The market opened this morning and dropped more than 200 points. It is anyones guess how this will play out. The selloff is not surprising.
The key indicator for mortgage rates is the 10 year bond. It is down about 5%, 2.42 from 2.56 on Friday. This is a benchmark for banks when they sell their mortgages, it becomes a base for the interest rates on mortgages as a result.
Typically there will be about a 1.7% spread between the 10 year bond and the 30 year mortgage interest rate. i.e. at 2.42 right now the 30 year mortgage would end up around 4.12%. (the 30 mortgage rates don’t fluctuate as much as the 10 year bond – so short dips or increases don’t impact the mortgage rates.)
The big question is whether or not this formula will work or not – we are in uncharted territory now. Will the banks use this as secure benchmark anymore? Will the US have to raise the payout in order to get people to invest, thus driving the interest rates higher?
Time will tell as we learn the impacts of having our credit downgraded for the first time in US History. I don’t know what will happen, but I don’t believe it will be all that good…