Mortgage Rates and the Fed - Get it Straight ! !

I ran across this article today by Matthew Graham. I thought it would be useful information for those looking to buy property. Here it is:

"I can't decide what was more troublesome yesterday: the comically uninformed questions put to Big Ben regarding mortgage rates, or the comically inaccurate article printed by CNBC on the same subject. Whatever the case, the media is awash with analysts, experts, officials, and laypersons offering rather strong opinions on a subject about which they have such a painfully shallow understanding.

Today Bernanke testified before congress on the state of the economy. I'll leave it to the 1000 or more other articles to bring you up to speed on the salient points. I'm more concerned with something that no one has really talked about yet: the lack of understanding of our mortgage problems. My concern began to peak after overcoming my amazement at a question I heard today from Luis Gutierrez. CNBC has kindly saved me from needing to type the exchange, listen here.

This question would not be that troublesome at all if it came from a mortgage consumer in the general public (if you don't know why it's troublesome yet, that's OK, we will cover that in a moment). But it comes from a member of the House financial services committee, a member of the subcommittee on financial institutions/consumer credit, and the chair of the subcommittee on domestic and international monetary policy. This guy should know something about this topic! For all I know, he and the rest of his ilk are quite knowledgeable in the rest of their purview, but his question, in conjunction with previous communications from members of congress, illustrates an appalling lack of understanding about the very specific topic of the macroeconomic role of mortgage finance.

Simply put, mortgage rates are tied to Fed policy decisions about as much as they are tied to the price of pork bellies! OK, that's a slight exaggeration. But I've previously written on just how unconnected the two can be. We've seen some Fed rate cuts that have preceded decreasing mortgage rates, and other rate cuts that have preceded increasing mortgage rates. It's enough to confuse anyone! (sarcasm) Wait! Maybe Fed rate cuts don't have a direct bearing on mortgage rates! (sarcasm) Sure, Home Equity Lines of Credit are tied to Prime, but that's about it. Maybe there is more than just one thing that affects mortgage rates! (sarcasm)

Since I know you're burning with curiosity, I'll give you a short version of the answer Bernanke should have given. Here goes... Almost all mortgage rates are in direct relationship with the yields of Mortgage Backed Securities (MBS). MBS are basically bonds: when the price goes up, the yield goes down. Their yields vary directly with mortgage rates and they are responsive to macroeconomic forces in a similar way to other types of bonds. So since inflation decreases today's value of a dollar, and since bonds return a fixed income, inflation makes bonds less valuable. (do you see where I'm going with this yet?). When something is less valuable, less people want to buy it, so the price goes down to attract buyers. When the price goes down on a bond, the yield goes up. And we just said that MBS yields equal mortgage rates. Ipso facto, ergo, therefore, rising inflation is a stimulus for rising mortgage rates.

Granted, this is not the whole story, but it is one of the most easily understandable reasons that mortgage rates have not fallen in concert with the Fed rates. Yes, money is cheaper for banks when rates are cut but BANKS DO NOT SET MORTGAGE RATES!!

Countrywide has to get together with Fannie Mae or Freddie Mac, pour a couple billion dollars of 30 year fixed mortgages into a cauldron, mix well with eye of newt and leg of toad, go down to the flea market, and auction off very small cups of this witch's brew (individual Mortgage Backed Securities) to investors. It's these investors: Saudi oil barons, overseas governments, institutional investors, and billionaire Chinese businessmen, who really hold the note on your mortgage. It's their appetites and goals that truly determine mortgage rates. Luis Guitierrez should know that. And you should too.

The fun continued when I read CNBC's article. I don't even have the space in this article to go line by line on this one, but suffice it to say that, should our bovine friends (especially bulls) not feel up to the task, the assertions herein could serve as equivalent fertilizer.

Mortgage rates high? Historically we're quite low! Perhaps it is referencing the fact that mortgage rates haven't fallen as much as they "should have" considering the yield on the 10 year treasury, which even mortgage brokers believe (incorrectly) is a good indicator of interest rate direction.

Yes, the spreads between mortgage rates and treasury rates are wider than they've been in the past. Maybe that has something to do with the perception of quality decreasing in the wake of a massive mortgage crisis! (understatement) Mortgage yields have always been higher than treasury yields in order to compensate investors for the extra risk.

