Joe Knows Mortgages

Let me make a statement, and I hope you truly digest what I am about to say: the interest rates on mortgages here in Brevard County, Florida are about 1/8% off of their lowest levels in history.  That means that if you qualify for a mortgage, you could potentially get a better rate on your loan than just about anyone in history.  With interest rates and home prices as low as they are, and with the first time home buyer tax credit extended into 2010, people should be lining up to buy homes.  However, these rates have only one way to go, and we are headed there soon.

One of the biggest factors in our low rates right now is not the Fed’s decision to keep the overnight rate as low as it is, rather it is from their decision to continue to purchase mortgage backed securities in the many Billions of dollars per week.  When this purchase program ends, the demand for Mortgage Backed Securities will be less, therefore the price will decrease, and the yield (or interest rate) will increase. 

Another factor that is keeping rates low, has been the low threat of inflation.  While inflation is not happening right now, there are many concerns of inflation coming once the economy starts to improve.  We are already seeing signs of inflation as the Core CPI (Consumer Price Index) came in higher than expected, and a little higher than this time last year. It is inevitable that when you dump as much into the economy as we have, and when the cost of money is as low as it is that we will see inflation.  In inflationary times, bonds are not as attractive because they become devalued. 

So, with Inflation around the corner, and the Fed finishing their Mortgage Backed security purchasing program coming to an end in 2010, interest rates are going to increase.  The increase in interest rates will affect buyer’s purchasing power, as well as their cost of money.  I have said it before, and I will say it again: Now is the time to buy!  Rates are low, but rising; home prices are down, but will go up; sellers are generous, but they will be greedy.  Please take advantage of this opportunity, before it goes away. If you are currently renting, talk to a professional to see if you can buy; if you know someone who is renting, encourage them to see if they can buy.

Everyone Wants a Lower Price, But What About the Impact of Interest Rates?

When shopping for a home, the natural tendency of any buyer is to want to pay the lowest price possible. It’s important to keep in mind, however, that the sales price is not the only factor that determines what the monthly payment will be. In fact, the impact of higher interest rates can easily nullify any benefit of waiting for a lower price.

Why Should I Rush to Buy?
While you may have heard discussions in the media about the decline of property values here for Brevard County Real Estate, the rate of decline appears to be stabilizing.

That being said, it would not be unreasonable for buyers to want to hold out for an additional decline of 10%, hoping to capture the best possible price. However, as property values have declined in many areas to 2003 levels or lower, waiting longer to pull the trigger could be a mistake. Many markets are reporting that lower property values have been bringing out investors and the result has been multiple offers on many properties. Properties priced correctly are not declining and, in fact, are creating a lot of interest.

Interest Rate Complacency
The problem is that many home buyers have been lulled into a sense of complacency because of extremely low interest rates. Since the Federal Reserve initiated its program of buying mortgage-backed securities, which control the rates people pay for their home loans, rates had been range bound, bouncing between 4.50% to 5.00% for a 30-year fixed-rate loan.  So the interest rates for a Brevard County Mortgage is still low.

But buyers shouldn’t be confused by this. These rates are artificially low! Historically, interest rates have been above 6.00%. And any rate obtained below this number is a great deal, especially on homes with price tags from 2003!

Markets are Unforgiving
The last two weeks of May showed just how unforgiving the markets can be for people who choose to procrastinate. In just five days, interest rates from many lenders increased anywhere from .50% to 1.00% as fixed-income investors demanded more for their money.

For anyone who was waiting for prices to drop even more, a 1.00% increase in interest rate would bring a higher monthly principal and interest payment on a home, even if the price of that same home had fallen an additional 10% in value.

If you or your clients are waiting for prices to fall even lower, be aware that while holding out for a lower price may help them win the battle, they could lose the war in terms of monthly payments and overall affordability. With the Federal Reserve scheduled to end its buying of mortgage-backed securities this year, rates only stand to go higher for those that wait. In fact, interest rates are already on the rise and could go higher from here.

Clock is Ticking on Free Money
If you are planning on purchasing your first home this year, you need to take possession before 12/01/2009 to be eligible for a tax credit of up to $8,000. In a survey conducted in March by Move.com, nearly 50% of home buyers are currently unaware that this free money exists in the marketplace. And since over 50% of all buyers are first-timers in today’s market, this impacts many buyers.

If you have questions about this update, give us a call. I can show you how waiting for the lowest price could really cost you or your clients more in the long run.