High mortgage rates? Let’s keep it in perspective.

Mortgage rates are on the rise once again.  Both stocks and bonds have been selling off resulting in bonds having to increase their attractiveness with offering higher yields.  The result is higher mortgage rates.

But let’s keep this in perspective.  An average 30-year fixed rate today as I write this is 6.5%.  Is that high?  Compared to the 5.75% of earlier this year and the 5.25% of 2003, yes it is.  But historically, 6.5% is a GREAT interest rate to buy a home.

Here are some rates from the past:  November 1983 – 13.5%.  March 1990 – 10.8%.  June 1996 – 8.0%.  May 2000, 8.4%.  July 2006 - 7.0% and June 2007 – 7.0%.  So is 6.5% a “high” interest rate.  I don’t think so.

What a crazy market!

With this crazy market, there are many concerns and fears about personal savings.  It is very frustrating to watch hard earned dollars evaporate, but sometimes a historical perspective can help.  We are clearly in the midst of a brutal bear market that began on October 9th of 2007.  Since that time, Stocks have declined by a staggering 41% as measured by the S&P 500.  A decline of 20% constitutes a bear market…and a 10% decline is a “correction”.  The last bear market which occurred between March 24th of 2000 and October 9th 2002 (yes, October 9th), and saw a 49% drop.  Overall, the average bear market lasts for 12.3 months, with the average decline being 32%.

 

The current bear market is right in line with the average historical time frames, and the extent of the decline is worse than previous bear market averages, but still slightly better than the bottom made in 2002.  So the historical data might suggest that we could be nearing a bottom.  Many people will say that it’s different this time, and that we have never had a financial crisis like we are seeing.  While that is true, it’s always different, and it’s always something.  The last bear market was driven by fears of terrorism and fueled by a dot com/tech bubble…both of which had never been seen before either. 

 

As for the date October 9th, which was yesterday, it’s interesting to note that October 9th of 2002 marked the end of the last bear market.  And October 9th 2007 was the beginning of the present one.  While it may just be coincidence, it will be interesting to see if yesterday’s low has some significance in stock market history. 

  

One bright spot is that oil prices are plunging, falling from a high of $147 last July to current levels of around $80 – at least making a trip to fill up at the gas station slightly more “bearable.”   (Yes, a little pun intended there.)

 

As far as mortgage rates go, the news isn’t much better than it is for stocks.  The weird part of this is usually when the stock market is having a bad day, mortgage rates will have a good day as investors are pulling money out of stocks and parking it in bonds.  But money is flowing out of bonds as well.  Where is the money going?  Maybe under mattresses – who knows.  But it is important to note that even though rates are rising, they are not high.  As I write this the 30 year mortgage rate is right around 6.375%.  That is not a bad rate.  In fact, it is a very good rate to borrow money for a home. 

 

Let’s all keep our chins up.  This, too, shall pass.

Mortgage Rates in the 5%’s?

That’s right!  Thanks to the Treasury coming in to bail out and take over Fannie Mae and Freddie Mac, 30-year fixed mortgage rates dropped from the 6%’s to the mid 5%’s on Monday, and have now held there all week.  Earlier this year rates dropped even lower than this but weren’t able to hold on.  Will they stay this low for a pronlonged period of time?  Maybe. . . let’s look at the reasons for the drops.

When the governement came in and backed up the mortgage securities of Fannie Mae and Freddie Mac, it made those securities look more apetizing to Wall Street investors.  They started scooping them up, causing demand to increase, thus yields rose and prices dropped.  Now some say that just like our domestic investors are now finding these investments more attractive, so will foreign investors.  These foreign investors take longer to jump in, so if and when they do, the demand could continue to go up, causing prices to drop again and mortgage rates to follow suit.

Let’s hope this scenario plays out.  It is just what the nation’s slumping housing market needs.  Of course, our market here in Eastern Idaho is still strong, but we will also take any bump we can get.

Mortgage Rates and Hurricanes

It’s been a great week for mortgage rates here in Pocatello and Eastern Idaho.  We started the week at 6.25% on a 30-year fixed, 5% down payment conventional mortgage loan and are now ending the week at 6.00%.  A .25% drop is significant in and of itself, but it also gets us so close to interest rates in the 5%’s again.  It is also significant since we started the first of August with rates around 6.50%.  So hopefully this is a nice trend.

I believe the reason for this nice downward pressure on mortgage rates is due to the price of oil coming down.  Mortgage rates are tied to the bond market and the bond market hates anything inflationary.  High oil prices are definitely a risk for higher inflation, causing the bond market to react negatively.  In turn, so do mortgage rates.

