in 2008 as bond investors’ skittishness about continued delinquencies and defaults and that the risk of these mortgages had not been properly assessed, resulted in higher risk premiums and higher costs to borrowers.

Late in 2008, however, the Federal Reserve Bank stepped in with a promise to purchase $500 billion in Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, and raised that figure to $1.25 trillion in March. That move, combined with loan modification initiatives and other federal intervention, restored investor confidence in the secondary market as well as Federal Reserve moves combined to push mortgage rates downward at a rapid pace. The yield spread in March dropped to 1% and zero and then fell to an unprecedented minus 0.5% by early May.

This condition is certainly unique and, more than likely, it is very short-lived. Statistically, when the yield spread deviates from historical norms, the chances are great it will return to the historic norm levels. Watch as this could quickly drive mortgage rates higher. How much higher and how soon is anyone’s guess, but if the cost of making a mortgage goes up by 1.5% so, too, mortgage interest rates will probably rise as well.

Now, let us factor in some additional variables. The marketplace for bonds relies heavily on purchases by international investorss who remain skeptical as the global economy continues in flux. There is also the inflation-deflation conundrum. Many fear a deflationary spiral with falling prices for goods and services that lead to falling wages can still drag down a yet-to-stabilize U.S. economy.

Conversely, others believe inflation will kick in, ushering in higher consumer prices, including higher mortgage rates. How this issue evolves will have important implications for interest rates.

One thing is crystal clear: the odds that mortgage interest rates will rise are naby times greater than the possibility of continued mortgage-rate decline. And for most home buyers, the cost of mortgage financing is as important as the price of the home itself.

Mortgage professionals will help their customers make the best long-term decisions by demonstrating the degree to which housing prices and mortgage interest rates could move and probably will move from this point forward. Customers waiting for the absolute lowest price on a house could miss a golden financing opportunity and the lowest overall cost of homeownership. 

I have available a Weekly Rate Lock Alert to give you very valuable insight into the markets as well as the how, why, when, and how much the market is or will be effected by various forces in our global and American economy.  For those that  would like to receive a copy please send an email to subscribetoweeklyrate@klcsloanteam.com with the words Subscribe in the subject line.