So don't be surprised when the Fed cuts rates and mortgages hold steady. As long as inflation is a concern and the quality of MBS as an investment is in question, there will not be a direct relationship. My Scoff-O-Meter was tripped all the more abruptly as yesterday was a fantastic day for mortgage rates, a very inopportune day to write such an article.

In conclusion, even if it's not feasible for the average consumer to digest and understand the complex macroeconomic forces that govern mortgage rates, the more people in congress and the news media that understand, the better equipped the general population will be to mitigate our freefall towards and stimulate our recovery from what will be one of the lowest points in our economic history."

Thank you matthew for you wonderfully written post. Leave comments and let's discuss this!

Mortgage Rates and the Fed - Get it Straight ! !

I ran across this article today by Matthew Graham. I thought it would be useful information for those looking to buy property. Here it is:

"I can't decide what was more troublesome yesterday: the comically uninformed questions put to Big Ben regarding mortgage rates, or the comically inaccurate article printed by CNBC on the same subject. Whatever the case, the media is awash with analysts, experts, officials, and laypersons offering rather strong opinions on a subject about which they have such a painfully shallow understanding.

Today Bernanke testified before congress on the state of the economy. I'll leave it to the 1000 or more other articles to bring you up to speed on the salient points. I'm more concerned with something that no one has really talked about yet: the lack of understanding of our mortgage problems. My concern began to peak after overcoming my amazement at a question I heard today from Luis Gutierrez. CNBC has kindly saved me from needing to type the exchange, listen here.

This question would not be that troublesome at all if it came from a mortgage consumer in the general public (if you don't know why it's troublesome yet, that's OK, we will cover that in a moment). But it comes from a member of the House financial services committee, a member of the subcommittee on financial institutions/consumer credit, and the chair of the subcommittee on domestic and international monetary policy. This guy should know something about this topic! For all I know, he and the rest of his ilk are quite knowledgeable in the rest of their purview, but his question, in conjunction with previous communications from members of congress, illustrates an appalling lack of understanding about the very specific topic of the macroeconomic role of mortgage finance.

Simply put, mortgage rates are tied to Fed policy decisions about as much as they are tied to the price of pork bellies! OK, that's a slight exaggeration. But I've previously written on just how unconnected the two can be. We've seen some Fed rate cuts that have preceded decreasing mortgage rates, and other rate cuts that have preceded increasing mortgage rates. It's enough to confuse anyone! (sarcasm) Wait! Maybe Fed rate cuts don't have a direct bearing on mortgage rates! (sarcasm) Sure, Home Equity Lines of Credit are tied to Prime, but that's about it. Maybe there is more than just one thing that affects mortgage rates! (sarcasm)

Since I know you're burning with curiosity, I'll give you a short version of the answer Bernanke should have given. Here goes... Almost all mortgage rates are in direct relationship with the yields of Mortgage Backed Securities (MBS). MBS are basically bonds: when the price goes up, the yield goes down. Their yields vary directly with mortgage rates and they are responsive to macroeconomic forces in a similar way to other types of bonds. So since inflation decreases today's value of a dollar, and since bonds return a fixed income, inflation makes bonds less valuable. (do you see where I'm going with this yet?). When something is less valuable, less people want to buy it, so the price goes down to attract buyers. When the price goes down on a bond, the yield goes up. And we just said that MBS yields equal mortgage rates. Ipso facto, ergo, therefore, rising inflation is a stimulus for rising mortgage rates.

Granted, this is not the whole story, but it is one of the most easily understandable reasons that mortgage rates have not fallen in concert with the Fed rates. Yes, money is cheaper for banks when rates are cut but BANKS DO NOT SET MORTGAGE RATES!!

Countrywide has to get together with Fannie Mae or Freddie Mac, pour a couple billion dollars of 30 year fixed mortgages into a cauldron, mix well with eye of newt and leg of toad, go down to the flea market, and auction off very small cups of this witch's brew (individual Mortgage Backed Securities) to investors. It's these investors: Saudi oil barons, overseas governments, institutional investors, and billionaire Chinese businessmen, who really hold the note on your mortgage. It's their appetites and goals that truly determine mortgage rates. Luis Guitierrez should know that. And you should too.

