We’ve all enjoyed extremely low mortgage rates over the past few months and years thanks to efforts by the government to do just that, as well as investors reacting to the sluggish economy out of fear by buying into the relative safety of Mortgage Backed Securities (MBS).
If you’ve been on this blog long enough you’ve probably read my article about how mortgage rates are determined and know the inverse relationship between the price paid for mortgage backed securities and their yield. The yield of the MBS is the index that is used for pricing mortgage rates. If investors are buying more MBS then the price will go up and the yield will go down – the result being lower interest rates.
If investors are less interested in the lower returns of the MBS and buy fewer of them then the price of those bonds will go down which drives up the yield and therefore interest rates will increase.
The all-time low mortgage rates we’ve been enjoying have been the result of increased purchases of the MBS and the prices of those bonds has hit an all-time high. At some point, however, investors will be less inclined to accept the extremely low returns of the MBS and will want to make more money on their investments. The question now becomes, how long will it be before investors decide that their returns on the MBS are too low.
This past week, we may have hit that point. After reaching all time pricing highs the MBS have retreated and their prices have dropped through 2 important resistance levels – the 25 day and 50 day moving averages. While all of this sounds very technical (and in truth, it is) what we may be seeing is that investors in MBS plainly feel that the rates that they are getting by holding the MBS is just too low. (note how high the prices of the MBS were on Sept. 22, 2011 vs. the pullback to Oct 7, 2011)
If this sentiment continues, we could see the prices of MBS drop and rates increase even more.
What this graph illustrates is that we may be seeing the investors in MBS decide that rates are too low for their taste. Previously, they poured into the MBS market as a way to minimize their risk of losing money in the stock market. Now, they are looking at returns in the 3.5% range that they will have to earn on their money for the next 30 years. Most consumers wouldn’t buy a CD with that type of return for such a long period of time so it is no sruprise that bond investors would feel the same way.
Timing that change of sentiment could mean the difference between catching this wave of low rates or missing the opportunity altogether. If you are considering buying or refinancing a home, this may be one of the best times to do so. Take all factors into account when making such an important decision but don’t let the illusion of continued lower rates hold you back from taking advantage now. There will be many people who will look back at the history we are making with these low rates. They will see what they missed with complacency or inaction or they will be glad that they took advantage of the opportunity presented. Which will you be?