By: Mark Wisterman
I have tried to do my best to refrain from watching too much TV news in the morning over the past few months.
For a news junkie like me, as my wife will attest, it has been very difficult to do this. After all, if I don’t watch all the depressing, ridiculous, and almost always inaccurate news reporting of the day, how am I supposed feed my own depression and anxiety. (I am ALMOST kidding).
As I say, I have been doing my best not to watch. But I will admit to peeking once in a while. Yesterday, while cheating on myself, I tuned in to a report on Fox Business while they were discussing the fact that Ben Bernanke, the Chairman of the Federal Reserve had mentioned in this congressional testimony that the time was nearing when The Fed would be winding down their policy of keeping interest rates artificially low in their ongoing mission to keep mortgage rates from being affected my true free market forces.
Many people, including myself, are of the opinion that economy may be sitting on somewhat of a powder keg when it comes to what interest rates will do when The Fed decides that the time has come to end the printing of money to purchase $85 billion of bonds that it has been making each month. Remember that home mortgage rates are based on and, for the most part, has a direct correlation to the 10 year Treasury Bond yields (interest rates). My research over the years shows that there is generally about a 2 to 2.5% point difference between the yield (interest rate) on the 10 year Treasury Bond and mortgage rates.
During the news report the discussion turned to how the markets reacted to Bernanke’s comments. When stock market began to sell off and interest rate on the 10 year bond jumped up on the comments, it confirmed, once again, my concern for how the Fed is going to extract themselves from this policy without causing a significant slowdown in mortgage activity and home sales. If just the mere mention of cutting back on the suppression of rates can send the markets through the gyrations it went through yesterday, and cause the increase in mortgage rates that it did, what will the reaction be when the announcement is made that the Fed bond purchases are actually being cut back or eliminated all together. In my view it would not take rates very long to move into the 6% range or higher. (Oh, and for the record, a 6% interest rate is still an historically good interest rate).
Now, I do not say all of this in an attempt to invoke panic in the Lake Oroville real estate market, or any other market for that matter. In fact it appears that the Fed will be continuing their purchases at some
level for a while longer. But I do think it is important for buyers and sellers to understand that, barring anything unforeseen, that the pressure is on rates to rise, not to decline.
I have included a couple of charts that I hope will illustrate my point here. One of charts is from the Wall Street Journal Market Watch website showing the swing in bond interest rates yesterday Click here or on the graphic to see the full chart. The other is a mortgage interest rate chart from Zillow .com showing the recent trend in mortgage rates.
As I have said many times on this blog, my intention with this space is to inform you and provoke thought and conversation regarding the conditions and events of the real estate to keep surprises to a minimum as nobody likes surprises in the real estate market.
So what to you think? Are we sitting on another powder keg?