So You Say You Want to be a Surfer?

Navigating the waters of home purchasing, refinancing and real estate finance can be challenging in times of market volatility. Getting into position can be the key making the most of these turbulent times in mortgage rate fluctuation and economic uncertainty.

I read this from economist, Elliot Eisenberg, Ph.D. (www.econ70.com) a couple of years ago:

“While interest rates on Treasuries have hit all-time lows, mortgage rates have fallen, but not as much. There are at least three reasons. First, if rates keep falling, prepayments will increase, hurting mortgage investors. Second, lower rates suggest the economy is weakening and that can boost defaults, hurting lenders. Third, with re-fi demand already sky-high, lenders need not juice it with yet lower rates, which would needlessly reduce profits.”

Here’s some thoughts on the three things he mentions:

1. “If rates keep falling, prepayments will increase, hurting mortgage investors.”

I’ve told 5 people in the last two days that the bottom of the rate market was Monday 3/2/20. Yep, BEFORE the Fed announced their emergency cut of 50 basis points (or one-half percentage point). Why haven’t rates fallen further? One, because the Fed Rate cut does not have a one-to-one effect on mortgage rates. Sometimes rates have gone UP after a Fed cut. And two, the super smart finance guys (the one who control the market for stocks and bonds) bake in any potential cuts that the Fed might make well in advance of any cut taking place. They all knew it was coming and the market had already made its move lower—WEEKS BEFORE THE ACTUAL CUT. Now, with everyone jumping on the refi wagon, the banks are in no hurry to offer you the lowest rates because they don’t have to, mostly because they know you want it. There it is—Supply vs. Demand.

Here’s what I am telling my clients: if you want to be a surfer, you need to be a strong swimmer and you must be able to balance yourself on the board. Does that make you a surfer? NO! You have BE IN THE WATER with your board and you MUST BE IN POSITION to catch the wave-THEN, YOU ARE A SURFER. Until then, you’re just a strong swimmer with good balancing skills. Want to catch the refi rates at their lowest? Get your loan application in with all your docs and be ready to catch that wave when it comes (and it will), so you can lock in the lowest rate.

By the way, getting the lowest rate isn’t always the best DEAL. Fees, loan costs, SERVICE matter too and as colleague of mine once said to me: “The sweetness of a low price is far outlasted by the bitterness of poor quality.” Like many things in life, you get what you pay for. Want great service, competitive rates and an “easy” button. Call me.

2. “Lower rates suggest the economy is weakening and that can boost defaults, hurting lenders.”

Some of you may be thinking that we’re heading for another 2008 melt down, where the housing market went to hell and people were throwing their keys inside the door, closing it and walking away. Some of you shopping for homes are rubbing your hands together, thinking you’re about to be Lowball Larry with your offers. Not so fast. Remember that the reason people were walking away from their homes is because the loans were poorly written with little to no documentation and those crappy loans were sold to the secondary market where things imploded right around October of 2007. Afterwards, very few of us could buy the homes that the banks were forced to reposes because the banks were in such bad shape and didn’t have the money to lend or the guidelines were so strict, no one could qualify!

Does the possibility exist that we’re heading for a higher default rate? Maybe, we must wait and see what the future holds. Let me share an article from TransUnion written at the end of last year. Look at chart they put together below. Five-year trends on Mortgage Delinquencies are down more 35%. So, really, at the moment, the signs don’t point to a housing bubble, just based on people making their payments.