Interest Rates and How it Might Affect Your Purchase

What is happening with Mortgage interest Rates and how does it affect me?
Freddie Mac said Thursday the average rate on a 30-year fixed mortgage rose again this week. After hitting a 40-year low in November, the average interest rate on a 30 year fixed mortgage has risen almost 16%.


Why?
After falling for 7 months in a row, mortgage interest rates are rising because investors are shifting money out of Treasury bonds and into stocks largely on the expectation that the tax-cut plan approved by the U.S. Congress and a recovering economy will spur growth and potentially higher inflation. As investors flee treasury bonds, the U.S. Treasury has to raise the yield on its bonds to attract investors back who are selling their bonds and buying stocks hoping to cash in on the higher returns that stocks offer. Since mortgage rates are heavily tied to the 10-year Treasury note, that means that as the Treasury raises the yield on its bonds…it’s byproduct is higher mortgage interest rates.

Since most of the financial indicators are pointing to increased productivity and profitability in U.S. companies, this data lends weight to the idea opinion that the economy is recovering. Even in our own financially depressed market in the Central Valley we are beginning to see new signs of life as more businesses are having “Grand Openings” than at any time in the last 3 years. Over the last 3 years, the U.S. Government has been using our own tax dollars and “borrowed money” called “stimulus” money to purchase its own bonds in the effort to keep yields low and as such…keeping mortgage interest rates artificially low as they are tied so closely to the Treasury yield.

As the need for stimulus weigns, the U.S. Government will stop buying treasury bonds, just as they stopped buying Mortgage Backed Securities earlier this year and that will cause interest rates to return to rate that is supported by normal economic activity. The last time interest rates were left to the free-market, rates were in the mid 6% range.



What does that mean for the home buyer?
It means simply that if the economy continues to improve, interest rates will continue to rise. Since higher interest rates mean higher monthly payments, this means that the cost of home ownership will be going up if the economy continues to improve. What will be impacted the most with rising interest rates will be the amount that a borrower can spend on a house. Since borrowers are limited to roughly half of their gross income for housing expenses, credit card bills and installment loans, the higher the interest rate, the less money a borrower can afford. If a consumer can borrower less money because the payment on the borrowed money is higher, they will have less money to spend on a house. This means simply that if you wait to purchase a home until interest rates are higher, you will be buying a smaller house or a house that is in worse condition.

Now that you are armed with the understanding of what is happening, why it is happening and what may be in the future as far as interest rates go, it is time to give consideration to how you should proceed. If you have questions or would like to discuss your situation further, feel free to contact me, I'd be happy to discuss your plans with you.

Case-Shiller's Index declined 2% in 3rd Quarter of 2010

New York, November 30, 2010 – Data through September 2010, released by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the leading measure of U.S. home prices, show that the U.S. National Home Price Index declined 2.0% in the third quarter of 2010, after having risen 4.7% in the second quarter. Nationally, home prices are 1.5% below their year-earlier levels. While housing prices are still above their spring 2009 lows, the end of the tax incentives and still active foreclosures appear to be weighing down the market.

Modesto as Investment Opportunity - Money Magazine

Money Magazine (Sept 2010) has highlighted Modesto as one of the smarter investment opportunites. They estimate that prices have dropped 61% since their peak and estimate a good five year forecast of appreciation of 34% for single-family homes. Whether it be a rental property or a home for yourself it remains to be a great time to purchase. Please contact me at tcreKevin@gmail.com with any questions that you might have.