Have you heard of the Law of Unintended Consequences? The idea that when you try and do something good, something entirely unforeseen results from your actions? This is a variation on Murphy’s Law, whatever can go wrong, will go wrong. I think we are seeing a great example of this in the financial markets. Conventional wisdom now tells us several things about the economy:

1 – Our economy is almost surely now in a recession.

2 – The recession is largely a result of all the problems in the real estate market.

3 – In order to get our economy back on track, we need to get the real estate market moving again.

4 – One of the best ways to get the real estate market moving again is through lower interest rates.

Makes sense, right? The Fed has moved aggressively to cut short term rates – cutting an astounding 1.25% in just over a week. In addition, the Congress has rushed a new stimulus plan through both houses. All this action surely means mortgage rates will drop and get the real estate market moving again. Right?

Maybe not.

The mortgage market is still in its up and down mode, but Thursday the mortgage backed securities market got clobbered, sending mortgage rates higher. Rates recovered some on Friday, but I think this is a taste of the problem we are dealing with, and this may be a bigger problem going forward. In a speech, Atlanta area Fed Governor Richard Fisher warned that aggressive rate cuts may ‘juice up’ inflation. The mortgage bond market hates any thought of inflation, and this prompted the sell off. Remember, a slowing economy is good news for mortgage rates. The worry here is that so much money flowing into the economy will spike inflation higher, lowering the value of mortgage bonds. If you have an adjustable rate loan, this may help on your reset, but mortgage rates could spike higher even as short term rates fall. Which brings us back to the law of unintended consequences – even as the Fed and the Government try to revive the economy they could do more damage to the real estate market.

Despite the fears of inflation, the big economic news this week showed more weakness. The January ISM survey (a measure of health in the service industries) plunged much more than expected to a reading of 41.9% - under 50 means the economy is contracting. January retail sales were the worst in years and among the signs of the times, Wal Mart reported that shoppers were using holiday gift cards to buy basic necessities, not electronics or toys – a sign that those on the lower rungs of the economic ladder are feeling the pinch bad.    

In real estate related news, the Senate passed the stimulus package and it should be signed into law next week. One of the provisions calls for a temporary increase in the max loan limit for conforming loans, from $417,000 currently, to 125% of the median income for the area. This will help the distressed markets on both coasts the most, but, depending on how they interpret this, it could help some home owners and home buyers here in the Chicago area. There is also talk of lifting the FHA limit up into the Jumbo price range. I’ll have more on this as details are released.

Buying a Home in Chicago just got a little more expensive. The city approved a hike in the transfer tax from $7.50 per $1,000 to $10.50 per thousand, effective April 1^st. That means if you buy a $300,000 it will now cost you $3,150 in tax. Again, if the market is slow, doesn’t it make sense to not make it harder for people to buy?

Mortgage rates are slightly higher this week than they were last week. It would have been worse but the market rallied strongly today. If you are thinking of refinancing you still may have opportunities. I’m recommending that people get their paperwork together and be ready to go. Rates may drop, but there is no guarantee that they will stay down for long. With all the volatility, it pays to pick the right time to lock your rate in. If you don’t have a loan officer you work with, give me a call.

Here is what Illinois mortgage rates look like today for an A+, full doc purchase on a 30 day rate lock, with 0 points, and no origination fee.  The conventional loans are based on the highest conforming loan amounts, which give the best pricing. (Again, there are many factors which affect mortgage rates and your ability to be approved for a loan. These rates may not fit your situation and this is just a sample of the programs that are out there. If you would like a quote for your personal situation, give me a call or contact me and I’ll take the time to find the rate and program that is best for you.) :

Conventional loans up to $417,000

30 year fixed rate    5.75%      5.814% APR

15 year fixed rate    5.25%      5. 372% APR

5-1 A.R.M.               5.00%      5.187% APR       

7-1 A.R.M.               5.125%    5.263% APR

For Jumbo loans over $417,000

30 year fixed rate    6.25%        6.34 9% APR

7-1 A.R.M.               5.875%       5.923% APR

FHA LOANS up to $270,200 with 1 point origination fee

30 year fixed rate    5.50%       5.718% APR

These are just a sampling of the mortgage rates available. We have special programs for first time home buyers and all the bond programs including the City of Chicago Bond program and the State of Illinois Bond program which offer no down payment and below market pricing.

Next week a new batch of indicators will be released and I fully expect that some unexpected developments will come out of left field and shake up the market. Volatility is the norm now, so I expect more next week and in the weeks to come.

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