Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009. For the past two months I've been warning that this will eventually happen. It's not because the economy is recovering; it isn't recovering. The reason mortgage rates will rise to 6% or above, soomer rather than later is because that is the "natural" market.
About a year ago, The Federal Reserve announced a $1.25 Trillion mortgage rates subsidy,by purchasing mortgage-backed securities in the open market, through March, 2010. Right before that subsidy was announced, mortgage rates were at or above 6%. The subsidy was referred to as Bernanke's "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.
One year and 12 months into the 15-month game, we're at $1.07 Trillion spent on this open market MBS purchase progran. This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right? After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.
Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be. The Fed's just about out of bullets and MBS traders know it. Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar REALTOR, on the beach this summer.
I had my daughter (Maggie) get me ten cups of water from the ocean. Then I drew six lines in the sand, equidistant from each other, and labeled them 6% (on the right) through 4.5% (on the left). I had Maggie stand at 6% and explained that this represented Dec, 2008 mortgage rates. I announced that my intention was to throw water at her until she moved to the left, away from 6% and towards 4.5%. I grabbed two cups and threw one at her, then at the line marked 5.5%; Maggie quickly darted to the left.
Then, I threw a cup at her every time she inched to the right. I explained that Maggie was acting EXACTLY like the MBS traders, naturally gravitating towards the "natural" market. Each time I chucked a cup full of"stimulus", Maggie moved back under 5% and closer to 4.5%. Once, she got real daring (like the MBS market this past summer) and I threw three cups at her.
At the beginning of December, The Fed had two cups of water. Now, they only have 1.5 cups of stimulus left.
Maggie, knowing that I only had 1-2 cups left, knew she could afford to get a bit wet in her dart towards 6%. She faked me by jumping like Rickey Henderson dances off first base; I threw a half cup of water at her. Then, she defiantly and purposefully walked towards 6%, knowing full well that I would throw my last cup of water at her.
Maggie knew she might get a bit wet but that I was utterly and completely out of water. She got sprinkled but was safely standing at 6% and I was as bone dry as the Sonoran desert in July.
That's what I think is happening today. The MBS traders are purposefully selling mortgage-backed securities, knowing that the Fed will buy every last bond they offer until they are "bone dry". Everybody is running towards the finish line (6%) now and they don't care how wet they get along the way.
Mortgage rates are headed to 6% and it probably won't take until March, 2010 for them to get there.
Wow, lucky Maggie.
The best way to teach children is by life examples.
Merry Christmas Brian and Family.
Great post - not only did you teach your daughter, but you clarified it for me with the great analogy! A good one to pass along to anyone sitting on the buyer's fence! Thanks and Merry Christmas!
Thanks for the post...I certainly wish some of the folks who decided to "shop around" or "wait for rates to drop" get a second chance to benefit from the current low rates.
Great way to discribe how MBS work. Now will anybody listen?
This is a "spot on" explanation of exactly what is happening. To go one step further, since traders know they need to unload securities now, they will likely oversell and re-buy once the market is beyond it's "natural" market or oversold. Rates will likely go higher than the 6.00% because the sellers will be rushing to exit and selling will get over exasperated.
It would be like your daughter running up and punching you for throwing water on her! LOL
Brian: The only unknown is will the Fed. extend its buyback past March? I think they will. The economy is super soft right now and the danger is that any rise in rates will dampen the tepid recovery going on. Plus, government feels they know best. Granted, we'll be paying for this bailout for years to come but the bureaucrats could care less. Obviously, if the Fed. chooses not to continue the buyback, I agree with you. We'll see rates at the high 5's minimum by the first part of February. Take care. Thanks for the post!
Great post! I wish my buyers who have been thinking about buying would start looking now before rates go up. With the current low rates, the homebuyer tax credit, and low prices in many areas, I think now is a great time to buy.
So many people are going to be wishing they had taken advantage of these opportunities.
You had a very good way of explaining what was happening and what will be happening witht he number of cups of water! Fantastic!
