Because I love what I do I happily answer their question. But as I give them their answer almost always something interesting happens. Slowly a glazed look will fall over the questioners face as they regress and fade into their own subconscious as if the answer to this single question will provide a beacon that they are hoping will lead them into a better situation. Unfortunately, it rarely does and the response after I stop talking is usually - "yeah I think I'm going to wait a little longer."
Since this is typically an informal conversation I leave it at that, and usually the topic changes shortly thereafter to something more, well "fun" to most people.
Well those of you still "waiting" it is time to get off the proverbial fence to take action. Why? Because interest rates will be rising very soon, and if you don't want a burning match glued to your finger, it's time to refinance.
For those of you familiar with the Mortgage Backed Securities (MBS) market, you should not have trouble following me from one conclusion to the next. For the unfamiliar I am going to ask you to take a leap of faith and simply accept that the MBS is ultimately responsible for dictating interest rates offered to the consumer.
Right now the MBS market is in a state of uncertainty. Currently and for the last year and a half or so (actually a little longer), the Fed has been buying mortgage backed securities to keep interest rates low. All in all they will have spent 1,250,000,000,000 dollars in MBS purchases... that's 1.25 trillion dollars for those of you having trouble with all those zeros. What did this buy us... the low interest rates that have been on the market and available for the last couple of years. Although it is difficult to estimate, it is figured that the Fed has made up at least 80% of the investor pool buying mortgage backed securites. What this means is essentially the Fed has artificially saturated the market with cash thereby forcing available rates to unsustainable lows.
Fast forward... it is now the end of March and Q1 2010 has come to an end. Guess what the Fed's plan is at the end of Q1? To stop buying mortgage backed securities... the 1.25 trillion has been spent, and they do not have any more money to infuse into this market. When this happens the largest investor, now responisble for 80% of the buying that is occuring in this market will no longer be buying MBS. With 80% of the money coming in right now disappearing, the remaining 20% will be forced to fill the void. Will this happen in my opinion, no.
Essentially that means less money in the market to lend which means the money lent will come at higher premiums, consequently the rate of interest offered to the general public will be going up.
Currently our market is in a state of consolidation. For the last three days we have seen mortgage backed securities open and close at the same number. These daily dojis are an excellent indicator that our market is currently in a state of equilibrium. For most that probably sounds like a good thing... in the trading world it means we are poised for a significant change.
Right now the bulls and bears are in agreement as to the prescribed value of our market. With the largest investor (our government) exiting, the bulls are going to be very short handed. To make an analogy... in the game of soccer you have 11 people on each team or 22 people on the field... let's remove each team's goalie... leaving ten players per team, or 20 players on the field... Since we are in a state of equilibrium between bulls and bears in our market... we divide 20 in half and get 10... 10 bulls, 10 bears.... now we know the Fed is leaving the market, and since the Fed is currently buying they are on the bulls side, we must reduce the bulls team by 80%... But the bears are still out in full force... the number of investors and their strategies have not changed so they still have a full team of 10... in our analogy currently we have set up a game, starting in April (beginning of Q2), that will be broken as follows... each team has their goalie, the bulls can play with 2 players on the field, the bears get the full 10. Now who do you think is going to win this game? The bears of course.... their are more of them, and all other things being equal 10 should and will always beat out 2.
Well our market behaves the same way... as soon as bears out number the bulls, the overall investment strategy of the MBS market is going to change and all of the sudden selling (bear action), not buying (bull action) is going to be the predominant formula which means the mortgage backed securities market is going to post losses which inevitably will lead to higher rates for the consumer.
I am sure there are those of you out there looking to poke holes in my analogy, and there are definitely other circumstances that must be taken into consideration, supply and demand, prepayment cycles, Fed monetary policy, etc... the list is too long to complete... but the fundamental argument is sound because if we reduce a market to its foundation... you have two primary entities responsible for making that market... you have buyers and you have sellers... remove either one of these variables and you no longer have a market.
The point - everyone that is considering refinancing in the near future... this year, one, two, or three years down the road, would be a fool, a FOOL!!! to not look at their current options before this inevitable rate climb takes affect. There is still time, and if you qualify, now is the time to take action.
This is literally the witching hour... and I had to speak out, warning everyone before things turned for the worse... the consolidation we have seen over the last three days in the mortgage backed securities market is the beginning.
Take action now before it's too late.
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