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rates always go up a hair in the spring and then again in the fall... busiest home buying season. I remember my first mortgage... landed an 8.25% and was very happy with myself as that was a great rate in the day! I never thought that in my day I'd see anything under 7%!
The time of year has no bearing on mortgage rates.
It doesn't work like this. Historical affordability numbers show that prices adjust, both upwards and downwards, to compensate for changes in rates (why do you think we had a bubble in the first place ?)
Incorrect, housing prices do not decline as a direct result of rate increases. It has only an indirect effect.
Last edited by MoorestownResident; 06-05-2009 at 06:00 AM..
The Case Shiller index for NY metro is currently ticking downwards at about 2.5% a month. So you're looking at 2-3 months for a 20-30K drop at the current rate of decline.
There are a bunch of reasons why high rates and low prices are preferable.
Besides the option to refinance, if rates are higher and prices are lower, it tilts the balance in favor of buyers who are more debt averse. For example, the rewards for prepayment are higher. The reward for having a substantial down payment is higher.
Lots of issues with Case Shiller. First your math is way off. If prices decline 2.5%-3.0% a month that's a 30-36% drop over 12 months, that is not happened in the NYC or Northern NJ markets. That didn't even happen in Vegas over 12 months. Second, even 3% drop in a month does not equal a $20,000-$30,000 drop in housing prices unless you are talking about a $700,000-$1 million property, certainly not the average house in NJ. Thanks for proving my point. If you believe Zillow, the median price in NJ has fallen below $300K.
The bottom line is this - for the average homeowner in NJ, if they waited to buy while watching rates move up 1% in a short period of time, they have LOST MONEY. You would have been far better off negotiating price and buying 6 months ago while locking at 4.50%. And that's exactly what I warned folks about perhaps 6 months ago. I was SPOT ON.
For those just starting out - the amount of interest you will now have to pay over the life of a 30 year loan far exceeds any modest price decline in the 'housing market' over the past 6 or so months. That's an unfortunate situation and the longer you wait the worst it might get if rates continue to increase even if housing declines modestly. And while the amount of interest is deductible, it is a deduction which means you only save a fraction on your tax return. It is not a credit, people often mistake the two.
Lastly, for those thinking you can refinance at some point, not likely. Rates might not even get below 5% again in our lifetime and if you believe the various bailouts will result in inflation and higher rates, don't be shocked if mortgage rates approach 10% in a couple years.
Last edited by MoorestownResident; 06-05-2009 at 06:06 AM..
The time of year has no bearing on mortgage rates.
Seriously? Just like gas price increases have nothing to do with "holiday weekends"... Supply, demand - or gouging as I see it... take while the taking is good!!
Lots of issues with Case Shiller. First your math is way off. If prices decline -2.5% a month that's a 30% drop over 12 months, that is not happened in the NYC or Northern NJ markets.
Prices are declining at increasing rates. From Feb to March, prices declined 2.5%.
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Second, even 3% drop in a month does not equal a $20,000-$30,000 drop in housing prices
I wrote that is was a 20-30k drop in 2-3 months.
For a 300k house, a 7.5% drop is a price drop of 22,500 (3 months at 2.5%). For a 600k house, a 5% drop is 30,000 (2 months at 2.5%).
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The bottom line is this - for the average homeowner in NJ, if they waited to buy while watching rates move up 1% in a short period of time, they have LOST MONEY. And that's exactly what I warned folks about perhaps 6 months ago. I was SPOT ON.
No, you were completely wrong.
What you write is only true if prices stay constant. But they don't stay constant. Prices move down when rates move up.
According to affordability numbers, like those that I have posted several times, prices actually appear to overshoot upwards when interest rates are low. That is, your monthly payment will be higher when rates are low, because prices are high. Below is a graph showing that affordability measures based on monthly payment demonstrate that your monthly expenses will be LOWER when rates are HIGHER.
It is an empirical question whether the price changes outweigh the changes in rates -- this is not a question that can be answered by some vague hand-waving. Instead, it requires some serious analysis and cold hard numbers. The numbers that I used were the HOI affordability index, and the historical 30 year fixed rates reported by Freddie Mac. When these are combined in a scatter plot, it becomes clear that affordability numbers took a hit during the bubble that resulted from low rates.