Brian: The only unknown is will the Fed. extend its buyback past March? I think they will. The economy is super soft right now and the danger is that any rise in rates will dampen the tepid recovery going on. Plus, government feels they know best.
I don't think it would have any efficacy, Paul. Read David's comment:
It would be like your daughter running up and punching you for throwing water on her!
David said in a few words what took me 500 to say:
Even if the Fed announces an extension of the MBS purchase program, bond traders might view this an inflationary (printing money to buy money) and reject the Fed's efforts to control mortgage rates. If bond traders push up yields on US Treasury securities, because they believe the Fed and Congress are borrowing and printing money irresponsibly, no amount of support will work. The only weapon left in Uncle Ben's arsenal will be a form of wage/price controls; that didn't work 35 years ago and won't work today.
Unfortunately most people will be listening to their friends, uncles, neighbors who know nothing about interest rates and mortgages. In turn a lot of people are going to saying shoulda, coulda, woulda years down the line. Great explanation of what's going on in the market. I hold out hope that Ben Bernake knows what he's doing. Best of luck to you.
I loved Ricky Henderson as a young lad collecting baseball cards. I hear he still plays all the time in the minor leagues. Great example, easily understandable for professionals and consumers alike. I can't help but think with less refinances coming, will it be the straw that broke the camel's back, leading even more LO's out of the business?
Good post and I also have to agree with Jerry. The two most popular catagories of post recession comments will be
1. I'm sure glad we bought when we did!
2. I wish I woulda bought when the market was at the bottom!
Brian,
Great article and great analogy - I am going to re-blog this. I agree with your point that the market is a discounting mechanism, however, the contrarian in me is telling me that the surprise next year is that rates are going to go down because everybody expects rates to go up! As you can tell I am a tormented soul with all of my conflicting thoughts!
maybe they'll just go get some more water from the ocean.
they've done that before, right?
Jump buyers, jump!! Get off that splinter filled fence you're sitting on!!
Brian, unfortunately I think this is right on. When the well looks like it will run dry, watch out. The question will be then, how much will that dampen home sales as rates rise and rebates go the way of the buggy whip? I think The Fed has worked itself into the proverbial corner.
maybe they'll just go get some more water from the ocean.
Oh no! Quiet, Jay; they might be reading.
The move upward in rates should be of concern for everyone pricing a listing based on market conditions. I find most Realtors around here do not take that into account, but should. 6% is still great. I had a 14 7/8% adjustable in 1979 so 6% fuxed is still a bargain versus the bad old days, but is will still affect buyers.
Brian,
I was going to stay out of this. Then I read of you abusing Maggie and I started typing, but as I reach this point the radio news started talking about "global warming" and I suspect Maggie need splashed to keep cool. O'well it makes as much sense as our current mortgage rates.
When did you stop water touchering Maggie?
All I really want to say is Marry Christmas!
Bill
6% is still a great rate. Not so long ago they were in double digits. I hope this hike does not turn anyone off and they realize the rates are still super low!
I wonder how much damage those rates are going to do....... and actually how high they will go too.......
If they go TOO high, it will KILL all the forward momentum we had in the real estate market.....
Then, what will happen to the prices of properties that AGAIN cannot be sold.......
OUCH..... =-(
I say, this may be true, it may not be true. What you say -- and your logic makes sense -- is just speculation. And anyway, 6% is a great rate!
Brian, Excellent post. I love the analogy of "getting wet". Now, what happens after this? How fast and far do rates go? My husband bought his first house at 16%. My parents have been in real estate 30 years and used to consider anything under 10% good. Although, the other big challenge is so few folks are qualifying today going back to intelligent basics, it will make the whole economy difficult if folks can't get loans or afford what they consider decent? Something to ponder. All the best, Michelle
Thanks for advising us about this. This is what is important in people's lives.
Really well done; especially nice to think about the summer beach with all the snow on the ground!
