Treasury Bonds

It's no secret that the Federal Government has been selling billions of dollars worth of bonds and notes to finance all of the spending programs it has instituted. But it is a little known fact that the Treasury Department has been purchasing their own bonds in an effort to soak up this excess supply and keep long term interest rates low. It is also not commonly known that mortgage rates are NOT directly tied to the performance of Treasury Bonds (though they do some times travel in the same direction), but are actually dictated by the performance of Mortgage Backed Securities or mortgage bonds. So mortgage bonds actually compete with Treasury bonds in the open market for investor dollars.

So what does all of this have to do with the real estate market? Well, the Treasury's bond-purchase program is going to end come October. And if you know anything about the rules of supply and demand, then you can see what is probably going to happen once that occurs. When the Treasury stops buying its own bonds/notes, the supply is going to increase dramatically. Investors, be they foreign or domestic, are only going to have so much of an appetite for this additional supply and when there's too much of a given product in the marketplace, the price of that product tends to drop to attract more buyers. When the price of bonds drops, the yield (or interest rate the bond pays) has to go up as well. And since mortgage bonds tend to travel in a similar direction, it stands to reason that long-term mortgage rates willl rise as well.

It's highly unlikely you're going to hear about any of this in the mainstream media until this begins to happen. So it's up to you, the realtor, to start advising your potential buyers (especially those that are sitting on the fence waiting for home prices to drop further) to start getting serious about purchasing now. If they wait much longer, the price reduction they may be able to get will be more than offset by a potentially higher mortgage rate. If we all knew the perfect time to pull the trigger on buying a home, a car or stocks, then the Cayman Islands would be a very crowded place. Better to take advantage of today's low home prices and mortgage rates now...before they're gone.