Quick Note: If you are thinking long in this real estate market, this is an exceptional time to consider a purchase or refinance with rates this sweet. The motivation level is rising among many selling. Contact your loan officer or me for suggestions for lending professionals (no obligation of course). I have no ownership stake in any financial services company (mortgage).
S-Crow
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33 responses so far ↓
1
gluten-freek
// Jan 9, 2008 at 11:42 am
Are my eyes playing tricks on me? I didn’t think I’d see a post like this for a while. I’m still holding out for prices to fall some more, but can anybody explain who controls these interest rates? What are these rates tied to? If the Fed is going to be slashing rates again, will housing interest rates go down too. I assume they are being lowered to encourage more people to buy. Does anybody expect them to go lower? Sorry for all the questions.
2
WestSideBilly
// Jan 9, 2008 at 12:17 pm
Refinance, absolutely, especially if you have an ARM.
If you feel confident in continuing price corrections, some food for thought:
$500k @ 5.5% = $2840/mo
$450k @ 6.5% = $2845/mo
$400k @ 7.5% = $2800/mo
Over the next 12-24 months, a 20% price correction seems more plausible than rates going up 2%, especially with the Fed’s apparent intent to keep interest rates low to prop the economy.
Of course, if you can get that $500k seller to sell for $400k, it’s all moot.
3
MacAttack
// Jan 9, 2008 at 12:17 pm
Cheap houses in portland: 17217 Marjorie Lane, Lake Oswego: Sold 10/23/07 for $423,000.
Countrywide REO asking price: $359,000
4
Buceri
// Jan 9, 2008 at 12:41 pm
Now it’s official…
http://biz.yahoo.com/cnnm/080109/010908_recession.html
5
vboring
// Jan 9, 2008 at 2:18 pm
Goldman Sachs says they expect the Fed reserve rate to be at 2.5% by the end of the year vs 4.25% today.
http://blogs.wsj.com/economics/2008/01/09/goldman-sees-recession-this-year/
if this happens, will mortgage rates also fall?
also, can anyone explain why the mortgage rate is only 1.25% above the reserve rate? i’ve read that it costs .5% just to service a loan. this leaves only .75% for profit. a pretty thin margin.
my impression is that banks are strapped for capital right now so they should be reducing their debt purchasing activities. am i way off?
are these rates declining because of decreasing demand for mortgage loans and therefore increased competition?
6
TJ_98370
// Jan 9, 2008 at 3:00 pm
Understanding How Federal Reserve Rate Cuts Work
.
……One thing the Fed does not do is set mortgage interest rates. The lenders do that based on such factors such as the yields from mortgage-backed securities. When the bond yields go down, interest rates follow. Bond yields go down when the market believes inflation is under control…..
7
David McManus
// Jan 9, 2008 at 3:12 pm
“……One thing the Fed does not do is set mortgage interest rates. The lenders do that based on such factors such as the yields from mortgage-backed securities. When the bond yields go down, interest rates follow. Bond yields go down when the market believes inflation is under control…..”
You can jump up and down and yell until you’re blue in the face and people will still not believe this.
8
TJ_98370
// Jan 9, 2008 at 3:30 pm
What is the relationship between the discount rate and mortgage rates?
.
…….The residential mortgage rate is the market-determined “contract interest rate on commitments for fixed-rate mortgages” published by the Federal Home Loan Mortgage Corporation (FHLMC or Freddie MAC). It represents the long-term end of the interest rate spectrum. Lenders must incorporate into their long-term loan pricing decisions their expectations for future inflation and interest rates. Movements in the mortgage rate also reflect supply-and-demand conditions in the market for mortgage-backed securities. Over time, movements in the primary conventional mortgage rate are highly correlated with movements in other long-term interest rates, like the 10-year constant maturity Treasury bond rate……
9
Greg Perry
// Jan 9, 2008 at 3:31 pm
A short while back, I posted a piece on the realtionship between interest rates and affordablitiy.
http://www.workingforyou.typepad.com//realestate/2008/01/the-relationshi.html
10
nishvm
// Jan 9, 2008 at 4:08 pm
S-Crow and all,
I am paying a very high mortgage rate 7.25% right now. Wells Fargo has give me a good faith estimate of 6.0% with zero cost. So with nothing out of my pocket, I will be cutting down my interest rate by 1.25%. Is that a good rate or can I get better than 6.0% with no cost elsewhere? Thank you very much. I love this blog site.