Best regards, Gretchen
No, the economy will not let rates go there.
Do you remember 2008? The high gas prices combined with a stock market crisis further depressed the market.
The recent rise in rates are because the money funds need to show they have stocks in their portfolios and less bonds. That's it.
The economy still needs a jolt that lowering payments from refinancing will generate.
Also, the jobs and current job raises are not anywhere near being back and people will not be able to afford the higher payments.
The Fed knows this and they will step in and continue to buy the MBS and Treasuries. This is economic reality.
A case of thinking a good thing will last forever. Good analogy..
It's great that you can teach a child - why can't we teach the adults.
Brian,
I think a portion of your follow up comment is key..
"the danger is that any rise in rates will dampen the tepid recovery going on."
If an increase in rates will result in more doom and gloom for homeowners, foreclosures and the economy...then you will see the Fed do something to keep rates low.
As a loan originator, having rates pop up into the mid 6% range for a couple of months is NOT a bad thing. Why? When rates drop again, all of those people will look to refinance which will ultimately help our business....IF THEY STILL QUALIFY!
The Fed knows this and they will step in and continue to buy the MBS and Treasuries. This is economic reality.
Where will they get the money, Fred?
Geez I love the internet...Thanks for a 'simple enough for me' description to help me understand and share !
I am laughing so hard at my mental picture of you throwing cups of water at your little girl, and her figuring out how to get to where she wanted to go, and when it was worth getting that last bit of water on her. I know that's not the point, but kids are so great, I'm LMHO.
Anyway, even at 6%, people will buy houses if they have JOBS. No 'recovery' is sustainable with 10%+ unemployment. We're doing well here in the Denver area, but hearing bad news from elsewhere reminds me that it all affects us all. And government spending = higher taxes = slower economy = fewer jobs. Duh, I say - DUH!!
Once rates go back up, prices will have to adjust downward! Rates going up will slow pricing escalation and gradually eliminate minimally qualified Buyers. The real estate recovery will continue to be an uphill slugfest! Don't worry though...our Gov't officials continue to propagandize that the recession is over even with 10% unemployment! More unemployed or barely employed Realtors on the horizon.
Not all owners (troubled assests) have fallen off the cliff yet and the banks are scheming to raise rates to make more money on the remainning few good borrowers. Typical. You just knew it was going to happen. But timing is everything and once the TARP imposed salary caps are off in 2010, you bet you'll see rate hikes for massive profits.
Excellent post. I've seen interest rates creep up and have been trying to get the message out that they're likely to rise more. This gives me more ammunition.
Brian,
You could be right... but every year at this time (end of the year) rates go up .500 to .625... they usually float back to Dec. 5th rates by Jan. 15..
Nice analogy, I have to say I agree with it totally too. You have a wonderful Christmas Brian. :)
Let's face it, the foreclosure departments are at least twice the size of the underwriting dept's and until the bad loans start to disappear and the first string of bad debtors start to reappear as "clean"(3 more years) enough to lend too, we're in a holding pattern. Trying to dispose of bad assets to a minimal field of credit worthy buyers/investors.
Raising rates now is the reverse of the Holiday Sales event that most Department Stores offer close to X-Mas. Ask yourself, are the Department Stores really giving away merchandise at Christmas or are they marking it down as low as they can to get you into their store in order to buy other things that aren't marked down as much?
Bank are doing the same thing.
Sad to say, the 'good times' for rates look to be ending.....of course 6% is not too bad historically....
"No 'recovery' is sustainable with 10%+ unemployment."
It is actually worse than that. The statistic does NOT capture all of the people who area employed but took significant pay cuts and can no longer afford their monthly obligations.
Yet another reason why I am an advocate of getting an interest only loan if your employment future is cloudy AND if the difference in rate is not significant. You will at least have the ability to send a lower payment during tough times.
