So what happened?

In a bold move, the Fed announced that it would be buying up to $500B in mortgage bonds backed by the “Mae� triplets, Fannie, Freddie and Ginnie.   Most of my sources think this was a smart move.   The net result should be an increase in the availability of credit for refinancing and the purchase of homes along with low—albeit still volatile—long-term rates for the foreseeable future.

This sort of decisive action on the part of the Fed is critically important.   Their action will support the housing markets and cultivate improved conditions in the financial markets.   We need credit to be available.   When the credit markets are too tight—e.g. the liquidity crunch we’ve witnessed—our economy suffers.

Likewise, by keeping LONG-TERM rates low, the Fed can provide more stability to the markets.   One of the few ways for the Fed to influence long-term rates is through actions like providing stability the mortgage-backed securities market.

Many people think there is a direct correlation between Fed rate cuts and mortgage interest rates, but this is not the case.   When the Fed cuts rates, it has a direct correlation to short-term rates only, such as the Prime Rate, CD rates, and banking indices.

Long term rates are tied to mortgage-backed securities, so when money flows into Mortgage-backed Securities, it means more liquidity, and lower long-term mortgage rates.   That’s why the Fed’s actions were so important.
If you have any doubt as to how lower rates translate to improvements in the housing market and more buying opportunities, consider this example:

Let’s presume a buyer put down 20% on a “typical” house in California that one year ago cost $500,000 when mortgage rates averaged 6.5%.   With a $400,000 mortgage at 6.5%, the mortgage payment would be $2528.

Now fast forward a year…

In this particular area, let’s say prices have come down 20%.   Now the home is worth $400,000.   With interest rates now at 5.5%, and a buyer puts 20% down for a mortgage of $320,000, their payment would be $1816, a savings of $712 dollars a month!   That opens the market to a lot more buyers.

Of course, not everyone has 20% down, so fortunately we still have FHA loans which only require 3% down.   On a $400,000 loan, the borrower only has to come up with $12,000 for the down-payment with interest rates comparable to conventional loans.   The only difference is that the borrower pays an up-front and monthly mortgage premium to insure the loan against default.

This is a great time to buy or refinance, especially over the holidays.   There are lots of buying opportunities out there!

If you are looking to buy a property, there is no more important factor than your interest rate.
It can make or break your deal. A slight change can end up costing you hundreds if not thousands of dollars over the life of your loan. The most closely watched barometer of the housing market, followed intently by home buyers and all but ignored by home sellers.

Why?

Because homes are priced based on comparative sales in the neighborhood with very little thought to economic conditions, with one exception as we will discuss in a following paragraph. On the other hand homes are purchased based upon affordability and qualification. Two factors that have maligned the mortgage industry of late, since borrowers are now being asked to document the file and prove their income.

The following graphs reflect the current status of the Pasadena California real estate market for single family homes as of last Friday, June 20.

Interest Rate Increase, Home Sales Decrease

Even though loan qualification is a much more stringent process these days, interest rates remain historically low. However when interest rates begin to rise what impact does this produce on home sales?

As you can see from the graph provided by Bankrate, over the last two and a half months interest have been steadily on the increase. Home buyers begin to recognize this and see the monthly mortgage payment consume more of the monthly budget. Instead of rushing out to lock in a loan, they choose to take a “wait and see” approach, in hopes of this just being a slight adjustment and thinking rates will soon fall to previous levels.

The Trickle Up Effect

When interest rates begin to move up, we see other leading indicators in the housing market begin to move in unison. Typically, inventory or unsold homes will increase as new homes become listed “for sale” and houses that have been “for sale” continue to increase their “days on market” or selling time due to the reduced activity of home buyers.

Now is when home sellers begin to pay attention to the economic indicators which is typified by how many days the house has been on the market for sale. The net result is the longer number of days it takes to sell a house produces a decline in property values.

One way to avoid being at the mercy of the housing market is to accept the fact that pricing your Pasadena home properly is critical to getting out of this market as quickly as possible. The longer you’re in it, the less likely your chances of winning.