Ok, I’m just going to go out there and do it. This is what the internet is all about right? People getting out there and putting out opinion and information and hoping that it gets read. Perhaps I could drive more traffic to my site if my views were more extreme! Well, I will start by saying that I am 35 years old, and have been in the mortgage business and a personal real estate investor (they happened at the same time) since 2003. I have 6 full years of experience under my belt for whatever its worth. I have spent many hours and thousands of dollars educating myself about exactly what influences our mortgage market.
What I have come to understand is that mortgage rates are directly influenced by yields on Mortgage Bonds. When the economy is doing well, most investors want to buy stocks because they are going up. When the economy is doing poorly, most investors sell their stocks and wait for improvement. When these stock sales happen, it is VERY common for the proceeds of these sales to be “parked” (invested) into the bond market. Bonds have much less risk associated as the returns are kind of guaranteed by the backer of the bond.
SO – when money enters the bond market, the yields associated with the bonds can be lowered. Because you don’t need to offer a big yield to investors when the alternative (stocks) is so horrible.
ERGO – when the economy is poor- Bond yields go down (Mortgage Backed security bond yields included). Thus – when the economy is poor, mortgage rates tend to be favorable.
So rates have been AMAZING for much of 2009, this is an exact reflection of just how pathetic our overall economy has been. My first prediction is that the economy will stabilize in 2010, but ultimately remain fairly weak/flat…. this is already happening, so to call it a prediction is pretty soft.
Another factor that is a major influence on the Mortgage Backed Security (MBS) market is that the US Treasury has been purchasing MBS’s all year long at a fairly shocking rate. Starting in March of 2009 the government announced they would purhcase 1.25 TRILLION dollars worth of MBS’s over the remainder of the calendar year. This purchase program was extended around October to last though Q1 of 2010. So when there are big purchasers of MBS bonds, rates are low…. So I’m saying the biggest single buyer of bonds has already announced that they will cease their purchasing. This is a force against good mortgage rates starting in April of 2010.
Another thing that I know that greatly influences the bond market is inflation. Anytime there is a whiff of inflation in the marketplace, investors shed bonds like crazy. ERGO – When inflation happens, mortgage rates get worse. And many economists agree that all of the “printing of cash” by the US Government will result in higher inflation at some point in the future TBD.
So if you are keeping score at home we now have:
- Crappy economy – this is GOOD for mortgage rates
- Biggest bond purchaser discontinuing their buying – this is BAD for rates
- Inflationary factors in our future – this is BAD for rates
I recently sat in on a lecture with economist John Mitchell (former head economist for US Bancorp). In his prediction for 2010, he sees inflation increases being VERY slight. (presently we are at 1.8% inflation, and he predicts we will end the year with 2% inflation). I will throw my hat into the ring and base my predictions on his prediction being accurate …
I predict that 30 year fixed mortgage rates will be very favorable for 2010. We have been below 5.5% for most of 2009, and I believe we will hover around 5.5% for most of 2010.
Because inflation will be monitored very closely by the Fed, and held down… the overall crappyness of our economy will counterbalance the removal of the Fed MBS purchasing program for the most part, with the scales tipping slightly upwards.
We may have episodes where rates crack above 5.75%, but I believe that these episodes will be short lived, and our economy will demand that mortgage rates remain low and steady.
I invite your commentary, and will be updating this prediction for better or worse throughout the year.