Interest Rates Struggle to Find Foothold

Rates right now are struggling to hold the ground they made up last Friday in the wake of a 10 year treasury yield that we have not seen in sometime. With the 10 year treasury yield currently at 3.87%, the problem our market faces is better opportunity elsewhere. Keep in mind the 10 year treasury is a direct competitor to the Mortgage Backed Securities market. Essentially with both investment vehicles operating in long term markets - the questions that all investors are asking: What is my return on investment? How secure is the investment?

Let's be candid for a moment. Whatever you think of the United States government, I think we can all agree that Treasury Bonds are a more secure intrument than Mortgage Backed Securities - after all if the government fails and defaults on its bonds, I think it is safe to say our economy will be in ruins as well, which means MBS is also worthless. With this simple understanding we can reasonably deduce why Treasuries are a more attractive investment when the MBS is offering similar yields. This explains why Treasuries are gaining steam as MBS begins to lose traction.

Currently we are even on the day of trading in the MBS market. Interest rates for home loans are static right now, with lenders waiting for some indication as to which way the market is leaning after a strong Friday ending last week. Without the Fed participating, I believe the longer the period of consolidation, the more exposed we are to a firsale forcing rates up substantially.

Point in fact I do not expect home loan interest rates to move much if at all today, simply because our market needs to redefine itself, and investors are going to move slowly and cautiously in this regard. The danger we face with this type of trading is it signifies that both bulls and bears have questions about the market. During times of uncertainty, it is the bears that typically win out, moreover should the market begin to lose ground forcing home loan interest rates up, we could see a snowball develop as bulls leave the market on top of the bears in attempt to curb any losses they are exposed to.

In addition there is serious risk associated with home loan investment opportunities right now, a new report claiming nearly one out of five homeowners is current behind on their payments. Considering this fact along with the unemployment numbers not improving, the question becomes, how stable is this market for investors? If investors believe there is too much risk in the MBS market, this will reduce the money coming in which will leads to higher interest rates which will make it harder for people to refinance or purchase which will hurt the real estate market further and down the drain we go.

This is why the White House revamped and released a new program to address foresclosures and people that are currently unemployed and/or upside down - something we addressed in our post to end last week. But even with this program, it does not address the real problem which is the ability to repay. Without work, people do not have income which makes paying their home loan next to impossible. Clearly low interest rates are important right now to ensure people that need help with their home loan or are looking to buy a new home have financing available to them.

One thing is for certain, with the government willing to pay people's home loan payments, and willing to subsidize the banks when they reduce mortgage balances for homeowner's upside down; it is clear our economy and the overall condition of our Country is not as favorable as we are being led to believe.

Let me close with one final point... if you do not own your own home and can afford to buy one on a 30 year fixed mortgage... now is the time to buy. Real estate is not just an investment, it is your home - a place of shelter. The three necessities of life are food, water, shelter. Of these three shelter is the moat important. Forget about the investment side of this. If you have your own home in a 30 year fixed rate... you know your monthly obligation. Should inflation hit... your monthly payment, your cost of shelter is fixed and will not change... if you are renting you can't say the same thing. We know our government undertstands how serious this problem is even if they are not talking about it. Inflation is by in large the nemesis of interest rates. We all know inflation is coming... you cannot print and spend the type of money like our government is doing without experiencing inflation. When inflation hits, we will see rates rise, and the cost to rent will increase as well. Having a fixed rate that dictates a stable and consistent payment during times like these is a huge advantage. Couple that with the fact that it will be the lowest fixed rate in history and you are sitting on a major opportunity.

Now let's talk about the investment side of this. With inflation coming, we know the value of you home will be rising. What do we all try to do? Buy low and sell high.

Happy to discuss particular situations. Just make sure you talk to a professional about your purcahse or refinance.