Thursday, Jan. 28
Written 9:15 a.m. EST
PONDERING THE FED: The Federal Reserve plans to stop buying mortgage-backed securities by the end of March. It says it will do so gradually, to allow private investors to take up the government's slack. For months, the consensus in the mortgage industry has been that rates will rise as the Fed withdraws from the mortgage market. That consensus is changing.
A minority is beginning to say that mortgage rates won't jump when the Fed withdraws from the market. I agree. I think rates will rise, yes. They're near record lows, so of course rates will go up eventually. But I don't think they will shoot up abruptly after the Fed has bought its last mortgage-backed security.
In my story yesterday about the Fed's decision to hold the federal funds rate near zero, I interviewed Bob Walters, chief economist for Quicken Loans. When I asked if he thinks rates will skyrocket after the Fed's withdrawal, he said, "Wouldn't it have happened already?" After all, the Fed has been signaling this shift to the marketplace for months. If rates are destined to jump abruptly in late March or early April, why wouldn't they rise now, in anticipation of it?
Over at Mortgage News Daily, analyst Adam Quinones makes a different argument to arrive at a similar conclusion. He notes that home sales are slow and are expected to remain slow, and that just about everyone who was willing and able to refinance has done so already. As a result, not a lot of people will get mortgages this year. And with few mortgages, the demand for mortgage-backed securities will be relatively high when compared with supply. That spells high prices for mortgage-backed securities, and low rates on mortgages.
Now, I want to repeat something: Most mortgage people expect rates to rise. There's near unanimity on that. A majority of mortgage experts believe that rates will skyrocket in late March or early April because of the Fed's withdrawal from the mortgage-backed securities market. A growing minority believe that rates will rise then, but they won't skyrocket.
THIS WEEK'S RATES: Mortgage rates were almost unchanged in Bankrate's weekly survey. The benchmark 30-year fixed fell for the fourth week in a row, by 2 basis points, to 5.13 percent. The conforming 5/1 ARM dropped 9 basis points, to 4.54 percent. In the article, Bankrate's Chris Kissell looks into whether the homebuyer tax credit is luring people into buying houses.
RATE TREND INDEX: We have made an important change in Bankrate's mortgage Rate Trend Index, in which we ask mortgage experts which direction mortgage rates are headed. In the past, we asked voters to look 35 to 45 days ahead. Now we're asking them to look one week ahead. I hope this results in greater accuracy.
This week, half of the voters believe rates will rise in the next week. I think they'll remain relatively unchanged. How accurate have my predictions been? I've been right in 24 of the past 52 weeks, for a batting average of .462. I've been right four of the past 10 weeks.