Mortgage rates have dropped close to .5% over the past week.
Some of this improvement was given back Monday afternoon and so far Tuesday morning.
To say this market is volatile is an understatement.
Below are average interest rates across America as of 3/13.
The news of the Silicon Valley Bank Failure shook financial markets and had many investors fleeing toward the safety of bonds, which helps interest rates improve.
Ironically, the major component of the Silicon Valley Bank failure was their investment in bonds.
Silicon Valley Bank purchased bonds when interest rates were much cheaper.
When rates moved higher, their bonds were not worth as much as there are higher yield bonds available today.
If they have to sell, they would need to sell at a discount and lose money on their investment.
As depositors started pulling money out of the bank, the bank is forced to raise capital to meet this demand.
Large investments would have to be sold at a loss, thus causing the bank to become insolvent.
With the news of multiple other bank failures, I’m left to wonder if the FED has moved too far too fast?
Actually I’m not wondering, I firmly believe the FED’s actions have been too drastic.
Banks only have to hold onto 10% of their deposits and they invest the other 90%.
Banks that invested in bonds will have difficulty selling due to the much higher rate levels today then when many of these bonds were purchased.
This could put them in a liquidity crisis should depositors take their money out of the bank.
I also strongly believe the labor markets are much worse than the jobs reports make them out to be.
A large amount of companies have had large layoffs or hiring freezes, yet the jobs numbers are good?
While people are out of work or working less hours, we have higher interest rates on short term loans, car loans, HELOCS, etc. due to the FED rate hike.
Less and less people are going to be able purchase goods and services thus hurting the economy more.
The FEDs actions have worked, but it takes time for those results to show in the numbers they monitor.
It’s my opinion that the FED is pushing rates higher too fast putting a lot of other areas in the economy at risk.
The Consumer Price Index which measured inflation was just released and came in where experts predicted.
8:39 AM : The Consumer Price Index (CPI), which measures inflation on the consumer level, was reported at 0.4% for the month, and decreased by 0.4% to 6% year over year, in line with expectations.
The Core CPI Rate, which strips out food and energy prices, increased by 0.1% for February, which was above the 0.4% estimate, and decreased by 0.1% to 5.5% year over year, also in line with expectations.
Next week is FED week where they will announce if they will raise rates and by how much.
Today, the average interest rate across America for a conventional 30 year fixed loan is 6.99%.
All eyes are on the Jobs Report this week and the CPI Inflation Report next week.
Remember that the January Jobs Report started this trend towards higher rates in February.
The US Jobs Report comes out Friday and if the job creation numbers are weak, I think we will see some nice interest rate improvement.
If we add that to a nice inflation drop next week, rates could erase some of the gains from February.
So if you want rates to go down, you’re a big fan of a weak Jobs Report and an Inflation Report showing a good drop in inflation.
If you lock a mortgage and interest rates drop significantly after you lock, you could be eligible for a Float Down.
A float down is when interest rates move .25% lower or more with same costs and you are able to negotiate your rate down.
This week, I’m the #1 fan of a weak Jobs Report!
DO HIGHER RATES PROVIDE A UNIQUE OPPORTUNITY?
This week, Barry Habib from MBS Highway provided a demonstration of how higher interest rates could be a unique opportunity for a homebuyer to benefit the most.
When the market hits or comes close to the bottom, buyers will usually benefit from great home appreciation as demand picks up.
It’s no secret that we have a ton of pent up demand for would-be home buyers that are on the sidelines due to higher rates and payments.
See the appreciation after the market hit the bottom in 2012.
In the example below, he illustrates this with a $500,000 purchase price with a $400,000 mortgage.
If rates go up 1%, the $400,000 mortgage will be $257 more per month or $3,084 more per year.
With demand down, the buyer can likely negotiate better terms. In this example, he shows the buyer negotiating $10,000 off the list price.
Everyone in the mortgage industry is expecting interest rates to go down.
As they come down, demand will pick up and home appreciation is likely to occur.
In the example below, he estimates 3% appreciation or $15,000.
He also assumes the below client will likely refinance to a lower rate when the circumstances make sense.
This may cost the client $5,000 in costs though that is dependent on the rate a customer chooses.
If this happens, the client would lose $3,084 in interest but would gain $25,000 in cost savings and appreciation.
Even when accounting for a $5,000 refi fee, the customer comes ahead $16,916 in the first year.
HOW DEBT HELPS AVOID INFLATION
In the video below, I explain the powerful principle of debt shifting inflation from a home owner to a mortgage holder.
