Monday, March 12, 2012

Mortgage Rates Likely, Not Guaranteed to Stay Low 

I’m one of those people who like to see things for myself or rely on a strategy that has been produced from both quantitative and qualitative data that I gather. When I read or see things in the news, I take note, but I don’t truly believe it unless my first-hand experience or my own analysis of the data confirms it.
For instance, shortly after I heard about the Gulf Oil Spill in 2010, I got on my motorcycle and headed across Florida to see the Florida/Louisiana Panhandle for myself. I rode along the coast from the east coast of Florida to New Orleans. What I was reading in the paper was not apparent on my ride. Although I saw many trucks and people standing by in preparation for clean up, I stopped at several beaches and inlets and saw no oil or clean-up boats. The water and beaches were as nice and pristine as the last time I rode the same route.
The ride took about two days. I finished with dinner at Acme Oyster House where I had an interesting discussion with the shuckers as I enjoyed crab claws. Sadly, the same shuckers who took tremendous pride in their work were laid off the next week due to the oyster supply scare. When I heard they were laid off, the sadness was truly more profound because I knew from our discussions how much pride they took in their jobs. One-dimension media cannot replace experiences and a good conversation.
I have guided Southeast Mortgage through the mortgage market since 1993, with a similar approach to how I view my rides. I tend to find news reports and financial reports lag by months with respect to what is really happening in the market and economy. Many weekends I ride throughout Georgia looking at qualitative indicators such as mall parking lots, new construction, for-lease signs or the lack of them, and traffic. Paying attention to activity and consumers, along with certain quantitative financial indicators will give you a pretty good idea of what stage the economy is in the recovery cycle. Once you can correlate enough indicators and they hold a three-month trend, you can extrapolate the trajectory of the recovery. Every recovery is different but holds a similar data relationship pattern and that is where experience and interpretation play a key role.
Trying to predict mortgage rates is never a good idea. If the current rate provides a financial benefit or allows you to purchase a home that fits your needs, you should do the transaction. We expected rates to breach 4% during this recession based our interpretation of data from the last recession. Any rate under 4.50% is considered a generational low. The issue is you have to have an investor that is willing to provide a mortgage at that low rate for up to a 30-year period. Thirty years of risk for 4% return is a tough pill to swallow. That is why you see rates resisting a sub 4% par level. Every recovery, especially when monetary policy actions were used, experiences inflation. With inflation, comes higher rates. The low-rate environment will not last forever and is the reason consumers should take advantage of this generational low and benefit from this unique alignment in the financial markets.

A map of my ride along the Gulf Coast after the Gulf Oil Spill in 2010.
A 30-year fixed-rate mortgage averaged 3.88% for the week ending March 8. Last week it averaged 3.9%. Just a year ago the rate was 4.88%. Although the Federal Reserve states they will keep interest rates low through 2014, inflation will raise its head sooner than later. While it’s hard to predict rates, most experts agree that rates will stay low through 2012.
I’ve personally seen much higher rates. For example, what do you think the highest rate for a mortgage has been and what year was it? Did you guess more than 15%? Think higher. The year was 1981 and the rate was a whopping 18.63%. Always keep rates in perspective to the economy and financial markets. Consumers earning 20% returns on their investments or home appreciation would not think twice about a 10% rate on their mortgage. It is all relative.
While the Federal Reserve plans to keep interest rates low, that is just one factor that affects mortgage rates. Another major factor that affects rates is the volume of mortgage loans available. The law of supply and demand affects mortgage rates as well. Now the number of people in the United States applying for new mortgage loans is relatively low, so interest rates are low. As the economy continues to improve, many more people may begin to apply for a mortgage. And the rates could go up.
In 2007 there were approximately 3,400 mortgage providers in the state of Georgia registered with the Department of Banking and Finance. Today, as of this writing, there are approximately 740. WOW, that is a 78% reduction in mortgage providers since the financial crisis. History proves pent-up demand and lifecycle demand surges after a recession with consumer confidence; however, the mortgage bankers have been significantly constrained.
Obviously our economy and all the factors that affect rates are much more complicated. The point to remember is that factors we don’t expect or predict may have dramatic results on the U.S. economy. My advice is that if you are looking to purchase a home, get started now to take advantage of these low rates. While I doubt we’ll see another rate approaching the 18% mark any time soon, you should take advantage of these historically low rates.
You might think current rates will continue to decline; however, this could be the optimal time to refinance or buy the home of your dreams. So please call me and see for yourself. You may want to see this financial opportunity in person – no matter whether you drive up in a car, SUV or a motorcycle.
— Cal Haupt, President and CEO of Southeast Mortgage

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