|This week the BUZZ is all about ‘deflation’: Will it come? What will happen? While the directors at the Fed agree that the economy will remain week for a while, they are split on the deflation issue. This week, the core CPI came in positive but just barely, underscoring why there’s disagreement. So, what does this mean for rates? (This message will be longer than usual, but worth it.)
View rates like a set of stairs. In lending money, the more risk you take (horizontally), the higher rate of return you want (vertically). Risk comes in how soon you’ll be paid back and who you lend to. The longer you wait to get your money back, the more risk you take and you want a higher interest rate. So, a 10 note pays a higher rate than a 1 year. Also, the risker the creditor, the higher rate of return you demand. So a mortgage to you and me requires a higher rate than Uncle Sam’s T-bills. Following so far?
Back to the stairs. Each step represents a different level of risk, either time lent or borrower lent to. 1 yr. T-bills are at the bottom, 10’s in the middle, and 30 yr. mortgages are at the top. Well, the 1 year T-Bills are basically at 0..so they can’t go any lower. And if THEY can’t go any lower, can any of the other steps on the interest-rate-stair-case (i.e. mortgages) go any lower? Not really. The only way for mortgages (the top steps) to drift lower would be for the size of the steps to shrink – i.e. investors would have to be willing to take less return for their added risk. This might happen to some degree, but not much.
But what IF, investors WERE willing to take less for their added risk and those steps DID shrink thereby lowering rates further? Well, a funny thing happens to a monthly payment when rates are this low. The difference between a 4.0% payment and a 4.25% payment is less than the difference between a 5% and 5.25%. My point? IF rates DID drift lower, which in my opinion is not likely, it wouldn’t impact your borrower as much as it did when rates were in the 5’s.
So, if you are asking, “Shouldn’t I wait for rates to go lower?” “Absolutely NOT!”.
This week 30 yr. fixed rates remained between 4.25% and 4.5% depending on program, credit and points (notice how we’ve been here for 4 weeks?).
Sr. Loan Officer
NMLSR # 217991
OK License # MLO01963