Why I believe mortgage rates will fall during the coming year

For one, the Fed Funds rate continues to decline and this is normally a precursor for a drop in the rates for treasury securities on which mortgage rates are loosely based. The spreads between the Fed Funds rate, treasury securities and mortgage rates typically fluctuate around their means but right now they are grossly out of sync with their statistical averages. In time, these spreads will narrow and move toward their means. What does this mean for home buyers? Well, the narrowing of these spreads can take shape in a variety of ways. All of which point to lower mortgage rates. There exists a phrase which is warmly embraced by Wall Street. It goes like this: “never bet against the Fed”. What they are saying is that it is unwise to invest in a direction contrary to what the Federal Reserve is trying to achieve. At this point in the cycle it is clear that the Fed is trying to bring down retail borrowing rates. They have mentioned the possibility of reducing the Fed Funds rate to zero and if that does not exert enough downward pressure on retail rates they have mentioned the possibility of buying up U.S. treasury securities. These government purchases would drive up the price of U.S. bonds which reduces the net interest rate the bonds are yielding. In time, reducing the yield of U.S. treasury securities will invariably enforce its gravitational downward pull on mortgage rates.
Secondly, the government is pumping hundreds of billions of dollars into the financial system. These actions make more money available to financial institutions to lend with. More importantly this flood of money helps ease the widespread fear which has caused large financial institutions to hoard their cash and refuse to lend it. As this fear ebbs, firms will begin to lend once again. As more firms feel comfortable lending their once precious cash we will see competition for customers drive rates down. I welcome any thoughts on this matter? How do you think the coming year will go?

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