Another gift? Always a gift...

A gift from the federal reserve

It is not often that low mortgage rates coincide with low house prices, the condition that exists today in this country.

When mortgage rates are high, they tend to keep house prices from rising because it becomes too financially onerous to finance the house.

When interest rates are low, it tends to stimulate demand for houses, pushing up the prices.

But we are in an unusual situation today! The housing bubble which burst in 2008 caused not only a massive oversupply of homes across nearly the entire country, but it also precipitated the worst recession in over 50 years.

The Federal Reserve, in response, cut interest rates sharply and despite the fact that the recession has officially been over for two years, it continues to keep rates low.

It is trying to allow home owners to refinance their mortgages at more favorable rates. However, the issue is complicated by the fact that many home owners now have mortgages that exceed the value of their homes. The Fed has stated that it will keep rates low for at least another 18-24 months, hoping that time as well as a resolution to thorny banking regulation issues will result in existing mortgage owners lowering the carrying costs of their debt.

Buying a house in this market is as good a time as you may find in the next twenty years to do so. Mortgage rates are lower than they have been in well over 50 years. House prices appear to have ceased falling (for the most part) but have not yet started to regain any significant momentum. This window of opportunity will not likely be around for more than a year or two. That may seem a long time, but once rates start to creep up again, this golden moment will be gone for years, maybe even decades.

And, while it may seem counterintuitive, when rates start to rise again in the next two years, so will house prices. The bursting of the housing inflation bubble resulted in damaging deflation, but as the economy rights itself, and employment improves, so too will house prices.

On a 30-year mortgage of $200,000, the difference between an interest rate of 3/5% (what one can get today) and 6.0% (the rate that is more like what it would be without the Fed’s intervention) is a total of $108,364. That’s more than 50% of the value of the house. Pass along the gift...