Rising Interest Rates - Locking Strategy

i hear the same info from my Wells Fargo guy...Mortgage bonds sold off big time as treasuries did. Not sure if this is a simple normalizing of a world with less cb intervention, as rates would prob be in this area anyway and never got that low to begin with. Its all relative though. relative to 6 weeks ago, it sucks. relative to a few years ago, its flat. relative to 3-5 years ago, its 150-200 bps lower. Bigger picture, hard to complain with a 30yr fixed at 4.8%. Perhaps the fed wants to rattle markets, shake things up and get us used to a future world without fed liquidity/QE programs in place.

Urban, When treasuries and tba's move that quickly it scares the originators a little because they are not sure at what level fannie mae committments will come in at so they back off. Once they know the new spreads the offered mortgage rates will come down a little. This is just typical over-reaction, but understandable. The originators do not want to get stuck with mortgages they can't sell to the GSE's.

ps -- unless equities selloff bigtime and money starts to go back into treasuries as a safe haven, I think this quick n fierce adjustment is here to stay. My wells guy thinks this pop was too much/too fast, and as u mention should pull in a bit. This is a fair gamble I think, say back down to 4.4%-4.6%, but barring a fierce equity selloff, I think the days of 3.5% 30yr fixed are gone. I think the new normal will be around 4.5%. The fed will be fine with that as the fed knows they really only have most control over the short end of the curve. And I think the fed wants to wean markets and sentiment off massive liquidity programs. But, if the longer end really slips away and both bonds selloff + an equity selloff continue (like they have recently), i can see the fed making a policy adjustment to keep rates close to the mid/upper 4s for 30yr fixed. Higher rates over longer term as banks recapitalize and the economy recovers are fine, just nothing too much too quick, which is why we r discussing this again.

This is just fun to talk out loud, curious to what others think.

One strategy is to lock in an ARM first to cover your downside. And if rates go down you can switch to a 30 year fixed then. Wells doesn't penalize you for program switch. I would expect a dip but I don't think the 3.5% is coming back.

it scares me too River. especially when credit markets start to jiggle a bit. this could have gotten much worse if china didnt address their short term funding situation; time will tell if it sticks. i think that is the main driver recently, with the fierce selloff in treasuries a close 2nd. deleveraging is back with commodities too. look at gold, damn. That drop could be consistent with a positive change in monetary policy, a good thing actually. One of the reasons gold rises is when trust in the system, in fiat currencies, in a paper derived world, fades - usually cb related. Therefore, a reason it falls is when confidence in those same items rises. I am fine with lower gold, even though I own some in my IRA as a hedge. Tough to know if this selloff is related to that, or to general deleveraging amidst this recent selloff in equities and bonds at the same time.

http://globaleconomicanalysis.blogspot.com/2013/06/china-acts-to-calm-markets-stock-market.html

Bottom line. equities follow credit. credit jiggled, could have jiglled more...for now, it seems intervention may allow the party to go on a bit more. Until the next time.

Urban,
I think the credit markets are playing a game of chicken with the Fed, and I believe if the markets move too quickly too fast, the Fed comes in and buys treasuries , enters into swaps, etc and moderates things a little.
On the other side, saw some welcome levels in the tax free market today, which I took advantage of. Nice to see higher yields after the meager returns offered earlier this year.
I'm not sure about Gold continuing to go down. In the physical market there is still good demand and the JP Morgan shortage of the physical metal to make good on delivery has been well reported.
As far as the back-up, in the credit markets, its complicated. In the cmo market participants are suddenly rediscovering convexity risk. No one wants a support bond backed by discount 3.5%-4% pass-thrus.

an urban, i agree its interesting to talk about.

These comments are very helpful. Of course, no one has a crystal ball but in the next couple of days it will be interesting to see if there's any more volatility - up or down - in mortgage rates. I'm interested in strategy options, similar to what ggman suggests, because on a personal note I just (finally) signed a contract to buy (and soon I really will be a "former renter") - and this couldn't come at a worse time for me. I budgeted everything at a 30 year rate of 3.75% last week and right now I'm trying to choose a bank. I'm not sure which one to choose; while the rates have tended to be very similar, I wonder if one would be better than another while rates in the short term are so volatile. Any advice? And the second question is, lock immediately or cross my fingers and float?

>And the second question is, lock immediately or cross my fingers and float?

