Monday, September 12, 2005

How Mortgage Rates Track Bond Markets - Unfortunately

September 12-

Holy….there’s a lot of information out there. I keep getting sucked into the blog vortex, thanks largely to and its ilk. And now I know all about RSS and Feedster and you name it, and frankly, I haven’t had this much fun on the internet since I learned HTML.

But that’s not why you come here. I should let you know that these articles now appear on three sites at the same time, at The Chris Jones Group main website, at The Chris Jones Group main blogsite, and at Mortgage Blog, the best mortgage blog on the ‘net, not that that is saying much. Each site has its own content as well as these posts, but they are common to all sites.

No economic news today means a flat market, except that bonds were off pretty substantially this morning on inflation fears. Well, folks, I think inflation is on its way, and there’s nothing the Fed can do about it. When you have food and water and gas and jet fuel and other shortages caused by the closing of one of the largest ports in the US, the prices of things will rise. This is Econ 101. Whether that inflation can or should have a larger impact that needs to be dealt with by raising short-term interest rates is debatable, but not very.

As we’ve stated here before, what the Gulf Coast needs to rebuild is not federal money, which will be mismanaged and wasted after being forcibly confiscated from other places, but short-term low-interest loans from the financial institutions directly connected to the community, possibly (with any luck) augmented by grants from private foundations using donated money.

If Greenspan has a brain, he’ll stop raising the Fed Funds Rate until Spring at the soonest (of course, by then, he’ll be retired, and maybe the next fellow will not raise them at all. A guy can dream).

To explain again – when the Fed raises short-term rates, that makes ARMs less attractive, as the ARM rates are based on short-term bond rates. There is no one-to-one correlation, but the trends track. The fixed-rate mortgages (30 and 15 year, and increasingly often 40-year) track the 10-year bond, which is not as affected by Fed decisions. In fact, currently, as short term rates have risen long-term rates have not, and that squeezes the prices together. For instance, the 30-year rates are currently better than the 7- and 10-year ARMs, and very close to the 5-year and 3-year ARMs. This reduces financing choices in the mortgage market.

This combination of circumstances is not necessarily bad; if you like the 5-year ARM rate you can still have it, only for 30 years. But the spread between the rates is so small that one thing is certainly true – either the 30-year rate is too low or the 5-year rate is too high. Since the 30-year rate is based on the wisdom of the massed bond market, and the 5-year rate is based on Alan Greenspan’s hunch about inflation, I’d be betting on the 30 being right. This is not just because I recently finished reading the Wisdom Of Crowds, but that helped.