Where Are Rates Going?!

I've been getting a disproportionate amount of "Where do you think mortgage rates are headed"-like questions from my clients lately.

If you're among the curious, just ask your question aloud, then click the "Shake Me" button on the Magic 8-Ball at right.

The answer you get will be as accurate as any other one but at least the 8-Ball reminds you that it's for Novelty Purposes Only.

The guys on CNBC don't use that disclaimer.

Because mortgage markets are in a funny place right now, making any kind of prognostication is extra-difficult. Versus the "normal" environment in which mortgage rates indirectly correlate to a few, well-known influences, this "abnormal" market negates the usual associations.

In a "normal" market:

-- When the U.S. dollar gets stronger, mortgage rates tend to fall
-- When concerns of inflation are rampant, mortgage rates tend to rise
-- When there are threats to financial markets, mortgage rates tend to fall

Lately, none of these relationships have held because mortgage markets are wildly dissociated.

As the dollar strengthens, mortgage rates rise; as rate cut talk grow, rates edge lower; as stock markets sell off, mortgage bonds lose out to cash.

It's dogs and cats living together -- mass hysteria.

Strangest, though, is that experts finger the U.S. housing market as the turmoil's root cause, even as they ignore signals of its rebirth. In the last two weeks, housing has kicked out a ton of positive data that is getting very little press coverage:

-- Homes under contract to sell are rising and exceeding estimates
-- Foreclosures are falling nationwide, led by California
-- "Used" home sales are rising, reducing home supply more than was expected
-- "New" home sales are rising, further reducing home supply

Now, stats like this are kind of like pictures in a flipbook. Individually, they don't mean that much; it's when you put them all together that the magic happens. And so to look at the data as a group, we can infer that the national housing market is finding a psychological balance between buyers and sellers.

Finding balance in housing should be good news for the mortgage market, of course, but not today. Instead, mortgage markets are a casualty of forced selling out of hedge funds and other institutional investors. In need of cash, the funds are indiscriminantly selling what they got -- including mortgage-backed bonds. The excess supply is driving bond prices down, causing mortgage rates to rise.

As for what will happen tomorrow, though, who knows -- except maybe the Magic 8-Ball.

(Magic 8-Ball Courtesy: Mattel.com)