Definitely gamble. It's only your home.

Yes gamble, and if the payment becomes too high don't pay it and blame someone else.. The bank, Wall Street, someone, bcs it won't be your fault.

Agree with greensdale. Why would you gamble on your home.....
If you don't like my original strategy ...Find 2 banks you like. Apply with both. Lock with one of them and float the other one.

So far, the advice that I've been given - to put in my mortgage application and not lock immediately - hasn't been seen as a gamble. With rates at 4.8% right now resulting from such an abrupt spike, the prevailing wisdom is that it won't go higher but will recede a little before landing at the "new normal." It's been very stressful in the past few days to watch this, as I'm still waiting for a countersigned contract. But my reason for this post is to see if anyone had some good alternative strategies, especially the locking and floating suggestion, which I think would only set me back $750 or so for a second application fee. But I think that mortgage rates crossing the 5% threshold in the next few days seems so unlikely, that it doesn't feel like a gamble. But, again, I do like the 2 application option, as well as the ARM with the ability to switch to a 30 year. I wonder if anyone else has additional thoughts - or a suggestion of which bank to go with. I'm leaning towards Wells Fargo. Hadn't even considered using a mortgage broker, but does using a mortgage broker now become a smarter way to go in an uncertain market? Many thanks.

> the prevailing wisdom is that it won't go higher but will recede a little before landing at the "new normal.

Did you find the prevailing wisdom in your crystal ball?

> It's been very stressful in the past few days to watch this

Hey what's a little more stress?

> that it doesn't feel like a gamble.

Are you sure you are ready to buy?

Former Renter, stop worrying. The situation is a pretty much out of your control, or in the words of David Mamet, "Worry is like interest paid in advance on a debt that never comes due"

Riversider, that might be very true, but the reality is that I have a few days to make a choice and a few options available for me to weigh. In this sort of situation, I think that the smart thing to do is to consider the different options and pick one, fully aware of the potential risks and rewards of each. Sure, I have no control over interest rates and where they're heading in the next few days, but devising a strategy that might include a hedge seems to have little downside.

did the same thing, and outsmarted myself. wound up with a slightly higher rate than i would have otherwise at the time. fortunately i was able to rectify it in a big way over the next two years.

You need to look at the spread between 30-year Treasuries and your mortgage quote over time to have any educated guess. This 'prevailing wisdom' stuff is no better than 50/50 over the short-term.

I have not seen it but since the long bond has only moved out 70 bps, then maybe the jump is too high in the mortgage rate. But I would determine if the spread at the trough in Treasury rates (3.5 vs 2.9- 60 bps?) was too thin to begin with.

cnbc says people are rushing to arms..

http://www.cnbc.com/id/100845777

That's smart take our an ARM to reduce your monthly payment now when rates are at historic lows then refinance to a fixed rate when rates rise.

This sucks. Sorry for you former. I think fed is troubled by the over-reaction and statements are trying to calm. Last thing they want is to kill the housing growth. I suspect things will go down a bit in coming days/weeks? Truly sucks. Sincere sympathies.

>> I budgeted everything at a 30 year rate of 3.75% last week and right now I'm trying to choose a bank.

>> It's been very stressful in the past few days to watch this, as I'm still waiting for a countersigned contract.

So here's another option. Not saying you should do it or not, but it's an option.

You say you budgeted for 3.75%, and presumably your offer price reflected that. Between that time and now, rates are up a percent. You thought your cost to carry was 3.75% plus (say) 3.25% for CCs + tax + upkeep + amortized transaction costs. Your bid was based on budgeting a carry of 7% (or whatever), now you're looking at a carry of 8%.

Given that you don't have a signed contract, why should you be willing to pay the same price you were willing to pay before? Until there's an executed contract that would enable you to fix a financing rate, why should you be taking on a piece of the risk that belongs in the hands of the seller?

Presumably if the rate had moved from 3.75% to 8.75%, you would walk away from your offer. Likewise, if you had placed an offer with interest rates at 8.75% and rates dropped to 3.75%, causing some other buyer to place a larger bid, the seller won't stay beholden to your offer.

Maybe with an ordinary move in interest rates, say a 0.1% move that bumps your cost of carry from 7% to 7.1%, you let it be. But when it bumps from 7% to 8%, that's a cost of carry that is 14% higher than you thought it would be. Shouldn't that make you reconsider your offer?

