Rick gives another compelling arguement as to why rates will continue to go down even if the Fed don't do any more rate cuts.  Give us Hope Rick - Give us Hope!

The Chance of a Lifetime

What do you think your business would be like if 30-year fixed rate mortgages fell to 4.5%?  
Would your phone be ringing off the hook?  Would listings come pouring in and buyers be
lining up to over-bid?

You know the answer better than I do, but I know something about mortgages.

And I’m here to tell you that this is very likely to happen.  In fact, I’m 100% convinced that
mortgage rates will be below 5% at some point during this year?

Why?

The answer is a concept that applies to much of life, a term that statisticians call Reversion to
the Mean.

If you remember high school math, the Mean is just another word for the average.  So
Reversion to the Mean just means that things return to the way they’ve been in the past.

I don’t know how many of you are baseball fans, but let me use that sport to give you an
example.  Let’s say a baseball player averages 23 home runs a year for the first seven years of
his career.  Suddenly, he hits 47 home runs in his 8th year.

Reversion to the Mean theory states that his 8th year was probably an aberration that won’t be
repeated, that he will probably return to his statistical average of hitting somewhere around
23 home runs.

Another way of looking at it is that flukes do happen, but they’re just flukes and not a whole
new level of performance.

So what the heck does this have to do with a 4.5% mortgage rate?

The answer is that there has been a statistical relationship between the rate on 10-year
treasury bonds and mortgage rates that has been remarkably consistent for decades.

Going back to the 1970’s, and probably earlier, pricing on mortgage rates has consistently
been 1.0 to 1.5% over 10-year treasuries.

As I sit here writing this, mortgage rates are 2.25% higher than 10-year treasury rates, and
they were actually 2.75% higher last summer.

Trust me, my friends, this is not some new way that the capital markets are pricing
mortgages. It is the ultimate fluke, a result of everything awful you’ve read in the business
headlines the past 7-8 months.

The capital markets have been going through very difficult times, and the so-called Mortgage
Meltdown has thrown everything into a temporary state of confusion.

But we always return to old patterns of behavior, and things always revert to the mean.

Quite simply, the 10-year treasury is at 3.5% today.  So if we add the historical spread of say
1.25, it means that mortgage rates should be 4.75%. 

Aside from Reversion to the Mean, Congress has loosened the rules that govern Fannie Mae
and Freddie Mac.  They authorized the two entities to increase mortgage purchases.
Secondly, the Federal Reserve has begun buying mortgage backed securities.  They typically
limit their buying and selling of securities to bonds issued by the U.S. government, but their
move into mortgage securities should also bring more liquidity to the mortgage markets, and
it should also drive rates somewhat lower.
The Fed will buy up to $200 billion in mortgage securities while the Home Loan Bank will
make available another $100 billion. That’s a whole bunch of liquidity coming into the
market, and it can only help drive mortgage rates lower.

Only you know what impact this will have on your real estate business. 

But it can only be for the better, I recommend that you be prepared for it. 

This could be the chance of a lifetime.

Things Revert to the Mean, and we will have rates below 5.0%.

Rick Soukoulis
Chairman & CEO
Intero Mortgage