Interest Rates

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i don't get it... who is better off? the 360k buyer? wouldn't the 200 less per month applied to the principal kill the loan off faster?
 
<p><em>Anyone think that home prices have fallen 8% since mid January?</em></p>

<p>January's deals will close in March.</p>

<p>The bubble stalled because of lack of affordability. The decline is because of lack of affordability. The foreclosure rate is because of affordability.</p>

<p>Make no mistake, increased interest rates will make it worse.</p>

<p> </p>

<p>Here's the recent numbers from Lansner. Note, over half are now in the $0 -$500,000 range. Previously, it was just above. So it looks like it probably is peeling off 10% a month.</p>
 
That's a very good point, ipoplaya. So even with home prices falling. Eventually, rates will increase. Making the monthly mortgage payments 'almost' similar. Either ways, the banks are going to make their money.
 
<p>"i don't get it... who is better off? the 360k buyer? wouldn't the 200 less per month applied to the principal kill the loan off faster? "</p>

<p>jbatz - in terms of monthly affordability, the buyer who buys at 25% less than today's prices will likely be better off, but the point is that it might not be by much. If mortgage rates head up due to inflation and higher and higher risk premiums due to large number of forecasted defaults, we could easily have mortgage rates in the 8-10% range at market bottom. It's plausible that the bottom buyer will be no better off on a monthly payment basis than they are today. </p>

<p>Taxes do go down, but a 25% drop to the median will only save the future buyer approximately $100 per month. That assumes today's median buyer at $490K doesn't get the property re-assessed when it drops down to $360K...</p>

<p>Just something for people to consider. Being a little bit of a devil's advocate here. Buyers itching to own something should understand that waiting 2-3 years may only improve their affordability by a couple of hundred bucks per month at the time they buy... </p>
 
The Federal Reserve has been on a rate cutting spree once more. Many mortgage applicants are calling their loan provider and expecting a lower interest rate. Others who have been waiting to refinance are puzzled as to why mortgage rates have not moved lower during the recent five Fed rate cuts. This is difficult to explain to consumers who have watched a 2.25% reduction by the Fed with very little benefit in mortgage rates.



Is a Fed rate cut really good news for mortgage rates? The facts may be surprising. The Fed can only control the Discount Rate and the Fed Funds Rate. This is very different from mortgage rates. A mortgage rate can be in effect for 30-years while a rate set by the Fed can change from one day to another.



It is often said history repeats itself. And if history is any teacher, we can learn from what happened to mortgage rates the last time the Federal Reserve was in a rate-cutting cycle.



The last time the Fed was in a lengthy rate cutting cycle was back in 2001 from January 3, 2001 to December 11, 2001. In the span of 11 months, they cut the Fed Funds rate 11 times with eight of those cuts by 50bp. This resulted in a total of 475bp or 4.75% in short-term interest rate cuts taking the Fed Funds Rate from 6.00% down to 1.75%. Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose.



Now let?s take a look at what happened with the Fed?s most recent cutting cycle, the first since 2001. On September 18, 2007 the Fed cut the Fed Funds Rate by 50bp. The mortgage bond market briefly enjoyed a ?knee-jerk? reaction to the Fed move by closing higher that day, but lost 140bp over the following two sessions. Then on October 31, 2007 the Fed lowered the Fed Funds rate by 25bp. The mortgage bond market responded by losing 78bp over the following five trading days. On December 11, 2007 the Fed once again lowered rates by 25bp and the mortgage bond market lost 88bp in the next three days. So far this year, the Fed delivered a surprise 75bp rate cut on January 22, 2008 and mortgage bonds lost a whopping 144bp in just 2 days. Eight days later and as widely expected, the Fed cut rates by 50bp. Within 13 days from that 50bp cut, mortgage bonds lost 269bp.
 