Thanks, Ottawa. Appreciate it. I know that I should be grateful that rates are still "historically low," as every article and talking head has been saying. But I finally get an accepted offer which I made after some serious number crunching and, of course, out of nowhere comes this significant jump. I know that things could be much worse, but it's just unfortunate timing.

>> I'm also hearing that there is likely to be a pullback in the rates because this sudden spike is now threatening the housing market's recovery.

What a novel idea! No one in the market has thought of that possibility, so it's probably not already reflected in the rates you are now seeing. You should tell the mortgage broker who told you that to quit their day job and trade Treasuries & MBS instead. Lord know we could use a person who can reliably predict the movements of a market that trades tens to hundreds of billion a day.

Can your friend predict the stock market as well? We could use that too.

I'm just trying to say that you need to look at short-term predictions of rate movements for what they are: a 50/50-ish gamble.

Inonada, I hear what you're saying, but it's an apartment that I want and in the grand scheme of things if I back out, I'm likely to be paying a higher interest down the road anyway. So I don't want to be penny wise and pound foolish. And it's not possible to renegotiate, as there's a line up of others just waiting to scoop up this apartment if my deal falls apart. Nothing like buying an apartment in Manhattan with so little "good product" inventory. In a buyer's market you're suggestion would work, but not at the moment.

You seem to acknowledge that the interest rate should affect the price you are willing to pay, but you are still willing to pay the same price as before. I think this means that last week, your price (that beat out all the others lined up) was appreciably lower than the price you would've come up to if push came to shove.

If that's the case, then that sucks. Last week, the underbidding by the others allowed you to pick up the apt at a price that was appreciably below what you considered its fair value. This week, you must pay the full fair value. Tough cookies, I guess: you won't be getting the "deal" you thought you were going to get.

Actually, even last week I was paying a "premium" in the sense that we're now above even the pre-Lehman prices. I've sucked it up, realizing that I missed the window during which there were relative "bargains" to be found. But I've accepted that the Manhattan market is a special market, and that although I'm not happy paying what I"m paying, I need a place to live, I love this place and, at the end of the day, it will be a good investment. However, although the additional carrying costs are of course a little upsetting, I'm trying to be practical about it. This is just another example that you can't time the market - the housing market, the stock market, any market. And it's all about risk assessment. So I'm not willing to back out of a deal that this week is not as good as it was last week because I predict that six months from now I'll be even more priced out of the market. Given that I've decided to stick with this deal though, I'm just trying to strategize how I can best hedge as I apply for my mortgage.

The long line of others waiting to scoop up the apartment don't pay attention to interest rates?
Don't kid yourself they won't be higher in price.

You can time the market. You just failed to do so.

Stop posting on multiple threads on the same issue.

You are looking for people to justify what you have done and no one will do that.

Just go hide in a hole for a week and the anxiety will go away.

Was able to pull up the graphs- 30-year fixed vs 5/1 ARM. Looks like the spread widened to 140 bps in May when the long bond blew out but since then the ARM rates have been playing catch-up and it's back to near 100.

Both mortgage indexes are in the middle of their 3-year range against the respective Treasury yields- spread has widened in the last month, going from a great deal for a new borrower to an average one.

The ten year treasury vs mortgage is a laymen's rule of thumb but not really correct, more to do with swaps, committment rates and tba's all of which have published pricing. The ten year is jus easier to find.

>>Given that you don't have a signed contract, why should you be willing to pay the same price you were willing to pay before? Until there's an executed contract that would enable you to fix a financing rate, why should you be taking on a piece of the risk that belongs in the hands of the seller?<<

How does any of the risk belong in the hands of the seller? Of course the buyer can renegotiate the deal until contracts are signed. But that would likely just cause the deal to die. As a seller, I would absolutely NOT entertain 11th hour price negotiations based on increased mortgage rates, especially not in the relatively 'hot' market we are now experiencing. I'd tell 'em to pound sand. That's just me of course.

Keep in mind that maintenance charges will rise, and assessments may come up so even with a steady mortgage rate you can still be certain the percentage you're paying to carry today will not last. If an extra point becomes a major burden then it is time to rethink the budget.