An example of this was the aftermath of Hurricane Gustav.  There were fears the hurricane would wipe out or severely damage all the refineries and oil platforms along the Gulf of Mexico.  When the hurricane was not as bad as feared, the markets reacted positively assuming there would not be a negative affect on oil prices.  And thus, mortgage rates came down.

So pray for continued lower oil prices, and hurricanes that don’t pack a lot of punch.

A $7,500 tax refund? Better read the fine print.

Congress passed and the President recently signed into law H.R. 3221, the Housing and Economic Recovery Act of 2008.  There is a lot of good stuff in it, including all mortgage originators (including those that work at banks and credit unions) must register in a national registry.  But there is one part of the Act that might be embellished by originators to generate more loans.

The Act provides for a First Time Homebuyer tax credit of 10% of the purchase price or a maximum of $7,500.  Sounds great, and it is a good thing.  But just like a piece of cake that is tasty and delicious, there are calories to count once you eat it.  The calories for the tax credit is you have to pay the tax credit back to Uncle Sam.  It is not a freebie.  You have to pay the entire tax credit back with $500 added to your taxable income until paid back or if you sell your home and earn a profit, you pay back the remaining tax credit balance. 

I anticipate for the next 6 months you will see many ads from mortgage originators and real estate agents saying “Buy a home today and get a $7,500 tax refund!”  Will the rest be disclosed once the new home buyers are at the agent’s or originator’s desk?  I hope so.  But logic tells me this is another buyer beware and many first time homebuyers will be lured into buying a home based on only a half disclosure.  If you have any questions on this, please call or comment on my site.

Some upsides to the downturn

There is a lot of negative news about the economy to read these days.  Home prices are decreasing (nationally), banks are failing, GDP is down, gas prices are at an all time high and the unemployment rate is increasing.  But sometimes when there is so much news it is easy to lose sight of the forest through all of the trees.  In other words, yes, times are bad, but there are some positive items to note.

First, if you are an investor, stocks are cheap.  Have you ever heard the expression “buy the recession”?  Stocks are much cheaper than they were last year and the stock market has always rebounded.  The bargain stocks you buy now will most likely be worth a lot more next year or the year after when we come out of our bad times. 

If you are looking to buy a house, boy, it sure is a buyers market.  Many sellers are very desperate to sell their homes and giving incentives or dropping prices, or both, to get their homes sold.  Of course you must have good credit to buy a house in this market, but if you do, you can get a great buy right now.

The other good news that we take for granted is the geopolitical situation, which is the underpinning of our financial stability and prosperity, is at least holding steady and maybe even getting better.  We haven’t had a terrorist attack on US soil since 2001.  The North Koreans haven’t set off any nuclear test detonations since 2006.   Andd things appear to be getting better in Iraq.  

And finally, the US economy is still growing.  Sure, the financial markets are taking a beating, but part of the purpose of having financial markets is to act as a buffer for the real economy.  And the real economy keeps chugging along.  It might be a little slower than we have seen in the recent past, but it is still growing.  Anyone who calls this time a recession has to admit it is one of the mildest recessions we have seen.

So keep your head up – there is always as silver lining if we look for it.

Real Estate Market not as bad as once thought?

For the past 12 months, it has been non-stop doom and gloom reporting on the real estate and mortgage markets.  Every time I turned on the TV, listened to the radio, opened a newspaper or started surfing online, it was another “the sky is falling” report on our national housing and mortgage markets.  While I agree we are in the middle of a market correction, it has been frustrating to watch the media moguls trying to out do each other in dramatizing the circumstances. 

Lately we have seen some reversals in both real estate and mortgage lending.  Markets that once were depreciating are leveling off and mortgage rates are still very low by historical standards.  People are buying homes and refinances are still happening.  Here in Eastern Idaho, including Pocatello, Blackfoot and Idaho Falls, we actually haven’t seen any depreciation.  It is true there are more houses on the market now than there have been in “the boom years”.  But this is now more of just a normal real estate market rather than a hot market.

I was watching a report on money.cnn.com that actually reported “housing’s rosy outlook”.  It talked about how real estate is local; meaning that, yes, there are some bad markets in the nations, such as Phoenix, AZ or Miami, FL.  However, there are many markets that are doing great.  Don’t trust everything you read or hear in the media.  Click here to watch the full report.  http://money.cnn.com/video/#/video/news/2008/05/19/news.harlow.coldwell.ceo.intv.cnnmoney

It was refreshing to see a national media report that was positive on our markets.  Since markets in general, including real estate markets, are driven by perception and feeling, perhaps we could see some of the markets that are depressed rebound quicker if more of our media friends would be just as enthusiasic reporting the positive rather than the negative.