Buyers who think the tax credit extension will give them more time to buy should be careful how long they wait...for 2 reasons. 1) Tighter credit standards are coming. Fannie Mae will very soon be reducing their allowable debt-to-income ratios which will therefore reduce the monthly mortgage amount a buyer will qualify for. 2) Mortgage rates are set to climb. The Fed ended their $300 billion Treasury bond purchases on 10/29 and will stop buying mortgage bonds in March. This will create an oversupply of bonds in the market looking for buyers. When there's too much of anything the price typically drops. When bond prices drop, the yield (or rate of return) goes up. The only way to get the $$ to pay higher yields is to charge borrowers higher rates. And none of this takes into account inflation (which bond investors hate). Though inflation remains relatively tame right now, we as a country can't continue spending billions that we don't have (which devalues the dollar) and expect that prices are not going to climb. Do your buyers a favor and tell them they can't afford to wait!
The Treasury Department auctioned off $109 Billion of 2, 5 and 7-year notes this week. This is typically not good news for mortgage bonds (read mortgage rates), but investors were in a healthy buying mood to soak up this excess supply. Consequently mortgage bonds have been trading in a narrow price range all week with little volatility which has kept rates fairly stable.
With the Dow closing up for the 8th day in a row yesterday (something that hasn't happened since April 2007) there's a good chance we'll see a sell-off in stocks next week as investors recoup some profits. Some of those profits will wind up being invested into the bond market and, with no Treasury Auctions slated for next week, mortgage bonds could be the beneficiary which will help rates improve.
You might want to consider calling your clients that a) have an active purchase contract pending, but are still floating their rate or b) those clients that are close to signing a contract next week and suggest they keep in constant contact with their mortgage professional regarding this potential rate improvement. Timing is everything and your client won't soon forget you if you helped them pull the trigger at the right time.
It's no secret that the Federal Government has been selling billions of dollars worth of bonds and notes to finance all of the spending programs it has instituted. But it is a little known fact that the Treasury Department has been purchasing their own bonds in an effort to soak up this excess supply and keep long term interest rates low. It is also not commonly known that mortgage rates are NOT directly tied to the performance of Treasury Bonds (though they do some times travel in the same direction), but are actually dictated by the performance of Mortgage Backed Securities or mortgage bonds. So mortgage bonds actually compete with Treasury bonds in the open market for investor dollars.
So what does all of this have to do with the real estate market? Well, the Treasury's bond-purchase program is going to end come October. And if you know anything about the rules of supply and demand, then you can see what is probably going to happen once that occurs. When the Treasury stops buying its own bonds/notes, the supply is going to increase dramatically. Investors, be they foreign or domestic, are only going to have so much of an appetite for this additional supply and when there's too much of a given product in the marketplace, the price of that product tends to drop to attract more buyers. When the price of bonds drops, the yield (or interest rate the bond pays) has to go up as well. And since mortgage bonds tend to travel in a similar direction, it stands to reason that long-term mortgage rates willl rise as well.
It's highly unlikely you're going to hear about any of this in the mainstream media until this begins to happen. So it's up to you, the realtor, to start advising your potential buyers (especially those that are sitting on the fence waiting for home prices to drop further) to start getting serious about purchasing now. If they wait much longer, the price reduction they may be able to get will be more than offset by a potentially higher mortgage rate. If we all knew the perfect time to pull the trigger on buying a home, a car or stocks, then the Cayman Islands would be a very crowded place. Better to take advantage of today's low home prices and mortgage rates now...before they're gone.
As a mortgage consultant my primary concern is to make sure my clients fully understand the mortgage process. And to ensure there will be no surprises, I personally attend all settlements.
ActiveRain Corp. is not responsible for the accuracy of the site's content (which is written by members of the ActiveRain Real Estate Network) and does not endorse the views of the real estate agents, mortgage brokers, and others listed here.
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