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The Quick and Expected Climb to 6% Mortgage Rates

December 28, 2009 by Marco Santarelli

Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009.  For the past two months I've been warning that this will eventually happen.  It's not because the economy is recovering; it isn't recovering.  The reason mortgage rates will rise to 6% or above, sooner rather than later is because that is the "natural" market.

About a year ago, the Federal Reserve announced a $1.25 Trillion mortgage rates subsidy, by purchasing mortgage-backed securities in the open market, through March, 2010.  Right before the subsidy was announced, mortgage rates were at or above 6%.  The subsidy was referred to as Bernanke's "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.

One year and 12 months into the 15-month game, we're at $1.07 Trillion spent on this open market MBS purchase program.  This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right?  After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.

Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be.  The Fed is just about out of bullets and MBS traders know it.  Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar Realtor, on the beach this summer.

I had my daughter (Maggie) get me ten cups of water from the ocean.  Then I drew six lines in the sand, equidistant from each other, and labeled them 6% (on the right) through 4.5% (on the left). I had Maggie stand at 6% and explained that this represented Dec, 2008 mortgage rates.  I announced that my intention was to throw water at her until she moved to the left, away from 6% and towards 4.5%.  I grabbed two cups and threw one at her, then at the line marked 5.5%; Maggie quickly darted to the left.

Then, I threw a cup at her every time she inched to the right.  I explained that Maggie was acting EXACTLY like the MBS traders, naturally gravitating towards the "natural" market.  Each time I chucked a cup full of "stimulus", Maggie moved back under 5% and closer to 4.5%.  Once, she got real daring (like the MBS market this past summer) and I threw three cups at her.

At the beginning of December, The Fed had two cups of water.  Now, they only have 1.5 cups of stimulus left.

Maggie, knowing that I only had 1-2 cups left, knew she could afford to get a bit wet in her dart towards 6%.  She faked me by jumping like Rickey Henderson dances off first base; I threw a half cup of water at her.  Then, she defiantly and purposefully walked towards 6%, knowing full well that I would throw my last cup of water at her.

Maggie knew she might get a bit wet but that I was utterly and completely out of water.  She got sprinkled but was safely standing at 6% and I was as bone dry as the Sonoran desert in July.

That's what I think is happening today.  The MBS traders are purposefully selling mortgage-backed securities, knowing that the Fed will buy every last bond they offer until they are "bone dry".  Everybody is running towards the finish line (6%) now and they don't care how wet they get along the way.

Mortgage rates are headed to 6% and it probably won't take until March, 2010 for them to get there.

Filed Under: Financing, Real Estate Investing Tagged With: Financing, mortgage rates, Real Estate Investing

About Marco Santarelli

Marco Santarelli is an investor, author, Inc. 5000 entrepreneur, and the founder of Norada Real Estate Investments – a nationwide provider of turnkey cash-flow investment property.  His mission is to help 1 million people create wealth and passive income and put them on the path to financial freedom with real estate.  He’s also the host of the top-rated podcast – Passive Real Estate Investing.

Comments

  1. Tom Jones says

    January 6, 2010 at 10:45 am

    Where are the 20 tips for staying positive?

  2. David Castro says

    January 6, 2010 at 11:17 am

    So Where are the 20 Tips?

  3. Jim Fridas says

    January 6, 2010 at 5:40 pm

    I do not think this is going to work for the banks or the mortgage lenders, after January 2010 the foreclosures will escalate, the banks have what is referred to as the “Phantom Inventory”, they created this word, that will need to be sold before that banks can recoup their money or sink deeper into the pit they created and can doom them so it does not look that good for an increase the rate at that time.

  4. Marco Santarelli says

    January 10, 2010 at 9:33 pm

    I apologize to those of you who landed on this page looking for our article, “20 Tips for a Positive New Year”, after clicking on the link in our newsletter. It appears that the link was accidentally pointed here in error.

    Although you will find the article on our blog, here is the link for your convenience: 20 Tips for a Positive New Year

    Thank you!

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