Here is an interesting post from a colleague, Nevin Miller, in Marin County, in the bay area. He’s been right more times than not, so its good to hear what he has to say.
“Just what the heck is going to happen with interest rates? I get that question a lot – so let’s spend a few minutes and talk about the possibilities. Mortgage rates fell sharply starting last Fall, and bottomed at the end of the first quarter of this year. Since the housing crisis started – the Fed engaged in three rounds of quantitative easing (the buying of first, Treasury-notes, and then actual mortgage backed securities) to attempt to force down long term interest rates.
‘Following each of the first two rounds of easing – Treasuries and Mortgage rates both fell. I predicted in the middle of last year that as the Fed withdrew their support completely at the end of Q3 (the third round), that we’d see rates fall again – and I was correct. The Fed’s stimulus was removed by the end of the year – and then earlier this year – we saw mortgage rates drift down into the high 3’s. However, since then – mortgage rates have moved up steadily.
‘So what’s up? Well, lots of things. First, the Fed has made it abundantly clear that they will eventually raise short term rates. While the Fed doesn’t set longer term rates, the raising of shorter term rates could easily create a flight to shorter term notes, with the selling of longer term bonds creating rising longer term yields.
‘Let’s continue with the Fed discussion. The Fed has nine governors. Six are doves, and 2 are hawks, and one is considered neutral (doves are wait and see on raising rates and hawks are extremely sensitive to inflation and will want to hike rates at the first sign). The Fed has said that they eventually will raise rates – when that action will not affect the fragile recovery. What will spur them to do this sooner, rather than later, is if we see signs of inflation this summer. While inflation is non-existent (the way it is measured), a few months of CPI increases of 0.2 or 0.3% may give them the ammunition they need.
‘Second, the uncertainty in the European Union about the future of Greece as a member of the EU has added significant complexity to the markets. If Greece can resolve their debt issues – that’s likely bad for interest rates. If they cannot – and they withdraw (or are forced out of the EU) – they could collapse their currency, which could be good for rates.
‘So, after all of that, we now have two schools of thought – one that says rates rise and we have seen the end of this low rate cycle, and one that says rates will fall before they eventually rise. All of the uncertainty with respect to Greece, and inflation, leads to volatility – and that is precisely what we see happening in the markets. Rates have fallen in the last week. It should be an interesting summer and fall.”
Nevin L. Miller Senior Residential Loan Officer Branch Manager 700 Irwin Street, Suite 300 San Rafael, CA 94901