Mortgage Rates Report

The Fed cut yesterday and mortgage rates in San Diego went up.

GDP growth is the best it's been in 18 months.  Inflation,excluding the costs of food and a gallon of gas, is tame.  This suggests that the economy is growing regardless of what we are feeling with this housing slump in San Diego.

Wall Street still thinks rates will be cut further.  Confused?

A cheeseburger happy meal at Mc Donalds and a gallon of gas at Chevron are almost twice as expensive as they were in 2003.  Monthly housing expenses (including the higher mortgage payments) are some 50% higher than they were in 2003.  That may just be a measure of the staple goods but that is real money coming out of consumers' pockets- money that could be used to purchase cars, computers, etc.  Shouldn't the Federal Reserve be raising rates instead of cutting them?

Well...no.  I think that Ben Bernanke draws a parallel between the housing slump of 1927 and the Great Depression of the 1930's (thanks to the late Milton Friedman's works).  While Bernanke acted as if the housing slump didn't matter this summer, I think he always recognized that there is a real risk to widesperead asset deflation.  Fear of a deep recession will be the reason he pursues these measured rate cuts.

Of course, Wall Street always tries to second guess the Fed (which is dumb).  Expect continued buying in the mortgage bond sector in anticipation of yet another .25% rate cut.  This means that mortgage rates in San Diego will be lower in the future- but the descent will look more like a lightning bolt than a straight line. This leads me to beleieve that we can readjust our recommendation from lock all loans to cautiously float.  Here's the strategy for the next few weeks:

If you can get a mortgage rate of 6% or below, lock-in the rate.  If the rate is above 6.125%, cautiously float...for now.  If your close of escrow is within 10 days, lock the mortgage rate, regardless of what's happening.

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