The stars have aligned to bring down mortgage rates to levels (even for jumbo mortgages) that may not be here for long.


source: Bloomberg (Bankrate.com mortgage rate and jumbo rate (orange) national average)

The US consumers who are able to refinance will find money in their pocket. Those who want to buy a new home, go for it - prices are down and you can't beat a 30-year mortgage rate at around 5%. That's a 3-4% 30-year loan on an after-tax basis, courtesy of the US government. Some may argue that house prices are going lower, and in some areas they will be. But by trying to time the exact bottom in the housing market, you may miss the great American 30-year mortgage party. Here are some reasons for this "generosity" from your local bank and why the party may not last:

1. The Fed has purchased $689 billion of mortgage backed securities plus $127 billion of agency paper. The supposed target for the program is $1.25 trillion, but it is possible they will slow down the purchases. The Fed is getting nervous about the quantitative easing, which has recently moved into full swing.

Demand for mortgage securities from the Fed lowers the financing rate for mortgages, making bankers set a lower rate and still have the ability to make their fees. The chart below shows the narrowing spread between a 5% mortgage bond from Fannie Mae and the 10-year treasury note (part of the reason for the drop is also the reduced volatility in interest rates - discussed below). Going forward, that spread may not keep on tightening the way it has.


Source: Bloomberg


2. Related to the point above, the government has been providing unprecedented support for Fannie and Freddie.