We have experienced a whole season of ultra-low mortgage rates.  Borrower’s who qualify, who own or are purchasing a property that qualifies have been able to cement sub-5% interest rates for up to 30-years. 

Why are rates so low?  First, we are in a recession.  Real unemployment is over 16%.  Regrettably, there is nothing on the horizon to dispel consumer jitters about their jobs or the future so the typical paths to recovery, housing and consumer spending offer no relief.

Second; inflation is not a fear, deflation is the fear, most notably in the housing market.  These two factors alone are enough to foster a low mortgage rate environment as long as energy prices remain in check.

There is a third factor at play.  The Federal Reserve and the Treasury have been plowing through the issues of mortgage backed securities.  According to the Mortgage Bankers Association, the Federal Reserve purchased almost 80% of available product in August.  The Treasury stepped in for another 9%.   You don’t need a Nobel Peace Prize in economics to imagine where rates would  be if the combined total of the two were less than 50% of the available product.  According to Jay Brinkman, Chief Economist for the MBA the government might be overpaying for mortgage backed securities (the higher the price, the lower the rate) and they are keeping the usual investors on the sidelines.

When will this end?  The conventional wisdom is the Federal Reserve plans to wean themselves off buying mortgage backed securities this Spring.  If the above analysis is right, expect rates to rise this Spring, just in time to throw cold water on the buying season.  And if the economy shows any signs of recovery or if energy prices rise (i.e. inflation) expect rates to leap high enough to punch housing in the stomach, getting us shovel-ready for stagflation.

My advice, buy now, pray later.

Note: today was a typical day for the bottom seekers.  Rates blipped up a tad and many have regrets.  “You should have locked yesterday.”