We have been anticipating this for some time I hope it stops at 6%
Great post and explanation of what is happening. It is tough to get people to understand just how positive this time period is to buy and sell real estate. In regards to where the Fed will get the money I just heard yesterday that the Republicans got as part of a concession on the health care reform bill the Democrats to agree to raise borrowing on the national debt limit, this way the ocean will never run dry.
Brian,
The Fed already has the money to buy more bonds via asset reallocation. The thought was not to buy more to keep their assets balanced.....but I agree that the market isn't ready to stand on it's own two feet yet. I don't know if you've noticed, but a lack of capital/liquidity hasn't slowed this administration down from spending (or in this care, reallocating) more funds to prop up a very important part of the market. They are already proposing raising the limit the government can go into debt. Could this be one of the reasons why?
The Feds announced an extension of the bond buying program so they could avoid a giant leap (of approximately 1%) in rates so the market didn't collapse again. Their purchasing power is actually 33% less than it has been over the last 45 days. In his last testimony before Congress Bernanke said he wouldn't rule out an extension of the program. I think they'd prefer not to extend it, but there's at least a reasonable possibility they could extend it. Time will tell. Personally, I'd recommend buying sooner rather than later. It's a big gamble on your mortgage and if you end up paying a 1% higher rate that's a lot of money over 10+ years.
Randy
Thanks for the analogy - a mortgage broker I spoke with mentioned that he thinks we'll see one last drop through January as the retail number from December come back looking poor and the market react. We'll see - I have several buyers who will lock during that time, so - fingers crossed.
Well stated and right on. It is interesting that this has not been a focus for the press. Kinda surprising at it may be the most effective tool used during this recession. Hope to see that we can go to a natural market. We all shall see.
A really well wriiten simplified post. People are so fortunate to get in right now with low home prices and low interest rates, it is indeed a time that I do not think will come again.
Wow! You should be the Nostradamus of interest rates! You've been predicting for months they will go up! How prescience! The government just raised our budget deficit cap AGAIN! This government has been subsidizing real estate for years! We had silly money replace 20% down, ratios totally out of whack, everyone from the lowly mortgage broker and Realtor to Moody's made a ton of dough. We had NO checks and balances. The government just extended the first timer credit plus gave a conditional nod to the move-up buyer. 1031's are still manna from Heaven! You can defer gain forever! You can buy real estate out of retirement funds. Depreciation still exists! Interest deduction too! If you go belly up the government is now mandating you be given a loan mod (with 66% default rates!) or a principal and Interest reduction (only 26% default rate then!) We are spoiled rotten!
I took a gander at long term interest rates going back to the 70's and realized I spent 2/3 of my career in double digit interest rates! I remember doing a 6 point buydown plus 6% to the Realtors for the sale--12% points to move the property and we bought the rate down to 10.75%!! We even had two roaring markets then!
Housing price is king. Keep them down and the buyers will come. Let's "rate" the various "Foreclosure/REO markets" and give them "zones". The imitable Carole Rodoni, in one of her usual lively lectures, rates the various REO markets by assigning them "grades". Detroit--take a guess! It needs all hands on deck to get the housing market back to either renters or new homeowners. Here government intervention may be further needed--subsidies for investors, more money for homeowners, etc. My area of Sonoma County--We are an "A" market--we can take all the REO's thrown at us! We swallow them up! Waiting lines, multiple offers! No need to subsidize out here--keep the prices down!
We still have plenty of "dumb" money out there--Homepath, 3% down, NO appraisal or HOA cert needed! FHA 3.5% down (for now!). Let me ask you folks a question? Would YOU LOAN with only 3 or 3.5% equity in this marketplace?! If you said yes, CAN WE TALK? But seriously--I liked your water analolgy but last time I looked, the Pacific is ONE BIG MOTHA of an ocean! Plenty of water within. How many Trillions does one wish to guess when it comes to our Deficit!
