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#11
06-14-2007, 02:34 AM
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Re: a quick mortgage question
[ QUOTE ]
So I was talking to a mortgage guy yesterday who said he could offer me 6.625% on a 30 year fixed with no fees at all. He advised me to not lock in the rate, as he believes the rates will fall in the next month or so(before i need my mortgage committment). Is he just like all other market speculators just using guesswork, or is there real reason to think that rates will go back down after this recent spike? James [/ QUOTE ] James, long time bud! good to see your buying a house [img]/images/graemlins/smile.gif[/img] mortgage rates change for a variety of reasons: 1) underlying benchmark yield changes (typically the US 10year treasurty bond) 2) appetites for risk change (higher risk aversion can affect all lenders though not proportionally. if risk aversion increases though, even high grade credit customers shoudl expect at least a small increase in rates) 3) individual lender risk (the person/institution with whom you are dealing may change its rate structure or something idiosyncratic is going on there) taking the latter first, only your lender knows that. if there is something beneficial to you in the near term there i can't tell you about it. i can guess though that on average, the previous two concerns will dwarf this last one. in terms of the 2nd concern, large changes in risk aversion can happen and have happened in the past. we expereinced a slight one (for high credit customers, and a fairly decent sized one for low credit customers) recently w/ the subprime mortgage issue. projected defaults are still. in the near term, it can go either way obviously but i dont have a strong outlook one way or the other. if i had to guess though, i'd say we're more likely to see it rise than fall in the future since we have had such a benign economic environment, anything major that happens is more likely to be bad than good. the housing slump & subsequent subprime mortgage default/forclosure increase is one thing that has indeed impacted risk aversion, but only slightly. more likely, a pull back from risky assets (due to real yield increases, globally) may spill over and affect the typically separate mortgage market. the reason could be that demands for higher quality credits &/or the demand for returns of similar quality credits might increase. i'd think that is more likely in the near term than the reverse (which would mean basically that everything would have to go perfectly for risk aversion to decrease- this could be that growth slows, inflation comes in line, wage pressures subside etc...not too likely) for the first one, however, i do have a strong outlook and that is that yields will continue to rise. i've said this a ton on this forum but i know you don't necessarily read it all the time so to summarize very briefly: - our capacity is very tight (we'll see how tight this friday but consensus is 81.6%, which is high) - the economy is stronger than most have predicted & realize (which was so underpriced that in 1 week the US10yr yield jumped almost 50bps to correct for this after not moving more than a few bps a day for a long time previously) - inflation is still uncomfortably high (beige book came out and seemed to imply inflation has come slightly under control. i think though that inflation will surprise on the upside this friday and thus come in above the 0.6% month over month consensus estimate -0.2% ex food & energy. even if it doesn't, consumer sentiment, industrial production, or the manufacturing survey could come in high. any or all of these could push rates higher than they currently are as expectations of a nearer than expected rate hike increase. therefore, overall, rates i think are on the rise. risk aversion & idiocyncratic risk are hard to gauge and estimate in the future. i'd say lock in a good rate that you're comfortable with now. good luck man and i wish you the best. B 
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