Friday, April 25, 2008

30-Year Mortgage Rates Top 6 Percent As Investors Fear Inflation

Homebuyers who thought mortgage rates were heading down because of all the Fed interest rate cuts need to think again. According to Freddie Mac, 30-year mortgages rates increased 0.15 percent this week, despite all the rate cuts from the Fed. If you think that is strange, remember that 30-year mortgage rates are not tied to the Fed interest rates, but instead are controlled by the mortgage-backed securities market. Read our previous post: How Do Fed Interest Rate Cuts Really Affect Mortgage Rates? for more background on that. The bottom line is that when 30-year mortgage rates go up, despite the lowering of key Fed interest rates, it is typically because of inflationary fears.

It seems that mortgage rates won't be going down until the Fed can get inflation under control. The Fed is likely to only cut rates by 0.25 percent at their next meeting because they are concerned about inflation, according to the Associated Press. My thought is that if they were truly concerned about inflation they wouldn’t be dropping interest rates, even by the quarter point. Considering past actions from the Fed, I would say that inflation concerns are not at the top of their list.

I’m not sure who in their right mind is buying these mortgage backed securities anyway. I wouldn’t touch these, or even U.S. treasuries, at this point in time. Considering that the returns they offer are barely above inflation--that is, if you believe the government’s CPI numbers are accurate (I think they are much higher than that)--they just aren’t worth it…but that is a post for another day.

The moral of the story is that if you are in the market to buy a home, don’t wait in anticipation of mortgage rates going down. You can wait because of the market and you can wait for better opportunities, but don’t wait because you think mortgage rates are going down, because they just might not.


Anonymous said...

Easy to say lock in your interest rate today (rates are way up) but where were you two weeks ago when interest rates were at their low point?

Eric Ames said...

The point I'm trying to make here is that guessing which way interest rates are going to go right now is a fools game. So don't worry about it. If you want to buy a house, then buy it, but don't not buy it in anticipation of interest rates dropping, because no one knows if they are.

I'm in no way saying I know which way interest rates are going to go, in fact I'm trying to say the exact opposite. I have no one does.