Most of this recent jump is trader hedging against Treasury Note auctions next week expecting weak demand on a light volume week and China trying to talk rates up with the threat of slowing their purchases in US debs. We should see a retracement in January back to likely retest 3.50% on the 10-year TSY and a drop of .750 to 1.00 in points (or .250 or so in rate). I do agree, however, that (barring a double dip recession) the trend and bias on mortgage rates will be upward... not so much as a result of any real inflation in 2010- just printing money doesn't cause inflation- it has to move or have velocity- which it does not - yet... that will come in late 2010 or 2011 if the economy truly gains traction in the next 6 months - which leading indicators are telling us it will.
I am not worried at all about higher rates. We have gotten way too accustomed to thinking that rates need to be low in order for the real estate market to thrive. Not true at all. I remember 1999 when I was offering 8% rates and people were sending me thank you cards.
Brian is right on when he says that the buyback program will not continue and even if they did consider it, it wouldn't work. Besides, beyond what your political affiliation may be, the Obama administration is fully aware of the inflationary policies it has set forward and they know they are about to hit the ceiling of tolerance.
We'll be fine selling 6 - 6.5% rates. It is also known as an inflationary boom. As the rates inch higher people will gravitate to hard assets for several reasons. I'll point out one of them.. Fear (That prices and rates will continue to go up). They may be right however will they have to deal with it. If not, then we are in for some serious trouble. The future will tell. The key here is taking advantage of what is happening and place our money in safe investments until the dust has settled.
Great analogy!!! Demand I'm sure has to also play into the game somehow.
I had a buyer say the other day 'Oh, I didn't know interest rates were so high' when I mentioned 5%. Funny how easy it is to get used to good times and think they are hard times.
Brian- Unfortunately you are correct in your prediction.. higher rates are a matter of when not if... A 1% rate increase corresponds to roughly a 10% hike in the cost of the home. Tougher lending guidelines along with higer acquisition costs will slow the market once again... which is not necessarily a bad thing. This market needs a long period of flat prices and stable interest rates to recover.
Bri...interesting times!!!
http://activerain.com/blogsview/1395262/interest-rates-around-the-holidays-do-we-lock-or-shop-buyer-beware
Gary DiGiorgio
The DiGiorgio Group
9035 Wadsworth pkwy 2000
Westminster.Co 80021
Direct 303 898 4279
Office 303 422 5200 fx 303 467 0211
Gary@Di-DenverRealty.com
20 Years ago below 10% was a great rate! People still bought and sold homes. Yes depressed markets will take another hit, but the cycle of real estate will continue. Consumer confidence is not driven by logic, when the masses decide we have "Hit the bottom" the market will start to rebound. That's why stimulus doesn't work. It's all perception. If somebody wants a house bad enough they will jump through all the lender hoops. If somebody wants to sell bad enough they will price it to make it happen. Without motivation, which is what we are lacking most (even with some agents) the market is blah. If we shout it loud enough and long enough the masses will get it, that this is a perfect time to buy. Once they embrace this, the bottom of the market will be in the rear view mirror. That's just how it happens. Hang in there, encouragement from a veteran Realtor.
Great analogy. And I agree that they will move to 6% sooner than later. Good insight into our market!
Great analogy. And I agree that they will move to 6% sooner than later. Good insight into our market!
Enjoyable read! What a creative way of teaching not just your daughter, but us and the public what goes on behind the fluctuations of the interest rate!
Poor Maggie... I shudder to think how you're going to explain the economic collaps effected by all this funny money: "(yelling from your beach chair)Alright honey, now walk another ten yards further out into the ocean! You see Mr. Del Mar REALTOR, she's now so underwater that there's no possibility of recovery. (again at the top of your voice)Good job Maggie!" :)
I had a little trouble with your analogy. I'm not sure how telling someone to step over lines in the sand compares to market forces at work on interest rates.
Anyhow, your prediction of higher rates in the future is right on -- eventually. And so will a prediction of lower rates again at some point -- eventually.
That said, I well remember higher interest rates than today's. And houses were still bought and sold at a good clip. The driving force is not interest rates, IMHO. It is jobs and consumer confidence. When those improve -- eventually -- we will look back on today and wonder what was wrong with us that we were not buying everything we could get our hands on.
