Thinking of Refinancing Your Mortgage? What's the Rush?Jul 20, 2012
Chad Karnes, CMT
The 30 year bond and mortgage rates continue to fall even as experts have called multiple bottoms the last few years. These experts have been wrong in the past and are likely wrong again.
Let’s play a game. Below I have listed six actual news headlines and I would like you to guess what year they were written.
1. “Refinance your home now” - Kiplingers.com
2. “Tips for Refinancing your Mortgage” - New York Times
3. “It’s now Literally the Best Time Ever to Refinance Your Mortgage” - BusinessInsider.com
4. “Mortgages: Why it may be time to refinance Your Loan” - Wall Street Journal
5. “The Great American Refinancing” - Barrons Magazine
6. “Is Now a Good Time to Refinance” - Smart Money Magazine
If you answered 2012 for all of them, it would be a perfectly logical guess, as all of these articles would certainly pertain to today’s environment. But, if you answered 2008, 2009, 2010, 2010, 2011, and 2012 you would score perfectly. These headlines are actually listed in order of appearance by year starting in 2008!
In hindsight, it is obvious that none of the articles are correct. Just recently on 7/16, the Detroit News reported that, “30-year mortgage rate drops to lowest level since 1950’s, 3.56%”. Since that first article above (written in 2008 with rates around 6.0%), 30 year mortgage rates (ChicagoOptions: ^TYX) have consistently fallen for four consecutive years, making now actually the best time in a generation (so far) to refinance.
Unfortunately, the writers of the articles and most mortgage advisors, brokers, agents, etc have three things working against them. The first is that they all have inherent conflicts of interest. The fact is their livelihoods depend on real estate transactions and home price stability / gains, so they are obligated to keep the rhetoric positive and encourage transactions. The second is that they have all fallen victim to what I will call the “bottom picking trap”. It is fun to try to pick bottoms, but it definitely is not a smart investment strategy. The popular phrase “catch a falling knife” comes to mind. The other popular phrase, “the market can stay irrational longer than you can stay solvent” also comes to mind. The final item working against these advisors is that they seemingly aren’t using data and charts for decision making, and therefore are at a great disadvantage.
The below chart, from the 7/1 ETF Profit Strategy Update shows the iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) at a price of $125.20 which is a proxy for the 20+ year treasury bond index. On 7/1 we stated, “we continue to stay long the longer duration treasury bonds”. On 7/3 with the TLT at $125.89 we reiterated, “This sets up for a nice risk / reward trade for aggressive buyers” and suggested a stop location as well. Today TLT's price is over $130 and at a very important price level.
Right now as the Detroit News headline above shows, 30 year mortgage rates are at their lowest levels in a generation, but that doesn’t mean a bottom is here and that today is the last opportunity ever! Learn from the mistakes made by the writers above: Just because rates and prices are at extremes, does not mean they can't become even more extreme.
At ETFguide we prefer not to try to catch falling knives, but instead use technicals and data-driven analysis to identify where markets are headed. The difference between a 6.0% and a 3.5% 30 year mortgage is massive and many homeowners would have benefited by waiting until now (or still later) to refinance. When a trend change in bonds does actually occur, we will be ready for it, but for now there is no reason to think a bottom in yields is here.
ETFs that take advantage of a continued downtrend in long term bond rates are the ProShares Ultra 20+ Year Treasury (NYSEArca: UBT) and the SPDR Barclays Capital Long Term Treasury (NYSEArca: TLO). To capitalize on a trend change in long term government bonds and mortgages when it does come, ETFs such as the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) and the unlevered version (NYSEArca: TBF) can be utilized. ETFs that follow the mortgage market include the iShares Barclays MBS Bond (NYSEArca: MBB) and the iShares FTSE NAREIT Index (NYSEArca: REM).
Today, there is no need to rush into refinancing as the trend in bond and mortgage yields is still down (as it has been for years). The ETF Profit Strategy Newsletter provides comprehensive technical analysis along with practical and actionable commentary across many asset classes to help keep investors on the right side of the market and stay ahead of any coming trend changes.