Wow, what a crazy week in the bond market! Due to increased concerns about inflation, the bond market took a beating for well over a week, causing rates on a 30 year fixed rate mortgage to hit a high for the year by mid-week. Although by Wednesday we experienced a bond rally which looked like we were poised for a turn-around, however, the rally was short-lived, and by Friday we saw most of these gains erased.

What happened Friday? The Michigan Consumer Confidence reading shocked the markets, with a much better reading than expected at 61.2. The expectation was 56.4. Likewise, we saw a strengthening of the dollar and lower oil prices, which caused a stock market rally at the expense of bonds.

In fact bond deterioration was so significant on Friday, that many lenders had two mid-day interest rate re-prices totaling .375% discount points. .375% discount equates to $1564 on a $417,000 loan, which means if you were to lock after the lender re-prices, it would cost an additional $1,564 to lock the same rate as before the re-price.

What’s the lesson here? Avoid the temptation to chase a bottom in the real estate market, because there are simply too many variables at play.

There are essentially two strategies that buyers are taking right now:

1) Chase the bottom of the real estate market.

Or,

2) Find a home that you like, that you can get a good deal on and that you can afford.

My opinion is that strategy #1 is not a prudent strategy. As I mentioned, there are simply too many variables at work that we can’t control. If you chase the bottom of the market, who knows where rates are going to be? If interest rates go up a full point, you could see your purchasing power seriously erode. For example, on a $729,000 loan, an increase of 1 percentage point, say from 6.5% to 7.5%, you would lose approximately $80,000 in purchasing power. It’s not uncommon in this market to see a change in rates of .25% - .5% in a week, so a change of 1% over a 3 month period is not inconceivable.

The best strategy is to simply find a home that you like, that you are prepared to live in or keep for at least five years, and make an offer on it with which you feel comfortable.

The national average interest rates as of Friday morning, July 25, 2008 are as follows:

6.49% 30 Year Fixed
6.53% 30 Year Fixed FHA
5.91% 5/1 ARM
7.56% 30 Year Fixed Rate JUMBO

Source: Bankrate and Mortgage101

Note: Interest rates are based on full income documentation, excellent credit and 80% Loan-to-Value.