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May 21, 1999
Mortgage rates are about the same as last Friday, and the lowest fee packages are still available near 7.375%. There was a pop to 7.50% when the Fed announced a "bias to raise", but bonds have relaxed since, and should have. These bias announcements are thus far completely useless as a guide to future Fed action, as follows. In May, 1997 the Fed flipped from "neutral" to bias-to-raise, didn't raise, and flopped back to neutral in December; then flipped to raise bias in March, 1998 (didn't, again), and flopped to neutral in August. Next a flip to "cut" bias in September -- evidently so, as the Fed cut rates in the next sentence on the same day, and cut twice more before flopping to neutral in December. I don't care what gear Mr. Greenspan happens to be in when he broadsides me in an intersection: nothing counts but the collision. Besides, the market has already done a good deal of raising for the Fed: February 5 Today Change
Fed Funds 4.75% 4.75% --
90-day T-bills 4.48 4.58 +.10
1-year T-bills 4.61 4.86 +.25
10-year T-notes 4.91 5.61 +.70
30-year T-bonds 5.36 5.83 +.47
If the next inflation reports substantiate last Friday's .4% rise in the core rate of inflation, the Fed will drop this bias stuff and do something. Locking at these levels for June/July closings is an insurance policy against a big upside surprise. Such a surprise is still a small likelihood, but at that a larger chance than any time in five years. If this inflation-and-Fed scare turns out to be just that -- a passing scare -- you'll not have missed much on the downside in the next few weeks. I'd a hell of a lot rather miss a shot at 7.125% than get hit in that intersection at, oh... 8.00% or more.
Having given that advice, it's important to emphasize what a low and stable interest rate era the 1990's have been. Despite widespread belief that mortgage rates have only recently fallen, the mortgage rate low in every year since 1992 has been in the seven percents somewhere, save the last two when they reached the very high sixes. The highs since 1992 have been in the eights or lower, save the one Fed collision resulting in rates above 9.00% from November 1994-January 1995. At that, rates were back in the sevens by May 1995. Volatility has been as low as the level of rates. Since December 1997, Freddie Mac's total top-down rate range has been .43%, the smallest spread over such an interval since the decontrol of depositor rates in 1978.
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