Real Estate Finance Alerts

How Much Lower Will Rates Go?

I think we are close to a rate bottom for the following reasons.

1. The FED cannot cut below 0.0%.

2. Mortgage Backed Security risk spreads are almost back to normal.

3. The 10 Year Treasury Bond is at record lows.

The current FED Funds Target Rate is 1.000% and the market expects a 0.5% cut today based on futures. While it has other tools at its disposal, it has used most of them already and can only cut the Target Rate to 0.00%.  Remember, the market expects this cut.  Rates will not move lower from this cut alone. Rates will move tomorrow based on the FED announcement regarding future actions. It is the change in expectations of future rates that changes the market today.

Most of the recent rate drop came from the narrowing of the risk spread between the 10 Year Treasury Bond and Fannie/Freddie Mortgage Backed Securities (MBS) when the government announced it would buy $600 Billion in MBS. While not an explicit backing of Freddie and Fannie, investors feel confident Freddie and Fannie will not be allowed to fail if the U.S. government is putting that much money on the line. The spread is down from just over 1.90% to about 0.60%. The spread is normally about 45 basis points. So, even if the risk spread returns to normal, rates would only go down another 0.125%.

If the FED cannot cut much more and risk spreads are close to normal, that leaves any rate improvements up to the 10 Year Treasury going lower. The 10 Year is already at record lows and in uncharted territory. More importantly, government spending will require the Treasury to issue more debt, which will cause rates to rise. Obama Administration programs and additional bailouts will be a lot of spending. I don't know how much lower rates will go, but I would not gamble on them going much lower than where they are today.

What Should You Do Today?

If you can lock an interest rate that works for you, lock it. We can always improve your position if rates go lower. Clients who try to time the bottom usually end up with a higher rate in the end or missing out altogether. Be smart, not greedy.

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