A big part of my job is helping our clients project the most likely scenarios for the housing market. Now that we know who will be President, my job just got easier because we have four years of experience with Obama and a divided Congress, so we know what we are getting.
Fed Set to Hold Rates Low as US Economy Struggles
The US Federal Reserve is expected to keep US interest rates at historic lows when it meets later Wednesday, as it tries to keep a languishing recovery on track. The Fed’s top rate-setting body is widely expected to keep its main rate of borrowing at between zero and 0.25 percent to help spur economic growth.
Faced with reams of data showing the recovery is still fragile, the debate over whether the Fed should quickly raise rates to stave off inflation has all but disappeared in recent months. The Fed’s announcement will still be keenly watched as investors look for any hint that a double-dip recession is on the way, or that the worst of the danger has passed.
Jobs growth remains anemic with employers still reluctant to add permanent positions during the fragile recovery. The unemployment rate is expected to hover near 10 percent for quite some time as the economy regroups after the worst downturn since the Great Depression of the 1930s Consumers have been cautious about spending, which normally drives about two-thirds of the activity in the world’s largest economy.
The Quick and Expected Climb to 6% Mortgage Rates
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, sooner 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 the 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 program. 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 is 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.
When Will Mortgage Interest Rates Increase?
On November 19, 2009 Freddie Mac recorded an average 30 year mortgage rate at 4.83%, down from 4.91% the previous week. Just over one year ago, the 30 year mortgage rate averaged 6.04%. So long as you have solid credit and a 20% down payment, whether real estate investor or homeowner, this time in history is certain to mark historic lows for home buying. In addition, those who still have equity in their property can take advantage of an incredible refinance opportunity.
Mortgage companies have seen steady rises in applications for refinance, but certainly not at the volumes seen just two years ago. Why isn’t everyone flocking to refinance? The answer is quite simple, homeowner appraisals are often below the requirements needed to refinance and many homeowners are dealing with loss of income due to unemployment or wage cutbacks. The only solution is for the economy to pick up and create more jobs along with more competition for increased wages. Unfortunately such a task, although eventually likely, is not in the near future. Economists across the nation are predicting additional declines in jobs during the first quarter of 2010. Job creation is likely to remain slow during most of 2010.
Yet there is still a silver lining to the doom and gloom. It is likely that the federal government will do all they can to keep interest rates low up until actual job creation becomes more robust. Interest rate hikes over the next 6 to 9 months will only occur if outside-international influences force the hand of our financial markets to increase rates. Although a remote chance of this exists, I for one believe we have another year of healthy-low interest rates within the real estate market. Once rates do inch up it is likely to be welcome, so long as inflation remains tame and not hyper.