The fun continued when I read CNBC's article. I don't even have the space in this article to go line by line on this one, but suffice it to say that, should our bovine friends (especially bulls) not feel up to the task, the assertions herein could serve as equivalent fertilizer.

Mortgage rates high? Historically we're quite low! Perhaps it is referencing the fact that mortgage rates haven't fallen as much as they "should have" considering the yield on the 10 year treasury, which even mortgage brokers believe (incorrectly) is a good indicator of interest rate direction.

Yes, the spreads between mortgage rates and treasury rates are wider than they've been in the past. Maybe that has something to do with the perception of quality decreasing in the wake of a massive mortgage crisis! (understatement) Mortgage yields have always been higher than treasury yields in order to compensate investors for the extra risk.

So don't be surprised when the Fed cuts rates and mortgages hold steady. As long as inflation is a concern and the quality of MBS as an investment is in question, there will not be a direct relationship. My Scoff-O-Meter was tripped all the more abruptly as yesterday was a fantastic day for mortgage rates, a very inopportune day to write such an article.

In conclusion, even if it's not feasible for the average consumer to digest and understand the complex macroeconomic forces that govern mortgage rates, the more people in congress and the news media that understand, the better equipped the general population will be to mitigate our freefall towards and stimulate our recovery from what will be one of the lowest points in our economic history."

Thank you matthew for you wonderfully written post. Leave comments and let's discuss this!

Charlottesville Real Estate Blog

Charlottesville VA Real Estate Information and Resources. Articles such as Buying a Foreclosure, What to do if you can't pay your mortgage, Buyer Representation, How to Sell you home and much more...by Rob Alley, Roy Wheeler, Avery Group

read more | digg story

Charlottesville Real Estate Blog

Charlottesville VA Real Estate Information and Resources. Articles such as Buying a Foreclosure, What to do if you can't pay your mortgage, Buyer Representation, How to Sell you home and much more...by Rob Alley, Roy Wheeler, Avery Group

read more | digg story

NAR Price Survey Shows House Prices Continuing To Increase In Many Areas

The National Association of Realtors® (NAR) has insisted for years, and insisted adamantly since the "bubble" started to burst, that real estate, like politics, is local. The quarterly survey of home prices that NAR released on Thursday proves this point and also indicates that, while the housing market is grim in some parts of the country it is doing quite well in others.

The survey which covers the fourth quarter of 2007 showed that 73 of the 150 metropolitan areas in the survey continued to show rising median prices for existing single-family homes.

11 areas actually showed double-digit annual gains and another 12 had increases of 6 percent or more. 77 Areas had price declines and 16 of those lost values in the double digits.

Still, in spite of the fact that the market is holding up well in much of the country, median prices for the country as a whole and for each of the four regions were down from the fourth quarter of 2006. The median price for the country declined 5.8 percent from $219,000 to $206,200. The West, which also had the highest prices in the country, took the biggest hit. The median price in that region in the fourth quarter of 2006 was $355,000 but had declined 8.7 percent to $324,100 in the latest report. The Midwest, which has the lowest median price fared the best, losing only 3.2 percent to a fourth quarter price of $156,300.

The largest single-family price increase was in the Cumberland area of Maryland and West Virginia. Prices there rose 19.0 percent from a year ago to a median of $116,500. Other big winners were Yakima, Washington (18.0 percent to a median of $170,600) and Binghamton, New York where prices increased 14.8 percent to a median of $110,000.

Big losers were Lansing/East Lansing Michigan where median prices dropped 18.8 percent to $109,600; the Sacramento California MSA which lost 18.5 percent in value to $297,600; and Jackson Mississippi and Riverside/San Bernardino California each at -16.8 percent to median prices of $120,900 and $338,000 respectively.

Lawrence Yun, NAR chief economist, said disruptions in the mortgage market have played a role. "The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges. For buyers who need loans of more than $417,000, mortgage interest rates have been running more than a percentage point higher, and that has been having an obvious impact. Higher ratios of sales for more moderately priced homes are naturally dampening the national median price as well as the data for some of the more expensive markets."

NAR President Richard Gaylord said he is encouraged by the raising of Freddie Mac, Fannie Mae, and FHA conventional loan limits. "Higher limits for FHA loans, which go into effect March 14, will be a big help to first-time buyers in high-cost markets. Higher limits for conventional loans purchased by Freddie Mac and Fannie Mae will take a bit longer - when they become available, high-income, creditworthy borrowers in high-cost areas will have access to affordable and safer financing, and that will help unleash pent-up demand."

