Where's my rate cut?

The ongoing financial crisis — and even bulls would have to admit after today’s 9% drop in the S&P 500 that it’s not likely to end soon — began in the real estate markets, and it won’t likely be over until some traction is found for sliding home prices. The Treasury Department and Federal Reserve are pulling out all the stops to get banks lending again. They’ve cut interest rates, forced banks to accept mounds of cash and still intend to buy mortgage back securities. But despite those moves, mortgage rates are actually going up — not an effective way to get people to start buying homes.

Rates on a 30-year fixed rate mortgage jumped nearly half a percentage point from October 3 to October 10, from 5.99% to 6.47%, according to the Mortgage Bankers Association, well above lows back in January, when the average 30-year fixed carried a rate of 5.5%.

So what’s going on? Shouldn’t the bailout benefit home buyers too? Mike Larson, real estate and interest rate analyst at Weiss Research and author of the Interest Rate Roundup blog, has his theory and it all comes down to supply and demand:

No one in Washington has shown any willingness to raise taxes to pay for these bailout programs. And there’s no a pile of money just sitting around in the U.S. Treasury to fund them, either. We’re a net debtor nation. We’re going to have to borrow hundreds of billions of dollars to make good on all of our promises.

That means a mammoth flood of Treasury debt is going to wash over the market in the coming year or two. Bond traders know that all of that bond supply will overwhelm bond demand. So they’re not sticking around. They’re selling bonds NOW, driving prices down and rates up.

This is U.S. government debt, folks and as the Treasury markets go, so go the rest of the credit markets, mortgages included.

The question, of course, is whether mortgage rates will come down anytime soon. On this one, I’m not a disinterested reporter — I have a mortgage that will need to be refinanced sometime during the next 12 months. Larson says there might be a short term drop. In fact, it may already be happening. Bankrate.com says mortgage rates fell by 0.21 percentage point, to 6.21% on Oct. 15. But Larson expects rates to be higher a year from now, perhaps closing in on 7%.

Not everyone is gloomy about the mortgage picture. Bankrate cites a pick up mortgage activity this week as reasons for optimism. Still, I’ll be placing a call to my mortgage broker sooner than later.

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