Tuesday, October 14, 2008

Dance This Mess Around

I still see that stupid, Flash-driven woman dancing on various websites.  She’s still telling me how mortgage rates are even lower, as the Fed cut rates again.  Again, she’s lying to me.

Last week, I wrote about mortgage rates not corresponding to the rates that Fed Chairman Ben Bernanke was cutting.  Well, after the markets for mortgage backed securities market opened, rates for mortgages actually climbed.  I’ll use the rates offered by the company I work at for comparison (Yes, I know they’re so much better than anywhere else.  But they serve well for purposes of illustration ;-).

On Tuesday, last week before the Wednesday rate cut.  You could call us in the morning, and if you and your property would’ve qualified, I could’ve done a conventional 30-year fixed rate mortgage for 5.5% for 1 point (Just so there’s no trouble of anyone considering this an advertisement, I’ll quote the APR in parenthesis.  In this case, it is 5.622).  Friday, the day after Mr. Bernanke and his international pen pals cut their short-term rates, that same mortgage had jumped to 5.75 for 1 point (5.873 APR).

Now this morning, the first full trading day of the week as many banks were closed for Columbus Day, you would’ve gotten the same mortgage for 6% with 1.125 points (6.137 APR).  You can’t even get that rate this afternoon, as we had a price increase during the day.

Why the increases from the decrease?  I think the best answer is fears of inflation.

The significant problem presently choking credit markets remains liquidity.  The U.S. Treasury and world central banks have responded by pumping in hundreds of billions, if not trillions of dollars.

This may get the banks trusting one another and lure investors hoarding cash on the sidelines back into the equity markets.  But what happens once the arteries of commerce start flowing again?

New astronomical amounts of dollars will still be in bank accounts and ledger sheets.  They aren’t going to just disappear.   All these new dollars and their older cousins will be chasing the relatively same amount of goods. 

Equilibrium only returns to the marketplace when all the new dollars are worth significantly less than what they are today.  That’s inflation in a nutshell.

Savvy investors don’t want to see their present money locked in ten-year bonds at lower rates.  Not when that rate might not even keep up with the annual inflation rate.  That's losing money.

The more investors see inflation as a problem, the greater return they’ll demand from mortgage bonds to lock their capital in.  That means mortgage rates will go up, not down like that dancing lady promises.  

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