Mortgage Rates in November, 2008

My mortgage rates report is syndicated from coast-to-coast.  In it, I try and help home buyers interpret what is happening in the economy and those effects on the mortgage-backed securities market.  As we discussed before, the mortgage-backed securities market is the single best indicator of mortgage rates movements.

I suggested that home buyers closing in October should lock at 5.875% and that homebuyers closing in November might wait for lower rates.  Soon thereafter, mortgage rates spiked to 6.5% causing those folks closing in November to worry.  One consumer asked about whether he should buy a home or wait:

In your professional opinion, what do you forecast the interest rate will be in November? I’m a buyer waiting hanging out on the fence hoping for interest rates to fall. When would be an ideal time to purchase? Thank you for your response.

Thanks for the question, RC; it’s a great one.

I think November mortgage rates will be much lower than the 6.5% you can get today.  I might have been overly aggressive thinking that mortgage rates can decline to 5.625% but I expect them to return to the sub-6% level within 10-14 days.  Here’s why:

1- As Tom Vanderwell noted, the Fed’s announcement should refocus the mortgage-backed securities traders to examine economic fundamentals.  When the economy is contracting, rates trend lower.

2- Spreads between Treasury notes and mortgage-backed securities still have room to tighten.

3- Money flowing into the stock market, and away from mortgage-backed securities, should redeply into fixed-income investments as those economic fundamentals suggest a recession.

RC, I want to address a specific part of your question, though.  You said you were “waiting” for rates to fall before you bought.  While I think securing a good rate is important, it should be noted that a mortgage decision can be changed (through a refinance) but a purchase price is permanent.  If you’re getting a compelling price on the property, a .5% difference shouldn’t make a HUGE impact on that purchase decision.

Let me demonstrate with some numbers.  A loan amount of $150,000, at 6.5%, would produce a $948 monthly payment.  Holding out for a 5.75% rate could lower that monthly payment to $875.  You might save $75/month by waiting.  There’s another way to “lower” that payment by the $75; lower the loan amount, through shrewd price negotiation, to $138,000.

This is an historical time in our economy with historical opportunities for the swift.  RC, I guess what I’m saying is that you should be more focused on picking off a property at a great price rather than to let the highly volatile mortgage market drive that purchase decision.  I think mortgage rates will decline in November, giving you the best of both worlds.  You can mitigate the risk of an incorrect rates prediction from me, however, by receiving generous price concessions from beleaguered sellers.

October 29, 2008