Kansas City Real Estate Overland Park Homes

No recommendation until tomorrow.  All eyes are on the Federal Reserve Open Market Committee today.  At 2:15PM (EDT), 11:15 (PDT), they will release their interest rate decision and statement.  The fixed income securities market believe there is a 43% chance that the Fed will RAISE rates, to stifle inflation, in August and that there is a 61% chance that the hike will come in November.

The eyes will be on the Fed's commentary, though:

"We expect the Fed to keep the funds rate at 2% today but to shift to a more hawkish statement by placing more emphasis on inflation over growth risks," strategists at Credit Suisse wrote in a research report. "The Fed will likely use this meeting as an opportunity to set the stage for a potential rate rise in August."

If the Fed signals that rates could rise as early as August, expect mortgage rates to jump .25% higher, from today's 6.375% 30 year fixed rate, over the next few weeks.  If the Fed signals rate hikes are "possible" as a way to fight inflation, expect rates to stay level through in July (6.25% to 6.5%).  Finally, if the Fed shifts back to its anti-recessinary talk, we could see rates drop down to 6%.

As you can see, there are a lot of "ifs".  This is why today's Fed commentary is all important.  The Fed's ambiguity has traders convinced that higher rates are a foregone conclusion.  Here's the silver lining hidden in this dark cloud; mortgage rates are equal to what they were in July, 2007.  The Fed Funds rate was at 5.25%, then.  Today, the Fed funds rate is at 2.25%.  What that means is that mortgage rates SHOULD be able to withstand some 5-6 rate hikes and stay under 7%.

Alas, markets are discounting mechanisms.  We still think there is a lot of risk to higher mortgage rates until the commodities bubble bursts.

I'm locking mortgage rates at application for all loan types, regardless of closing date.  I've been recommending locks for three weeks.  Rates improved about .375% so I was incorrect.  Why then, should you heed my advice now?  Let's look at this chart:

This chart is pricing for the last 30 days for mortgage-backed securities.  When MBS prices go up, mortgage rates come down.  In this case, I noticed a meteoric rise in MBS prices in the last week in April (off a low of 99.5).  I called for clients to lock on May 2, 2008, when the 30 year fixed rate mortgage was at 5.875%.  Today, it has improved to 5.875%

MBS prices improved to 100.75, then retreated to 99.75.  I was locking as prices improved to 100.75 again (rates lowered).  They closed down today at 100.62.  If they retreat below 99.75, we could see a 6.0% 30 year fixed rate mortgage.

Lock all loans.  I'm more about not losing money rather than making money when I analyze execution.  I think the risk of higher rates, in the next few weeks, is greater than any chance of lower rates.