Interest Rates

Today marks the one week anniversary of the end of the Mortgage Backed Securities Purchase Program (MBSPP). This monster $1.25 TRILLION stimulus program began in Early January 2009 and held rates under 5.00% for most of the year. So, what happened?

THE GOOD NEWS is, so far the change in the market has been TAME with rates rising only .250% from a week ago. Considering that the stimulus program caused rates to FALL over 1.00% at its onset, there were fears the opposite would occur at its end. The modest increase is just what we need to keep the momentum in the housing market.

SO NOW WHAT? Our top industry analyst Barry Habib has forecast interest rates for 2010 ranging from just above 5.00% to potentially as high as 6.5% (I did say potentially). Here are three key factors that will influence this range:

INFLATION will be the NUMBER ONE factor in determining how and when rates will rise. Currently, inflation is very low, but rising oil prices or an improving economy could change this trend.

DEMAND for Mortgage backed securities in the US and Worldwide is always a factor. This is exactly why the MBSPP stimulus program worked…it increased demand. Current demand is still strong as evidenced by the modest change in rates following the MBSPP. Historically, when investors are uncertain about the equities market, the have a healthy appetite for Mortgage Bonds. Also investor confidence in the US economy helps maintain demand. Watch for signs that either of these may change.

VOLUME 2009 brought HUGE volumes of new mortgages, especially re-finances. With rates gradually rising, re-finances will decrease as we move thru 2010. Lower volumes of new mortgages require less demand…and could help mortgage rates remain low, or rise gradually.

A COMMONLY HELD MISPERCEPTION among our clients is that rates will remain low “because the Federal Reserve said they won’t raise rates anytime soon”. We hear this daily from your clients. Just a reminder that the Federal Reserve controls a short term rate called the Federal Funds Rate. There is little correlation between this rate and the direction of mortgage rates. You will see mortgage rates rise even while the Fed’s keep the Fed. Funds Rate low. Don’t let your clients be fooled by listening to the media on where rates are headed.

BE AN ADVISOR TO YOUR CLIENTS Armed with the above information we hope you can help your clients who are trying to “time the market” realize that with regard to rates, NOW is a great time to make a buying decision.

As realtors, we are always telling people why “today or now is a good time to buy” and many times we have good reason for that. The prices are down and there are a number of foreclosures available, buyer incentives, etc, etc. Maybe the best reason of all right now to buy is the interest rate.

I know mortgage lenders are always talking about this and advertising this, but we hear it so much that we forget to pay attention to it. If you really stop and think about it, interest rates may be the biggest influence on whether we can buy or not. Let’s face it, the vast majority of the population buy based on what they can afford in a monthly mortgage payment. Nothing affects that more or greater than the interest rate. Let’s take a look at a snap shot of a few figures to see the real impact when interest rates rise and what that does to your monthly payments.

According to Metrolist, at the end of 2009 the average price for a single family home was $281K. For this example, let’s call it an even $280,000 and let’s also base all of our calculations on a 30-year-fixed. We’ll take a look at a 5% loan, a 6%, and a 7%. We are also all in agreement that it’s unlikely that interest rates will go lower and the reality is that they are only going high from here.

1. $280,000 at 5% = 1,503 P&I
2. $280,000 at 6% = 1,678 P&I
3. $280,000 at 7% = 1,862 P&I

Just the jump from 5% to 6% almost added $200 a month to your payment and we still haven’t added in taxes and insurance yet. If you have to add mortgage insurance, you could be easily looking at $2000 a month. It adds up quickly and that’s why interest rate is such an important factor. It’s also the main reason why I tell people who are on the fence about buying now or waiting not to wait any longer.

Dan Polimino is a Realtor with Fuller Sotheby’s International Realty. He can be reached at DPolimino@fullerproperties.com and www.coloradodreamhouse.com/denverpost