Why are mortgage rates still low?
What factors impact the mortgage rates? Why are they still low, even after the short-term interest rates increased quite a bit & after the sub-prime market starting to explode?
Increase in mortage rates might be the last nail in the coffin?
Increase in mortage rates might be the last nail in the coffin?
Comments
Wonder if this will lead to a raise of the short-term (& mortgage) interest rates.
It's quite simple: mortgage rates are still low because there is still a lot of demand from investors who think mortgages are the best place to park their money right now. If investors felt the risk was too high (i.e. that there would be a substantial increase in foreclosures), or that there were other investments with a better risk/yield potential, they would be putting their money there instead. Like it or not, the fact is that many investors still feel that mortgages are one of the best assets around.
Investors may have soured on SOME sub-prime loan types, but so far they haven't lost an appetite for most other mortgages.
It is a mis-conception that central bank interest rate policies have a direct correlation on mortgage rates. Just plot the Fed rates against mortgage rates over the last 10 years and you will see that the two don't move in sync. Like I said, it's all about what demand investors have for mortgages.
True, there are a lot of factors that come into play with investor demand. One key factor has been the very low Japanese central bank interest rates, which has made it attractive to borrow money cheaply in Japan, and then buy higher yielding assets in the US (like mortgages).
Can individual investors invest in the mortgage market? If so, how does one do it? (Not that I want to invest, but I'm just curious).
I don't think so. Most of the investments in mortgages are done by institutions (e.g. mutual funds, hedge funds, central banks, etc).
As investors become more cautious adverse they will demand MUCH higher premiums for higher risks. I think all the debate about whether low mortgage rates will give another breath of air to the market is simplistic. If low rates are offered only to a handful of the best quality customers, then they don't really goose the market all that much.
Isn't this the case even now? Isn't a "0% down" mortgage rate more expensive than a "20% down" mortgage rate?
and yes, they do charge more for higher risk loans, based on FICO, LTV, etc - however, in the past few years the risk premiums have shrunk considerably, as the bankers got all cocky about thinking they had figured out how to minimize risk through strips and collateralization.
Now that they are getting all these defaults, the yields buyers are expecting on higher risk loans have skyrocketed, where they used to get 95 cents on the dollar - they are now getting bids of 60 or 70. That is why subprime lending has dried up
Yes, riskier loans have higher interest rates today. However, I suspect that the spread will widen much more than it is already before the market hits bottom. As was mentioned earlier, the premium required for risky loans is at an all time low right now.