The NAR report also covered condominium and cooperative prices in 59 metropolitan areas. The national median price for existing condos was $221,100 in the fourth quarter, only $100 less than in the fourth quarter of 2006. Thirty-three areas showed year-over-year increases (four of these had double-digit gains) while 26 areas saw prices decline, four of those by double-digits.

Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate(2) of 4.96 million units in the fourth quarter, down 8.5 percent from 5.42 million in the third quarter, and are 20.9 percent below a 6.26 million-unit pace in the fourth quarter of 2006.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series was launched at the beginning of 2006, with several years of historic data.

Homes For Sale

NAR Price Survey Shows House Prices Continuing To Increase In Many Areas

The National Association of Realtors® (NAR) has insisted for years, and insisted adamantly since the "bubble" started to burst, that real estate, like politics, is local. The quarterly survey of home prices that NAR released on Thursday proves this point and also indicates that, while the housing market is grim in some parts of the country it is doing quite well in others.

The survey which covers the fourth quarter of 2007 showed that 73 of the 150 metropolitan areas in the survey continued to show rising median prices for existing single-family homes.

11 areas actually showed double-digit annual gains and another 12 had increases of 6 percent or more. 77 Areas had price declines and 16 of those lost values in the double digits.

Still, in spite of the fact that the market is holding up well in much of the country, median prices for the country as a whole and for each of the four regions were down from the fourth quarter of 2006. The median price for the country declined 5.8 percent from $219,000 to $206,200. The West, which also had the highest prices in the country, took the biggest hit. The median price in that region in the fourth quarter of 2006 was $355,000 but had declined 8.7 percent to $324,100 in the latest report. The Midwest, which has the lowest median price fared the best, losing only 3.2 percent to a fourth quarter price of $156,300.

The largest single-family price increase was in the Cumberland area of Maryland and West Virginia. Prices there rose 19.0 percent from a year ago to a median of $116,500. Other big winners were Yakima, Washington (18.0 percent to a median of $170,600) and Binghamton, New York where prices increased 14.8 percent to a median of $110,000.

Big losers were Lansing/East Lansing Michigan where median prices dropped 18.8 percent to $109,600; the Sacramento California MSA which lost 18.5 percent in value to $297,600; and Jackson Mississippi and Riverside/San Bernardino California each at -16.8 percent to median prices of $120,900 and $338,000 respectively.

Lawrence Yun, NAR chief economist, said disruptions in the mortgage market have played a role. "The continuing crunch in the jumbo loan market that began in August has disproportionately reduced the number of transactions in higher price ranges. For buyers who need loans of more than $417,000, mortgage interest rates have been running more than a percentage point higher, and that has been having an obvious impact. Higher ratios of sales for more moderately priced homes are naturally dampening the national median price as well as the data for some of the more expensive markets."

NAR President Richard Gaylord said he is encouraged by the raising of Freddie Mac, Fannie Mae, and FHA conventional loan limits. "Higher limits for FHA loans, which go into effect March 14, will be a big help to first-time buyers in high-cost markets. Higher limits for conventional loans purchased by Freddie Mac and Fannie Mae will take a bit longer - when they become available, high-income, creditworthy borrowers in high-cost areas will have access to affordable and safer financing, and that will help unleash pent-up demand."

The NAR report also covered condominium and cooperative prices in 59 metropolitan areas. The national median price for existing condos was $221,100 in the fourth quarter, only $100 less than in the fourth quarter of 2006. Thirty-three areas showed year-over-year increases (four of these had double-digit gains) while 26 areas saw prices decline, four of those by double-digits.

Total state existing-home sales, including single-family and condo, were at a seasonally adjusted annual rate(2) of 4.96 million units in the fourth quarter, down 8.5 percent from 5.42 million in the third quarter, and are 20.9 percent below a 6.26 million-unit pace in the fourth quarter of 2006.
NAR began tracking of metropolitan area median single-family home prices in 1979; the metro area condo price series was launched at the beginning of 2006, with several years of historic data.

Homes For Sale

Real Estate Market Report - Year End

Year End Market Report - News and Analysis