11
jon
// Jan 9, 2008 at 4:13 pm
“You can jump up and down and yell until you’re blue in the face and people will still not believe this.”
He left out the real rate of return, but that usually moves within a small range. Other than that, what is wrong with what TJ said?
About the recession, since when did unemployment become a leading indicator of a recession? I’ve always thought of it as a lagging indicator. 5% is hardly alarming, and the recent fall in the dollar will take a while to fully show up in rising dollar, because it takes a while to renegogiate suppliers and then for manufacturers to build up the backlog to jusitfy increasing headcount.
12
jon
// Jan 9, 2008 at 4:14 pm
“rising dollar” I meant to say rising employment
13
David McManus
// Jan 9, 2008 at 4:17 pm
jon,
nothing is wrong with what tj said; i totally agree with him. It’s trying to convince other people that’s the problem.
14
Ira Sacharoff
// Jan 9, 2008 at 4:57 pm
I’ve been wrong before ( like frequently?) but historically, haven’t lower mortgage interest rates historically resulted in higher home prices?
I’m not saying that’s what’s going to happen now, in fact I see further home price declines . But isn’t the lowering of mortgage interest rates done in order to stimulate more borrowing?
At the same time, the subprime well is dry, and loans are harder to get approved for…these are not normal times. In the past, this might have done the trick to turn around home prices, as it significantly lowers monthly payments. But now? Where’s the amazing Kreskin when we need him?
15
Peckhammer
// Jan 9, 2008 at 5:07 pm
“haven’t lower mortgage interest rates historically resulted in higher home prices?”
Maybe, but now you have to qualify for that higher home price. If there are fewer qualified borrowers, well, you can imagine how that might play out.
16
TJ_98370
// Jan 9, 2008 at 5:16 pm
Ira -
As you imply - the tightened lending standards will counteract the lower mortgage interest rates with respect to sales volume IMHO.
17
b
// Jan 9, 2008 at 6:39 pm
Ira -
We passed the point of low rates helping housing around 2004, when the industry moved to using ARMs, IO loans, etc because house prices were so high that low fixed rates did not help anymore. I would expect with stagnant wage increases it will probably take a return to below those prices before we see fixed rates helping/hurting the market overall.
18
Rhonda Porter
// Jan 9, 2008 at 6:50 pm
Anyone considering buying or refinancing needs to get ready well in advance. Rates bumped up slightly towards the end of the day and with the FOMC meeting at the end of the month, it’s hard to say where they may end up. Bottom line, you have to be ready to jump and lock. They move up just as quickly as the move down. By the time the media reports rates are low, they’re back up!
19
Jonny
// Jan 9, 2008 at 6:59 pm
At current prices, it would take a negative interest rate to get me interested.
20
Scotsman
// Jan 9, 2008 at 7:07 pm
5.5% is a relatively good deal. But wait- by the end of this year both housing prices and mortgage rates will be lower than they are now.
This drop in rates may act to slow the fall in housing prices, but the effect will be lost in the greater scheme of rising unemployment and stagnant wages.
