Mortgage Rates in Limbo. Waiting on Quantitative Easing

Last Thursday I posed the question: Are We Too Complacent with Record Low Mortgage Rates?

On the surface my intention behind this query was to draw your attention to a trading environment that was exerting unfriendly pressures on mortgage rates. I viewed these "technical trading pressures" as short term in nature and saw no legitimate reason to believe mortgage rates had seen the last of their lifetime lows. This was based on the assumption that the Fed would announce a "Quantitative Easing" program which would push short-term and long-term interest rates lower (increasing the opportunity cost of saving and lowering government financing costs).

My gut just won't let me get comfortable with that outlook though. Exploring alternative outcomes is the only way I'll be able to sleep at night. 

Let's start by sorting out the BIG PICTURE first....

The Fed has a tough problem. 14.7 million Americans are classified as unemployed by the Bureau of Labor Statistics.  6.1 million of those folks have been unemployed for longer than 27 weeks.  When you account for discouraged workers, people who are capable of working but choose not to look for a job, and the Fed is up against a 17.1% unemployment rate. (SEE TABLE A-16).  Picture yourself driving up hill in a Ford Festiva with a load of bricks tied to your bumper. Think of the labor market as the bag of bricks and your car as our economic engine  (consumer spending). The top of the mountain is a sustained economic recovery. Well....the bag of bricks had babies and now those babies are birthing their own babies.

Consumer spending has suffered greatly right along with the labor market.  Goods producers were forced to cut costs and lower prices to maintain profitability. Some producers were unable to cut costs without going out of business, jobs were lost in either scenario. This led to less consumer spending which forced goods producers to cut costs again which led to more job cuts which led to less consumer spending which forced producers to cut costs again which of course meant more job losses which led to another reduction in consumer spending...and the downward spiral suddenly looks possible.

Plain and Simple:  The main channel used to distribute wealth across America has been blocked. America's growth engines have stalled and we're starting to roll down the hill, backwards. The Fed is looking to avoid a downward spiral. 

In order to avoid this downward spiral, the Fed must find a way to better distribute wealth across America. Fed leaders have made a clear case for more "Quantitative Easing" as a potential solution.

Quantitative Easing won't accomplish this goal directly, only the ripple effects of Federal Reserve Quantitative Easing are capable of leading to sustained job creation. This is the reason mortgage rates touched new record lows in the week before last. But the Fed hasn't confirmed its plans yet and no specific timeline on when to expect Quantitative Easing has been offered. Ben hasn't communicated what policy approach the FOMC feels will be most effective either. We don't know if the Fed is totally playing us here or not. That's really why I posed the question: Are We Too Complacent with Record Low Mortgage Rates?

Until they Fed offers some sort of new information on Quantitative Easing, mortgage rates will be at the mercy of the above discussed "technical trading pressures".READ MORE ABOUT THESE TECHNICAL TRADING PRESSURES

Luckily there are plenty of opportunities for the Fed to influence mortgage rates in a consumer friendly manner during the week ahead. READ MORE: THE ECON AND EVENTS CALENDAR FOR THE WEEK AHEAD.

If no new details are shared by Fed officials, consumer borrowing costs will remain in limbo and the risk of floating in the short term will be high. Tomorrow I go deeper into the reasons for my insecurities surrounding record low mortgage rates.

The best par 30 year fixed mortgage rates remain in the 4.000% to 4.250% range for well-qualified consumers. 3.75% is gone, 3.875% is very hard to find, 4.00% is available but the points/buydown structure is not homeowner friendly, and 4.125% is really where it's at for a perfect borrower. 

Mortgage Rate Disclaimer:  Loan originators will only be able to offer these rates to borrowers who have perfect credit profiles and enough equity in their home to qualify for a refinance. If the terms of your loan trigger any risk-based loan level pricing adjustments (LLPAs), your rate quote will be higher. If you do not fall into the "perfect borrower" category, make sure you ask your loan originator for an explanation of the characteristics that make your loan a riskier investment. (investment properties and second homes are a riskier investment )

On quantitative surveillance...