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January 24, 2008

Mortgage Refinancings a Bullish Development

I spent yesterday afternoon and evening traveling from Chicago to Salt Lake City on my way to the Sundance Film Festival in Park City.

In the morning, I chatted with my mortgage broker. He told me he was getting flooded with calls but not a lot of action yet. He said he many clients that are in position to refinance with 30 year fixed rate mortgages now at 5.4% and falling. One undeniable fact about the 175 basis points the Fed has cut is that it has brought mortgage rates way down. Tony has chronicled this well including the impact it can have on the subprime resets. If mortgage rates drop much further (Bill Gross thinks the Fed is targeting 4% to 4.5% for mortgage rates), it will be a huge boost to the beleaguered and unconfident consumer. Oil has backed off and heating season is going to be over soon. And more rates cuts are on the way.

With this in mind, I was pleased to read a Ned Davis Research report where their economist, Joe Kalish, noted that refi applications rose 17% last week to their highest level since March 2004. Furthermore, refi apps are up 150% in three weeks, the biggest increase in seven years.

Somewhere else I read that the average mortgage in the US carries a rate of 6.1% and nearly 70% of current mortgages could now be considered refinancable. That may have been on RealMoney but I was so busy preparing to leave for Utah that I didn't copy down a quote or link.

The bottom line is that interest rate reductions are starting to bite....

....The Fed has made it clear that growth is going to take precedent for the foreseeable future and more rate cuts are likely coming. The recent market decline is not going to have a v-shaped bottom that formed in the last two days but barring some major new bad news, the interest cycle alone should contain the downside and eventually will launch a major bull market. I'm not sure from what level or when and I'm willing to wait to get longer. As Rev Shark, my favrorite trader who writes for Real Money likes to say, there will be plenty of time and upside to make money after the market turns to a new uptrends.

Posted by Steve Birenberg at January 24, 2008 10:23 AM in Market