"This is a great time to buy a house".
Akron, Ohio
YOu may be right, but in this market who know what is going to happen from one day to the next. The rules keep getting changed.
Great post... especially the example. Sound thinking in my opinion. Good job Brian!
Ahh Brian,
Do you really think that the FED is going to stop at $1,250,000,000,000 when they have access to all of those really cool printing presses and other people's credit cards?
What are 6% interest rates going to do to all of those Mortgage Backed Securities already treading water?
Freddie and Fannie are already asking for another $400,000,000,000...
6% Interest rates?? We are entitled to 5% interest rates and $15,000 tax credits for buying homes!!
What's another $1,000,000,000,000 when you can't pay back what you currently owe?? LOL!!
Merry Christmas...
(The only reason why home values have somewhat stabilized is because of the low rates. Rates go up and there goes the "jobless" recovery... in an election year.)
The market will stay slow until the inventory of pending foreclosures are processed out of the market. The lenders will hold rates unrealistically low to facilitate the sales of these assetts..no matter the cost to us the tax payer..the fed is not going to follow logic.
they will continue to get cheap money and we shall continue to simply print more..
the lack of new jobs shall also factor into the market ability to support higher rates, and when you add in the current california budget deficit, higher prop taxes.. thelist goes on.. the affordability of homes shall continue to be pressured well into the next 3-5 years. I do not believe this is anormal cycle of the market and thus the cycle curve is not predictable..who says we are not going to continue yet further down in pricing and this is only a short bump in the curve.?
commodity traders are already counting the profits from $100 /barrel of oil this next year..which commodity gets the limited consumer dollars first will prevail..there is only so much to go around.
good post..it sparks dialog about serious issues..economists never agree, who do we follow?
Interesting analysis. If inflation starts creeping in, then rates may even go higher. I don't know.
The problem with rising rates is that it will take some time for the housing industry to understand that buyer affordability will be affected. Sellers will need to reduce prices even more to offset these higher rates if they want to sell. And that won't happen overnight. We're still dealing with sellers who think their property should be priced at the boom market prices.
Do you really think that the FED is going to stop at $1,250,000,000,000 when they have access to all of those really cool printing presses and other people's credit cards?
Isn't that inflationary?
You see Mr. Del Mar REALTOR, she's now so underwater that there's no possibility of recovery. (again at the top of your voice)Good job Maggie!" :)
Certainly Sean, you're not suggesting we are "drowning" our children in all this debt, are you? That almost sounds downright seditious.
Hi Brian, I l;iked the analogy and your insight into our financial markets. Hope your Holiday Season is the best ever !
The Fed knows this and they will step in and continue to buy the MBS and Treasuries. This is economic reality.
Where will they get the money, Fred?
Same place they got it before, our kids and grandkids (through both taxes and inflation).
Brian,
I just recently did a post on this very same thing. It is my hope that the buyers out there heed the warning because it is going to be night and day difference for a lot of first timers as to what type of home they can afford.
Merry Christmas!
Wendy
Wow, great post and fantastic analogy, Brian. Even the most financially challenged minds can understand the way you described this -- I did! :)
Thanks for bringing us up to speed on the likelihood of mortgage rates in the near future!
Excellent post. I agree with you that the printing presses will keep going for a long time. Can anyone say Zimbabwe.
Sure glad I do not have kids.
Great analogy, Brian. Lets hope the Fed makes that last 1.5 cups of water last as long as possible.
Boulder City Steve
(through both taxes and inflation)
Doesn't that mean higher interest rates? I'm using the socratic method with y'all to show that the Fed's out of bullets. Bond traders know the jig is up. If the Fed continues this reckless central planning approach, we'll have "credit rationing" or a currency collapse (which means much higher mortgage rates).
The gov't teat has been milked. No more subsidized rates or tax credit deals after April. Now, our industries have to rely on pricing and utility to sell houses.
