Interest Rate Update

Interest rates dropped at the end of the week as investors continued to react negatively to the debt limit increase legislation. The stock market today ended up about 125 points, after alternating days of dramatic swings in the market up and down a minimum of 400 points each day. The extreme volatility in the market caused investors to continue to move money into bonds, thus driving their prices up and yields down.

The perceived risk in investing in bonds due to potential increases in interest rates has moderated significantly due to the Federal Reserve’s announcement this weak that they plan to keep short term interest rates at their current historical lows for the next two years. With the volatility in the stock market expected to continue, the flight to safety and bonds is expected to continue, keeping interest rates down The following are some excerpts from this week’s newsletter on interest rates from HSH Associates :

” After an unprecedented whipsawing in markets this week, thirty-year fixed rate mortgages have moved to historic lows. Fifteen-year fixed rate mortgages are already there, as are adjustable rate mortgages. That said, and despite monstrous swings in influential Treasury yields, the overall effect on mortgage rates when all was said and done (so far) was little more than a reasonable decline from week to week… the overall average rate for 30-year fixed-rate mortgages decreased by twelve basis points (0.12). . .”The Fed’s reduced expectation for economic growth, lower inflation and a declaration of a long, long period of low short-term interest rates yet to come fostered the decline. ”

“Conforming 30-year FRMs didn’t quite make it into record territory, falling just four basis points shy of hitting last year’s near 56-year low. Thirty-year FRM private market jumbos are now available at an average 4.87%, and are sliding deeper into record territory. With the loan limits for agency jumbos starting to decline in the market, private mortgage money for these borrowers will become more important, and it is available at fantastic rates.

That’s not to say more declines won’t come. However, with a surge in refinance activity over the past couple of weeks as conforming 30-year FRMs moved below the psychologically-important 4.5% level, lenders don’t need to compete as aggressively for your business. If you couple this with investor concerns over a new wave of inbound prepayments from refinancing plus the possible formation of a new recession (which increases delinquency and default risks) and there’s little wonder that the difference between 100%-safe Treasuries and average 30-year mortgage rates widened appreciably this week. There is apparently plenty of appetite for the safety of US Treasuries, but obviously rather less for the risks inherent in mortgage investments.”

Will the decline continue? That’s a very good question. Could the economy turn toward recession, which would lower rates? Possibly. Can inflation move from mild to outright deflation? Possibly, but the Fed is betting not, at least for the moment. There has been some “spread expansion” this week which may diminish over time, allowing rates to back down somewhat. However, now that we are past the fear of the debt ceiling debacle, and now that the actual downgrade has replaced fear of the downgrade, we again should be turning to clues about the economy and inflation to evaluate where interest rates will go. Next week brings some housing-related news (both from builders and buyers), measures of inflation, looks at the state of lending, and the forward-looking Index of Leading Economic Indicators.

To the extent that July’s economic numbers are warmer than June’s — feats which are not all that difficult to accomplish — mortgage rates will tend to respond by firming slightly. Any report that is less terrible than expected, and especially anything that quells fear or otherwise removes the immediate need for the safe-haven parking of money will serve to firm up mortgage and other interest rates. For next week, we should start the week on a lower note, but may not end there, even if we aren’t likely to go very far.”

The following are interest rate quotes from Al Hermann of American/California Financial Services ,

30 Yr Fixed FHA

Rate
APR

3.875
4.565
Details

Conforming 30 Yr Fixed up to $417000

Rate
APR

4.250
4.399
Details

Conforming Jumbo 30 Yr Fixed $417001 – $729750

Rate
APR

4.250
4.392
Details

Jumbo 30 Yr. to $1.5 Mil

Rate
APR

4.750
4.886
Details

Jumbo 7/1 ARM $1.5 Mil (higher loan amt available)

Rate
APR

3.990
3.379
Details

The following are interest rate quotes from Jan Schott Bank of America, Home Loans jan.schott@bankofamerica.com 310-802-2300 :

For more information about Palos Verdes and South Bay Real Estate and buying and selling a home on the Palos Verdes Peninsula, visit my website at http://www.maureenmegowan.com . I try to make this the best real estate web blog in the South Bay Los Angeles and the Palos Verdes Peninsula. I would love to hear your comments or suggestions.

About mmegowan

I am a realtor with Remax Estate Properties in Palos Verdes Estates. Visit my website at http://www.maureenmegowan.com
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