How Newton’s First Law Relates To Mortgage Rates

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People ask me where mortgage rates are headed.

I don't know the answer to that question.  And, for a lot of reasons, really.  None, however, more apparent than what happened yesterday.

Shortly before the market open, the government pledged $500 billion to buy mortgage-backed debt.  The move came as a complete surprise, creating an immediate imbalance in the forces that determine mortgage rates.

When mortgage bond demand grows faster than mortgage bond supply, rates fall.  It's a pretty simple equation and it's exactly why mortgage rates fell so sharply Tuesday -- the government added large amounts of demand.

Well, rates fell for at least a little bit.

Similar to what happened in January after the Federal Reserve made a surprise 0.750% rate cut, knee-jerk market euphoria gave way to mortgage bond pragmatism and profit-taking.  After mortgage rates fell to unfathomable lows and hung around for a bit, they started to edge higher.  And higher.  And higher.

By the time the bond market closed at 4:00 PM, half of the day's gains were erased and mortgage lenders had issued as many as 4 separate rate sheets.  It was an eerily similar trading pattern to that day in January, too.

Days like yesterday remind us that mortgage rates can't be forecasted because:

1. Mortgage markets follow Newton's First Law of Motion
2. The government is an unpredictable and very strong "outside force".

Paraphrasing Roderick George Toombs, just when you think you've got the mortgage rate answers, the market changes the questions.  And, it's one of the biggest reasons why you have to be working with a loan officer who will manage your mortgage for you.  If you do, you likely got a phone call yesterday about low mortgage rates.  Otherwise, you got the news from this morning's Wall Street Journal.

By then, it was too late -- the uber-low mortgage rates were already gone.

Now, if we look back at the 30 days following the Fed's surprise rate cut of January 2008, we see a pattern,  Mortgage rates slowly, constantly, ticked higher -- day by day.  I chronicaled the journey at the time, all the way to February 19 -- another infamous day for mortgage markets.

On February 19, mortgage rates posted their largest one-day gain in 10 years and settled near 7 percent -- almost as a "ha ha" to homeowners waiting for rates to fall back down.

About every 10 months, mortgage markets give us a day like yesterday.  You can't predict the days it will happen, but you can be prepared for them.  Having your mortgage managed professionally is the first step.

The second is to be ready to act when the phone call comes because if we're learning anything, it's that markets crave balance and when demand side gets too strong, the supply side responds appropriately.  And quickly.

When rates dive in a hurry, it's rarely a permanent condition so get your mortgage news as it's happening.  Follow my Twitter feed at http://www.twitter.com/mortgagereports. I post several times daily.