Mortgage Rates at Historical Lows

By Danny Riley

The last time I saw my mortgage rate nearing 3% was when my floating ARM went from a high of 6% down to 3%. After the ARM moved back up I locked into a fixed 30-year jumbo at 5.5%. I thought I had done a good job. All in all, I have done well with mortgage rates over the years, but I have yet to lock at the current lower rate. As of today most mortgage rates are 3.25% to 3.5% and are still going down. In normal times a loan on a house under 5% was considered a great rate, but that’s not where rates are today or where they are going.

Interest rates tend to get better in times of bad news. As investors sell stocks they move into bonds and rates begin to fall. When the stock market falls sharply and bonds go up it is called a “flight to quality,” or it used to be called that. When the credit crisis pounded the stock market in 2007 into 2010 and some of Wall Street’s big firms went out of business, the stock market seized. Most people’s retirement and stock investment accounts were down over 50% of their value. As uncertainty took over and the Eurozone continued to unravel, quantitative easing programs in the United States helped push interest rates down to zero. Bad times and uncertainty are good for mortgage rates.

As you recall, there was a lot of overinvestment in buying and selling homes in the ’90s. Everyone was rushing to buy pre-construction properties, condos and homes to flip them. Many people said openly that they thought it was getting hard to flip the properties, but they kept buying. Some people just owned a condo while some developers were stuck with hundreds of properties. We knew a guy in Florida who owned a subdivision with over 150 homes. He sold it for less than 40% of its original price, and today that would be considered a steal. Yesterday sales of new U.S. homes jumped near a two-year high. Record low borrowing costs are pushing buyers back into the housing market. After taking a beating over the last several years, homebuilders like Toll Bros. Inc. (TOL), Lennar Corp. (LEN) and KB Homes (KBH) have all seen a big pickup in new home orders. They say the homebuilding business is starting to get back to normal — a good thing for the housing market and the economic recovery.

So how low are rates? The average rate on a 30-year fixed mortgage dropped to 3.49% in the week ended Sept. 20, matching a reading two months ago as the lowest in records dating to 1972, according to Freddie Mac. The Fed has committed to purchasing $40 billion of mortgage debt a month to lower borrowing costs to help the housing market. After the central bank announced the debt-buying plans on Sept. 16, Bernanke said, “Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.” Unlike the mad rush to buy and “flip” homes and condos in the late ’90s, a lot has changed. Despite existing home sales hitting a two-year high, it is going to take a lot longer to see a full recovery.

One of my best trades ever was when I bought my home 18 years ago in downtown Chicago. Yes, we avoided several economic downturns, but the timing of the purchase and the low interest rate made it not just a great place to live but also an investment. The current economic downturn has created record debt and changed the investment environment, but it has also made for some good investment opportunities. With rates at historic lows and some great investment property readily available, it’s hard to overlook the opportunity.

Anyone know about any good property in Boca?

MrTopStep Closing Print Video: http://www.youtube.com/watch?v=oa2Nw3yhmxg

Our view:
There are a lot of earnings and economic reports to get past this morning. We still maintain that the S&P is going higher. As we have pointed out, the current S&P price action is to sell off  in the first part of the week and then rally Thursday into Friday. After a selloff and rally yesterday the SPZ sold off again late in day and it is up this morning on a possible China rate reduction. Our view is we are going to see big two-way flow over the next two days as the big investment firms mark up the winners and sell the losers as we head into the final two trading days of the third quarter. We also do not want to forget that the last trading day of September has been down 10 out of the last 14 occasions and Monday, the first trading day of October, has been down 4 out of the last 6 with a 2.1% loss in 2009. Our view is that you can play both sides but we lean to buying weakness. As always, keep an eye on the 10-handle rule and please use stops.

• It’s 6:00 a.m. and the ESZ is up 6.57 handles at 1433.75, crude is  is up 28 cents at 90.32 and the EC is trading 1.2880, up 9 ticks.
• In Asia 9 out of 11 markets closed higher (Shanghai Comp. +2.60%, Hang Seng +1.14%)
• In Europe 9 out of 12 markets are trading higher (CAC +0.82%, DAX +0.55%)
• Today’s headline: “World Stocks Rise Amid China Easing Hopes.”
• Economic calendar: Today: Durable goods orders, GDP, jobless claims, pending home sales, 7-yr note auction, farm prices; earnings from Discover Financial, Nike, Accenture, Research in Motion, Micron. FRIDAY: Personal income & outlays, Chicago PMI, consumer sentiment; earnings from Walgreens

• VOLUME: 1.77mil ESZ and 10.8k SPZ traded
• SPREADS: 60 SPU/Z spreads traded
• FAIR VALUE: S&P +6.00, NASDAQ +10.00