Good post. I cover this in my blog post, Our Phony Real Estate Market. Interest rates are going up, but they won't stop at 6%. When the Fed stops buying mortgage securities and Fannie Mae and Freddie Mac stop getting US Treasury money to buy up mortgages (currently this accounts for 95% of all mortgage purchases), there will be no secondary market for mortgage securities and rates will skyrocket in order to entice 3rd party (i.e. non-government) investors to buy mortgage securities, otherwise, mortgages will be extremely difficult to obtain unless the government continues with the mortgage purchases. Our entire real estate market is based on debt, not peoples' incomes, therefore, when the debt becomes more expensive, or harder to obtain, housing prices will fall again. I predict that housing prices will fall by more than 10% in 2010 while interest rates push closer to 10%.
I know that the increase it rate is more of an emotional shock to those waiting and waiting for rates to drop more. I have several clients waiting for the rates to go lower. I am conversative and have told them to get what you can get right now as who can really predict the future, as if they could they would have written a book on it!!! Don't look a gift horse in the mouth or be too greedy!
I didn't make it to the end of all of the comments, so I apologize if someone else hit on the same thing. I always think what will my clients get from a post like this. I hope that buyers understand how much a 1.5 to 2% rise in interest rates will effect how much house they will be able to afford. If they are already looking at the high end of the spectrum they can qualify for many of the houses may be beyond their reach if they wait to long. Great post and I enjoyed the analagy. I am also reblogging this.
I've loved reading each and every one of your comments. A few thoughts before I sign off for the holiday:
1- Kaye Thomas is right when she says that higher rates reduce qualifications by almost 10%- that could soften prices up a bit next year.
2- I think it's time to realize that we can't rely on the Fed or Congress to prop up housing anymore (it doesn't work, long-term anyway). If the result is 6.5% rates and prices 5-10% below where they are today, y'all will still sell homes.
3- 2008 was a challenge for all of us. 2009 was a melee of confusing, maniacal, bittersweet victories. Congratulations to those of you left standing. I admire your commitment.
As always, it's been my honor and privilege to do business with those of you whom I met on Active Rain. It's been an honor to meet so many of you from other states, offline as well.
Merry Christmas, Happy Chanukkah, Merry Solstice, and Happy New Year.
BB 12/24/2009
Maggie, Maggie, got wet and so are we. This is going to be an interesting year as artificial catches up to reality. Thanks for the explanation.
Very good, I agree rates have been stretched like a rubber band and they will snap back to a higher, safer and more easily sustained range, but this is not going to cause the real estate market to tank. I've compiled some figures just to quantify a little:
Now to see the past 5yr approx 30 yr FNMA rates. [there were spikes and valleys]
This is just to encourage you, a 1% increase isn't that bad. We are talking about buying a house and the difference between $100k on a 30yr fixed is $61-63 per month. That is not much when you think of it. A 2-3% increase will slow down the market maybe but not just a 1%.
Rates at 5% to 6% are great. Yes, I remember 1983 at 13%, and when I got into the mortgage biz in 1987 rates started in Jan from 9.2% and ended at 10.2%. This was my intro to the mortgage biz and most of my biz was purchase loan biz. People were still buying.
Merry Christmas, remind people to enjoy what we have, we have plenty to be thankful of.
RAND MILLER
Brian
Our government in Canada is contemplating raising the minimum down payment froom 5% to 10-15% and shortening the amortization period from 30-35 year to 25 year maximum.
The fear is that those with 2-2.5% variables will be hit soon (summer 2010) with 5-6% mortgages which in turn doubles their monthly payments.
It also will cause more 'Orphan Mortgages'
Ty
Brian,
Sometimes people will pass on making a move until everything is in alignment. Even waiting for rates to move back down to 4.50%. Next!
