MORTGAGE RATES FIRMLY OVER 5%

In my last few posts, I discussed the issues facing the Fed in controlling mortgage rates and the bond market. Not much has changed over the last week, although bonds are trying to mount a rally at the current level. We are seeing a conflict between bonds and stocks. As the perception of an improving economy continues, stocks rise and bonds sell off. Unfortunately, our economy still requires exceptionally low rates to stimulate the housing market and the costs of borrowing. If the fed prints too much money to buy bonds and support the bond market, the dollar declines and sets up inflationary pressures. So, right now the Fed is between the rock and the hard place. My perception is that the Fed will work overtime to support the bond market and try to push mortgage rates below 5%.

Anyone who has not refinanced should get another opportunity as we approach the fall season.

I think it will take time to see ultralow rates again unless we see more issues arise in the stock market or banking sector.

MORTGAGE RATES SHOULD FIND A TEMPORARY REPRIEVE

We have seen mortgage rates creep up these last few weeks. Rates are still historically low and offer tremendous value for those needing to purchase homes or refinance. However, we are seeing warning signs. Normally, fund managers exit bonds and buy stocks in a progressive fashion as they chase stock performance and have less regard for safety. We could have expected some increase in yields as stock values improved.

On the other hand, we have the Fed buying treasury bonds to provide a buyer of last resort to keep yields down. The most significant factor affecting current bond market performance is the vast amount of supply the US government needs to sell this year in order to fund our country's debt. The Fed prints money out of thin air in order to buy treasury bonds(so we sell bonds to ourself and pay with printed money). The effect on the dollar is harmful, bringing down the value of the dollar and leading to inflation. When bond yields rise, we are being warned of inflation to come in the future. Those buying our debt want a better return.

Back to the Fed: he needs to keep rates low so individuals and businesses can borrow and refinance debt at low levels. He needs to keep borrowing costs low for the US government. The bond market is vastly larger than the stock market. Expect the stock market to pull back in the next few weeks with a bigger decline to take place in late summer to early fall. The only solution to creating another bond rally is an engineered deflationary wave(i.e. another stock market crash).

Realtors: expect better sentiment to persist through the summer along with great rates. This is the time for sellers to get realistic and price their homes to move. The coming supply of REO will continue to put pressure on prices. First time home buyers are once again, one of the most prominent groups of buyers. There are excellent programs available in addition to government incentives.

MORTGAGE RATES UNDER PRESSURE

We are witnessing a sudden drop in bond prices with yields rising to uncomfortable levels. In the past, it was normal to see stock market fund managers sell bonds and add stocks once stock market rallies looked sustainable. Much of the recent rise in stocks has come too quickly on the back of news which has been spun into the "green shoots" story line. In fact, banks have been propped in order to complete secondary offerings. Mission is now accomplished.

The fed has been buying treasuries in an effort to keep mortgage and refinancing rates low. Now the fed is stuck between a rock and a hard place. I predict the stock market will pull back (and be allowed to do so) in order to find willing buyers of treasury bonds. Look for a tug of war in the next few weeks.