There’s always something to howl about.

Why Won’t Mortgage Rates Drop Below 5% ?

Mortgage-backed securities have been on a tear, improving more than a half a point in the last week.  This means that the 5.25% rate, offered at 1 point last Friday, should be offered at a half a point today….BUT….

…that isn’t the case at all.  Mortgage rates may very well rise while the mortgage-backed securities market improves.  I told you that the only relevant indicator of mortgage rates is the mortgage-backed securities marketWhy would I reverse my position?

This conundrum is a Freshman year Macroeconomics 101 case study; supply and demand.  Rates have improved since the Fed hinted at a 4.5% world.  Demand has risen, for mortgage money.  Lenders have cut back their workforce or disappeared altogether.  There just ain’t enough folks to process the paperwork so “supply” is down.

Lenders are making it clear that they just hate refinance transactions, because of nebulous valuations, in their pricing.  Expect refinance transactions to become even more expensive, in 2009. What this means is that your soon-to-be-neighbor , who is buying a home with a 3% down payment, may very well get a 5.25% rate while you, who has more equity (in a similar home), may be offered 5.75% for a refinance.

Lenders won’t get fooled into believing that business will pick up next year so they won’t be adding to the workforce.  Market volatility may encourage profiteering as long as rates stay low.