Brian,
Nice analogy,. Not to be too pedantic, but I'm not sure I completely get it. If Maggie is standing on 5% and you throw water at her, she could move either way couldn't she? I don't think that's what either you or Ben want. Or perhaps you're throwing it just slightly right of her. Or maybe thrown-water-induced jumps to the right are not allowed in your little game.
On a slightly different note, this may be very good advice, but I think potential buyers have good reason to be skeptical of interest rate advice from realtors and mortgage people, most of whom paint the situation in terms that encourage "Buy Now", no matter what the circumstances.
Or perhaps you're throwing it just slightly right of her.
You understand the analogy, Rick.
I think potential buyers have good reason to be skeptical of interest rate advice from realtors and mortgage people, most of whom paint the situation in terms that encourage "Buy Now", no matter what the circumstances.
So do I. I'd like to think I've developed a reputation for objective analysis and prescient advice but I'm a salesman, just like you. Hopefully, consumers read my track record and discern whether or not I'm credible.
Right. I agree. I guess one test of our objectivity would be how often we advise potential clients NOT to buy now: "Mr Client, I've looked at what you want to do, and I don't think this is a good time or way to do it."
Thank You, Brian, for the important information on rates. I have been hearing that rates are going to rise further, but your analogy is a good one to share for all to understand.
Among some of the buyers that I am currently working with, I am working with a couple who is deciding whether to build (will take 6 months) or to buy a resale. I want the best for my clients, and will share your information which will help in their decision. The build will cost them more money ultimately.
Happy New Year!
Fantastic way to illustrate the point! I have my 'elevator speech' to accomplish the same thing but yours is WAY more fun! I feel a reblog coming on and I'm obviously not the only one! Thanks!
Brian,
Thanks for such a nicely illustrated explanation of a very confusing topic. I've already re-bloogged!
I have been telling my potential buyers that rates will go up when the Fed stops buying MBS- it's only a matter of time before they realize that i was right.
Thanks for the analogy. Now, if I can only get a a couple fence sitters to see it too. Dottie Carter
This is awesome. It clarified it to me and is really going to help me explain it to clients. In fact I intend to use it today. Thanks!
You guys have to remember there are multiple points of view and you're only looking at it from the realtors perspective saying jump, jump off the fence and make a move. While a 1% rate hike may be another reason for you to market to buyers to buy now, I don't think it's really that big of a motivator when they see the economy is still tanking and no legitimate positive info coming from the Feds these days. Too much number fudging from the Whitehouse and releases of outright false and misleading info from this administration, people just aren't trusting our Government at all, even less than they already did. When people lose trust in the government, they lose control.
I see many buyers who have more cash to put down saying, I'll wait... I'd rather pay down more on principal after prices drop more due to higher interest rates, more inventory and foreclosures on the horizon than to "jump, jump now" when prices are bound to fall more.
Consumers are coming out of the woodwork now with the mentality of "I'd rather pay 6% on $100,000 than 5% on $200,000 when I can use the down payment money to pay down more of the principal on that $100,000 before taking the loan and getting an even better deal". I can't argue, we all know someone who bought in the late 70's with rates in the teens at sub $100,000 prices. Well could those prices be nearing again? Doubtful but consumers seem to think so and the longer they think that, the more it will become a reality.
We still have ahead of us a big mess to deal with in 2010 and beyond, We've still got coming....
Brian, What at great post. I agree with those who say rising rates will put a damper on the real estate market just when in some areas the market seems to be stabilizing. Affordability will be affected. Sellers will have to reduce their homes further if they want to move.
I have buyers today saying it doesn't pay for them to risk their money to buy when they may have to sell their home within 3- 5 years. They feel it is safer to rent.
Sure rates were higher in the past, but look at the prices of homes. It all comes down to being able to afford the monthly payments and appreciating home ownership.
The buyers need to get off the fence and take advantage of the rates now. The generation above me still talks about the 18% rates in the 80s.
To date, I was wholly incorrect on this prediction.
Buy To Let Mortgage Rates
fantastic way to illustrute the point......