<p>"Now most uninformed people would naturally think because the Fed cut rates by so much during this time that mortgage rates would follow suit and trend lower as well. Not so. Mortgage rates actually moved higher during this time of significant rate cuts because inflation, the arch enemy of bonds, gradually rose."</p>

<p>National average mortgage rates:</p>

<p>Date: 1/5/01, 30-year fixed = 7.07, 15-year fixed = 6.74, 1-year ARM = 6.86</p>

<p>Date: 12/14/01, 30-year fixed = 7.09, 15-year fixed = 6.57, 1-year ARM = 5.19</p>

<p>SoCalGal, during the period of time you reference, most mortgage rates did in fact fall I believe. The 1, 3, and 5-year products definitely fell by pretty significant amounts. Maybe you only mean longer-term fixed rates didn't move. The 30-year fixed was essentially flat over that period of time although in November of 2001 it hit around 6.50%. The 15-year was a smidge lower but did go sub 6% in November of 2001.</p>
 
Even at 5.5%, payments were well above the rent equivalence they will soon reach. If interest rates end up going even higher that will push prices even lower so no gain there. <b>Maybe</b>, if the Irvine market holds up well, people who slipped in during a 2-week window in January will only lose 10% of their purchase price, i.e. a year and a half of payments. Maybe. Tight window for a not-so-great situation (only worth it if living in the house for the next 18 months is worth double the payment). In any case, the window is shut.
 
"Just something for people to consider. Being a little bit of a devil's advocate here. Buyers itching to own something should understand that waiting 2-3 years may only improve their affordability by a couple of hundred bucks per month at the time they buy... "





IPOPLAYA- i think you are using the classic case most use car saleman use when they sell a car to a sap who doesn't know too much about finance. the sale's man push the buyer into an affordable monthly payment but stretches the loan to a longer length and thus making more money on financing. you are much better off talking about price of and item vs monthly payments.





anyways i hear ya about being a devil advocate.... this board needs a resident bull and i enjoy your website of house going into escrow. I hope you follow though and see which one actually close escrow too. too bad you don't have one for HB.
 
<pre>I think Bernanke just doesn't get it!! What is it with this clown?
Ron Paul's Statements and Bernanke's response at Fed Reserve Meeting
</pre>

<pre>
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<p><em>Buyers itching to own something should understand that waiting 2-3 years may only improve their affordability by a couple of hundred bucks per month at the time they buy...</em> </p>

<p>Except prices aren't based on rational interest rates. By rational, I mean real long term rates. The current prices are based on affordability of a tiny fraction of the required market transaction volume. The overall base price that people are looking at homes coming from and being "a deal" aren't based on 5.5% fixed mortgages, they were based on option ARM pricing resulting in $800-$900k loans carrying $2500/month payments.</p>
 
jbatzmaru wrote: the sale's [sic] man push the buyer into an affordable monthly payment but stretches the loan to a longer length and thus making more money on financing.



You're forgetting about the time value of money; there's a huge difference between getting adjusted to market at 1, 3 or 5 years (ARMs) and getting cashed out in three decades (30 year FRM).
 
<a href="http://bigpicture.typepad.com/comments/2008/02/declining-home.html">Oh yeah... check out what Barry (a guy who has been on CNBC as much as I have posted on IHB), says about a WSJ article</a>. I still don't know what I am talking about though.
 
graphrix, I didn't see anything by Barry Habib at your link above. Can you provide a more direct link? (Oh, and by the way, you da man.)
 
"Those January and early Feb buyers that locked up 30-year conformings in the mid to high 5% range and jumbos around 6.5% might have been the smart ones."



thanks... 4.875% fixed for 30 years
 
<p>"There are two reasons mortgage rates haven't responded more to the Fed's rate cuts. <strong>One is that long-term Treasury yields, which are the benchmark for most mortgage rates</strong>, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar. The other is that the spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans."</p>

<p>So again, if you want to track mortgage rates the best way to do it is via treasury yields.</p>

<p> </p>

<p> </p>
 
interloper wrote: So again, if you want to track mortgage rates the best way to do it is via treasury yields.



Actually, Treasury yields don't have anything to do with MBS (mortgage backed securities). I'd like to post an explanation, with graphs, but I don't know how to post the article so that all the graphs are intact. Can someone tell me how to do that on this board?
 
SoCalGal,





Link the article, depending on what it is, I can get the charts to work. And, I will show you how to do it for yourself next time. But, you are right, MBS and treasury yields are complete polar opposites in this market. Investors do not want a high risk 6% yield, when they can get 4% with little to no risk.
 
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