Rates fall, home sales soar, bubble talk explodes

Mortgage market commentary: What's behind this?

Mortgages are back down to 5.5 percent, taken down by the 10-year T-note's return to 3.93 percent, that dive in turn caused by events overseas.

As of Friday, the mortgage market is in a pattern not seen since 1995: on a fee-equivalent basis (no points, no origination), 5/1, 7/1 and 10/1 hybrid ARM rates are about the same as fixed-Fannie. As the Fed pushed the cost of money from 1 percent to 3 percent in the last year (going to 3.25 percent this Thursday, 3.5 percent in August...), the ARM-to-fixed spread has narrowed and now closed. 3/1s can be had under 5.5 percent (for another month or two), and one-month COFI and MTA teasers are sub-3 percent, but both will index to the mid-fives, and then rise monthly as lagging indices catch up with the Fed. Figure a tenth a percent a month for a year or more. Cheers.

This ARM-to-fixed spread may go ARMs-on-top, and will persist until the Fed overshoots neutral and has to cut its rate; or the Fed turns out to be right about economic heat and inflation risk, and long-term rates blow out of a colossal mistake.

Domestic economic data were strong, but a European recession threatens to spread worldwide, except for the United States and non-Japan Asia. If the slowdown happens, even the exceptions will falter, and the prospect creates a lot of buyers for bonds.

Read the entire Lou Barnes article at Inman News