21
Scotsman
// Jan 9, 2008 at 7:20 pm
Here’s a great note on the current money supply situation. Why is that important, you may ask? Well, inflation expectations are the biggest part of setting long term rates for mortgages, etc. Low expected inflation equals low rates. Inflation is most easily described as too many dollars chasing too few goods. The number of goods in our market is increasing as people sell assets to increase liquidity and service debt. The number of dollars in circulation is holding steady or, more probably, decreasing as liquidity contracts. So, we have fewer, not more dollars chasing more, not the same or less goods. That is deflationary, not inflationary. Rates will continue to drop. Housing prices will continue to drop. Patience is rewarded, and haste is waste.
Dave Rosenberg at Merrill Lynch Addresses “Reflation”
In a letter to clients, Rosenberg had this to say about monetary reflation:
For all the folks out there complaining about monetary reflation, let’s look at the data before jumping to conclusions:
Since the Fed cut the discount rate for the first time this cycle in mid-August, the St. Louis Fed adjusted monetary base has contracted at a 2.2% annual rate. The YoY trend has slowed to 1% from 3%. That does not sound like monetary reflation to us.
Since mid-August, bank reserves have collapsed at a 13% annual rate and the YoY trend is running fractionally below 0%.
M1 has not grown one dollar since the Fed first eased the discount rate last summer and the YoY pace is running at -1.4%. Excuse us – how do you build a monetary reflation story out of this?
There has been no growth at all in currency in circulation for crying out loud; the YoY trend at +1.2% is the second lowest on record. The lowest ever was flat in Jan/01, the same quarter the last recession began.
Demand deposits are down 9.7% YoY and bank chequable personal deposits are down 1.8%. You can’t make this stuff up – transaction-related household deposits are shrinking at a very rapid rate.
Oh yes – but M2 is running at almost a 6% YoY rate: well, of course it is – most of it is situated in non-transaction savings accounts and these are up almost 8% from a year ago. So transaction balances are falling and precautionary balances are rising – what does that tell you about consumer spending and saving behavior? This is all, from our lens, very deflationary. Not the other way around.
At the same time, since mid-summer the banks have seen $800 bln of assets come back onto their balance sheets as the financial institutions assume the responsibility from the SIVS and conduits; while capital has declined by roughly $50 bln. For the next few years, the banks will have little choice but to cut dividends, sell assets and raise capital to deal with these newly-found balance sheet exposures
22
S-Crow
// Jan 9, 2008 at 10:20 pm
Nishvm-
Sorry I missed your question. Yes, I think you can do better. But there may be some qualifying variables that come into play that Wells Fargo is privy to regarding your situation. Regardless, if you ‘d like some resources please contact me.
23
explorer
// Jan 10, 2008 at 2:20 pm
Regardless of interest rates, no one expects the Spanish Inquistion of changing the inflation measurments, definitions, employment and income, etc. to not justify buying now.
Provided you can truly get a refi on favorable terms for your ARM. Provided, you truly don’t care to lose up to 30% of the equity in the next year or two, and be under water and forced to roll the dice on getting ANOTHER refi.
A lot of faith by some that I don’t share.
24
Orion
// Jan 10, 2008 at 3:24 pm
[JARRING CHORD]
Cardinal Ximinez: NOBODY expects the Spanish Inquisition! Our chief weapon is surprise…surprise and fear…fear and surprise…. Our two weapons are fear and surprise…and ruthless efficiency…. Our *three* weapons are fear, surprise, and ruthless efficiency…and an almost fanatical devotion to the Pope…. Our *four*…no… *Amongst* our weapons…. Amongst our weaponry…are such elements as fear, surprise…. I’ll come in again.
———————-
Sorry… couldn’t resist the set up.
25
NostraDamnUs
// Jan 11, 2008 at 1:58 am
nice rates, makes me think about a refi. I’m at 6.25 7 year ARM….
Nice time to buy, people!
26
what goes up comes down
// Jan 11, 2008 at 3:54 am
Nostadumbus — Nice time to buy, people = The band played on.
Man you should get a clue.
