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Where's my rate cut?

Posted by: Ben Levisohn on October 15, 2008

The ongoing financial crisis — and even bulls would have to admit after today’s 9% drop in the S&P 500 that it’s not likely to end soon — began in the real estate markets, and it won’t likely be over until some traction is found for sliding home prices. The Treasury Department and Federal Reserve are pulling out all the stops to get banks lending again. They’ve cut interest rates, forced banks to accept mounds of cash and still intend to buy mortgage back securities. But despite those moves, mortgage rates are actually going up — not an effective way to get people to start buying homes.

Rates on a 30-year fixed rate mortgage jumped nearly half a percentage point from October 3 to October 10, from 5.99% to 6.47%, according to the Mortgage Bankers Association, well above lows back in January, when the average 30-year fixed carried a rate of 5.5%.

So what’s going on? Shouldn’t the bailout benefit home buyers too? Mike Larson, real estate and interest rate analyst at Weiss Research and author of the Interest Rate Roundup blog, has his theory and it all comes down to supply and demand:

No one in Washington has shown any willingness to raise taxes to pay for these bailout programs. And there’s no a pile of money just sitting around in the U.S. Treasury to fund them, either. We’re a net debtor nation. We’re going to have to borrow hundreds of billions of dollars to make good on all of our promises.

That means a mammoth flood of Treasury debt is going to wash over the market in the coming year or two. Bond traders know that all of that bond supply will overwhelm bond demand. So they’re not sticking around. They’re selling bonds NOW, driving prices down and rates up.

This is U.S. government debt, folks and as the Treasury markets go, so go the rest of the credit markets, mortgages included.

The question, of course, is whether mortgage rates will come down anytime soon. On this one, I’m not a disinterested reporter — I have a mortgage that will need to be refinanced sometime during the next 12 months. Larson says there might be a short term drop. In fact, it may already be happening. says mortgage rates fell by 0.21 percentage point, to 6.21% on Oct. 15. But Larson expects rates to be higher a year from now, perhaps closing in on 7%.

Not everyone is gloomy about the mortgage picture. Bankrate cites a pick up mortgage activity this week as reasons for optimism. Still, I’ll be placing a call to my mortgage broker sooner than later.

Reader Comments

Frustrated First-time Homebuyer

October 15, 2008 8:13 PM

After all the hurdles of buying real estate in this market (the 20% down payment, the high credit score, the massive amount of documentation required and scrutiny involved), the skyrocketing mortgage rates just add insult to injury.

While you may think it's a low rate, I don't. My salary hasn't increased, and the house prices and property taxes are still very high where I live. Personally, this means another $200 a month, which for me is nothing to sneeze at. No matter how hard you try to do the right thing, these days it's almost impossible to win.

American Dream? What's that?

Maybe I should have been irresponsible and bought a place a couple of years ago, so the government could bail me out and I would be better off.


October 15, 2008 11:54 PM

This begs the question, why are you in a loan that you have to refinance within the next 12 months? Why didn't you get a 30 year fixed loan? It's just this kind of short-sightedness that's at the bottom of it all.


October 16, 2008 6:53 AM

Real estate developers have taken the severest hit from the funds shortage banks are going through. DLF Ltd and Unitech Ltd, the country’s two of the largest real estate developers, have not been able to draw on loans sanctioned by their bankers.Standard Chartered Bank, the second largest foreign bank in India after Citigroup, has held back disbursement of loans sanctioned to DLF and Unitech. The bank declined to comment on the development. Spokespersons of the two real estate developers also did not want to comment on the issue.For more view-

Ben Levisohn

October 16, 2008 12:10 PM

The short answer to why I didn't get a 30-year fixed rate mortgage: When I bought my apartment in 2002, I figured I'd probably live there for five years and then move to a larger place. So I got myself a 7-year adjustable rate mortgage, giving myself two more years than I thought I'd need.

Well, things didn't quite turn out as I expected. I'm still living in the same place and probably will continue to live there for another 5-10 years, hence the need for refinancing.

Still, I don't regret getting the mortgage I did. It was a rational decision based on what I knew at the time. My mistake was not refinancing a few years ago when rates were super low. Thankfully, I made a 30% down payment and my apartment is still worth (knock on wood) quite a bit more than I paid for it. While it's certainly not the best time to be refinancing, it's simply something that needs to be done, not a step on the road to insolvency.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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