The Real Story …
News and commentary about the real estate market and related topics.
Dave Parrish, ABR ®, CRSA, CSP, GRI, ePRO ®, REALTOR ®, RealtySouth
The Coming Rise in Interest Rates…
It seems that we’ve come very used to the low mortgage interest rates of the past 18-24 months. Now near a 50 year low, it is well possible that those rates may well be on the rise in the very near future.
The Fed claims it is on track to end its purchase of mortgage backed securities as planned effective March 31 this year. As the Fed winds up its $1.25 trillion program begun in 2008 to buy Fannie and Freddie securities, thereby keeping interest rates artificially low by keeping demand high, it follows that in the free market rates are likely to take a jump. While how much of a jump is still open to debate, estimates (guesses) vary from a modest half a percent to as high as one and half percent, with some sages betting on even higher rate increases.
Mid December 2009 saw rates as low as 4.75% while current rates for the best credit prospects are now as low as 5.0%. An increase of 
1% in rates from this current position would place us at 6%, still a great interest rate. However, even that rate would also represent a 20% increase in the best mortgage rates resulting in a corresponding and significant reduction in buying power. That is homes will become less affordable.
An interesting sidebar is that the largest increase in activity in the housing market over the course of the last six months has been cash-only buyers/investors. They’re sidestepping the mortgage market entirely. These are investors who see the current pricing of housing as a promising investment arena and are not real organic home buyers. The housing market, while it may have become a commodities market over the past decade, is inherently not one and therefore cannot recover with investors alone.
While it may sound self-serving, our economic recovery which remains in an embryonic and fragile state is in no small part dependent on recovery of the housing market. This is not because of what it does to the incomes of real estate agents, but because of the jobs created and affected by the housing market not to mention the protection of the largest single asset for most Americans… their homes.
A significant rise in mortgage interest rates at this time that further hampers the recovery has far reaching impact. But then so does the continued growth of our growing national deficit. The overwhelming question of what serves our national interests best is similar to the brain-twisting age old question as to the origin of the chicken and the egg.
For prospective buyers the issue is perhaps a bit simpler… be aware of the significant impact that a rise in mortgage rates will have on buying power. Current low rates combined with current low prices and high inventory levels not to mention home buyer tax credit programs create an exceptional buying opportunity that now seems to have a real time limit set. Don’t get caught by the bell!