27
notabull
// Jan 11, 2008 at 7:05 am
I did some calculations on buying the the same house at different rates. In my situation I’m considering a 30 year loan, and then paying it off as a 15 year loan. This gives additional flexibility during unexpected times, and the interest rate is hardly any different, as far as I have seen.
In my calculations I included as much as I could regarding the cost of the house. The only thing missing is the maintenance.
Details:
500K house, 350K loan (30 year loan paid over 15 years), 2K/year insurance, 1.25% real estate tax, 28% tax rate for deduction beyond standard:
5.5% year 1 - $3194
7.0% year 1 - $3359
Difference is $165 a month
Note that I didn’t include the increase in value of the house and associated increase in real estate tax. Hard to predict, and I don’t think it has a huge impact (could be wrong).
So in my first year, the 5.5% loan saves me only $165 a month over the “boo hoo, so high, waaaaah” interest rate of 7.0%. Personally, $165 a month really isn’t much money at all. I could stop buying cheese and save that much for Christ’s sake. (lie, but you get the point)
28
notabull
// Jan 11, 2008 at 7:08 am
“nice rates, makes me think about a refi. I’m at 6.25 7 year ARM….”
Why on earth do you have an ARM at 6.25%?? I can’t imagine a time in the last few years when that made sense to anyone, unless of course the difference between a fixed at 6.5% and an ARM at 6.25% was going to cause hardship. Yikes.
What’s the deal, Nostapaychecktopaycheck?
29
Hyperbola
// Jan 11, 2008 at 7:24 am
Notabull,
Yes, the difference in monthly payment sounds small. However, if you took that $165 a month and stashed it in a money market account at 4-5%, after those 15 years of payments you would have over $40,000!
And yes, you could probably save that money by scrimping on your expenses, but that’s irrelevant because you could stop buying cheese no matter which loan you had.
30
notabull
// Jan 11, 2008 at 7:39 am
“Yes, the difference in monthly payment sounds small. However, if you took that $165 a month and stashed it in a money market account at 4-5%, after those 15 years of payments you would have over $40,000!”
BUT, over that 15 year period, it’s quite likely the rates would, once again, dip below 6% and I’d refinance. You can always refinance DOWN. You would never refinance UP.
Also, money market accounts make about 4-5% right now, while interest rates are actually fairly high. I think it’s fair to assume that we’re realistically talking about an average of 3% over the long-term if you’re looking at a conservative investment vehicle like this. Also, you MUST consider that this interest is taxed. Let’s assume it’s taxed at 28% as in my above example. So the actual interest rate is about 2.2%. Over 15 years this is now $35K. Still not to be sneezed at, but this is in 15 years time when that money will be worth significantly less.
I suppose my point is that the 15 year gain due to this substantial difference in rates is considerably less than you would think. So to rush out an buy-buy-buy based on a rate like this doesn’t make sense, especially if you believe that house prices are stagnating at best, and most likely continuing to fall.
31
notabull
// Jan 11, 2008 at 7:40 am
“And yes, you could probably save that money by scrimping on your expenses, but that’s irrelevant because you could stop buying cheese no matter which loan you had.”
I should never have used this example.
I will NEVER stop buying cheese.
32
Nozferatu
// Jan 11, 2008 at 8:29 am
With the rates going down, are the home prices going to go down now? Sellers are going to see this and keep holding firm on prices…so what does this help at all?
33
S-Crow
// Jan 14, 2008 at 1:58 pm
Nozferatu-
I don’t necessarily believe the lower interest rates will keep sellers from holding firm. Because lending standards have come back into play, the pool of borrowers that “kicked the can” of upward price swings are largely removed from the market. What I mean is that the borrowers who were not necessarily of the highest credit or income brackets, those that could get loans without verifying income or assets, are unable to purchase today. And that creates a problem for those selling who will buy up into the higher price brackets. For example: Less buyers, higher standards for mortgage qualifying means sellers cannot sell the home at 5pm after listing the house for sale at 8am.
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