Bramstar, I completely agree. If I tried to renegotiate, the deal would die; there was tremendous interest and I have no reason to doubt that there are very good back up offers. I still want this deal, so I just have to assume the higher payments. My purpose in starting this discussion was to try to educate myself about how best to minimize the risk. For those who have advised that not locking in immediately is a gamble, let's face it, all of the decisions to be made are risk assessments. For example, if I lock too quickly, then there's pressure to close before the 60 or 90 days - and it's now summertime, so delays should be expected. If I want 90 days, that affects the rate (as most banks offer 60). That's the reality in a market that's still "hot." This is, after all, Manhattan - and even though it's diappointing to me that 3.5% is gone, moving up a point is not bringing Manhattan's real estate market to a screeching halt the way that it might do to a weak housing market. So it would be unrealistic in my view that the seller of an apartment that went to "best and final" in under a week would do anything other than tell me to take a hike if I tried to renegotiate. Perhaps if rates had jumped to 8% in a week (but, thankfully, that's not the case, or we'd all have much more to worry about the state of the economy).

Again why start this thread?

If you would not qualify for a loan if rates go up to 8% then you are really dumb for not locking now.

Stop responding to this thread.

Give the guy a break- he is buying in the middle of a bidding war on a big spike in city prices and now with rates torpedoing his budget. You might have some insecurities too if you were in his situation, not that you would be.

FR, make sure you get the interest back on your security deposit: every fraction of a penny counts when you are stretched: http://streeteasy.com/nyc/talk/discussion/35686-just-noticed-this-interest-on-security-deposit

Actually I've been reading that these higher rates have been a boast to the market.

If some buyer told me to reduce my price because his interest rate went up, I would reject this,; not in this market.

Boost

>Actually I've been reading that these higher rates have been a boast to the market.

Right. Because buyers are thinking this is their last shot at low rates before they go up more. These are the same buyers who started looking because they though prices would be going up because of all of the activity. I predict 6 months more of above average activity and then a slowdown in volume and then a decline in prices.

Unless they build another Eataly

Crescent, it has been quite stressful - and I appreciate your support. Everyone is free to comment in these discussions - and as to the comments that I find to be just plain silly or obnoxious, I'm just as free to ignore. Of course, I'm always optimistic that these discussions won't devolve into such banter, despite the fact that they often do. But this has been a very helpful discussion, so I thank all of the well-intentioned and well-informed folks who've contributed thus far.

>I'm just as free to ignore.

Oh no!

@FormerRenter - in case you haven't seen this:
http://www.nytimes.com/2013/06/28/business/economy/fed-has-not-changed-commitments-official-says.html?hp

>> This is just another example that you can't time the market - the housing market, the stock market, any market.

OK, so you're saying you cannot time the market. Fine.

>> So I'm not willing to back out of a deal that this week is not as good as it was last week because I predict that six months from now I'll be even more priced out of the market.

Wait a second. Now you are saying you know where the housing market is heading. Didn't you just say you can't time the market?

>> But I think that mortgage rates crossing the 5% threshold in the next few days seems so unlikely, that it doesn't feel like a gamble.

That sounds like you are predicting the bond market.

>> I'm likely to be paying a higher interest down the road anyway.

And again you're timing the bond market.

Maybe you can predict markets, maybe you can't. But it seems to me that your opinion on the matter varies depending on whether it matches vs goes against what you want to do.

>> How does any of the risk belong in the hands of the seller? Of course the buyer can renegotiate the deal until contracts are signed. But that would likely just cause the deal to die.

Bramstar, both you and FR speak in terms of having to consummate the deal. Your "negotiating" position is an empty bluff, because you think the deal must be consummated.

Now I'm a simple guy. I made my money the old-fashioned way, I earned it. When I spend my money, I make sure I am getting value: for the sake of the inonada of years past, for the sake of all the people working hard to put a buck on the table.

If FR and/or you had a sense of value for the apt, you'd question whether continuing with the purchase still made sense for _you_ given alternatives. Instead, your focus is on the perceived inevitable (purchasing apt) and the viewpoint of others (seller won't negotiate, other buyers are lined up). It's as if the idea that FR may not want the apt at the higher cost structure is even on the radar.

FR, in any case I suggest you simply gamble on the rate as that will probably make you happiest. If it goes in your favor, you'll think you're a genius, which will make you feel great. If it goes against you, you seem like you'll just shrug and think there isn't much choice. You'll forget about it soon enough.

http://www.usatoday.com/story/money/business/2013/06/27/june-mortgage-rates-rise/2464883/