I notice that these were in response to one of your posts. Since you didn't get it then, please pay more attention this time:
First, here's a plot of interest rates against price:income ratio. The x axis is the price:income ratio, the y axis is the 30 year fixed rate. Note that higher rates go with much lower price:income numbers:
And here is a plot of the HOI (x axis, higher means more affordable) and rates (on the y axis). Notice that higher rates means that housing is more affordable.
There are many possible reasons this is the case, but I suspect one reason for it is that most buyers have a preference for taking on a large amount of debt, and per my previous comments, low rate environments favor this preference.
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For those just starting out - the amount of interest you will now have to pay over the life of a 30 year loan far exceeds any modest price decline in the 'housing market' over the past 6 or so months.
You're hand-waving again. Please show us the numbers.
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Lastly, for those thinking you can refinance at some point, not likely. Rates might not even get below 5% again in our lifetime and if you believe the various bailouts will result in inflation and higher rates, don't be shocked if mortgage rates approach 10% in a couple years.
And what do you suppose will happen to house prices when rates hit 10% ?
What will the fed buy them with ? In particular, how do they buy them without driving long term bond yields up, which will ultimately put a floor on borrowing rates ?
Fed will buy that with investor's money. You know why? Investor's are not going to get more that 5% 'Safe' return from profit-making corporates anytime soon. They need to wait 3/4 yrs to get that. Meanwhile, they will invest in Treasury Bills, Notes, Bonds, and TIPS because they are safer. Yes, in the long run the rate will go up. But not in next 6 mo/1 yr. It will be a slow rise over several years rather than a spike like on April 29th.
Any talk to alternate reserve currency will not have much steam when the world specifically China/Russia, realize that they still need USA and it's dollar to recover before they can recover.
Seriously? Just like gas price increases have nothing to do with "holiday weekends"... Supply, demand - or gouging as I see it... take while the taking is good!!
SPring and summer has an impact on rates. They usually go up during that time, unless there are some other greater negative factors
Sorry guy you are so wrong I cannot even begin to correct you with the amount of time it would take. The problem with citing housing statistics is that are are wrong in vast majority of cases, they lag substantially, they are based on numbers reflect the PATTERN OF SALES which is largely irrelvant, and are barely relevant to the local market. Price to income ratios are going to show the same thing in the northeast regardless of the market environment. If those listening to me 6 months ago negotiated price and purchased or refinanced as I suggested, they'd be tens of thousands in the black today. That is the bottom line.
Last edited by MoorestownResident; 06-05-2009 at 06:45 AM..
Fed will buy that with investor's money. You know why? Investor's are not going to get more that 5% 'Safe' return from profit-making corporates anytime soon. They need to wait 3/4 yrs to get that. Meanwhile, they will invest in Treasury Bills, Notes, Bonds, and TIPS because they are safer. Yes, in the long run the rate will go up.
Flight to safety will have investors piling into T-Bills, TIPs, high quality floaters, and anything that is relatively short duration.
They are not going to pile into 30 year bonds.
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But not in next 6 mo/1 yr. It will be a slow rise over several years rather than a spike like on April 29th.
The short term rates will be low, and the long term rates will get higher -- the treasury yield curve will steepen. That's what flight to safety does, it produces a steeper yield curve.
Sorry guy you are so wrong I cannot even begin to correct you with the amount of time it would take. The problem with citing housing statistics is that are are wrong in vast majority of cases, they lag substantially, they are based on numbers reflect the PATTERN OF SALES which is largely irrelvant, and are barely relevant to the local market. Price to income ratios are going to show the same thing in the northeast regardless of the market environment. If those listening to me 6 months ago negotiated price and purchased or refinanced as I suggested, they'd be tens of thousands in the black today. That is the bottom line.
If they bought with a 10% down-payment 6 months ago, they are probably underwater already. Case Shiller dropped more than 5% between Dec and March. If they bought with a 3.5% down payment, then they are almost certainly under water.
The next bogus NY Times sob story will be about some guy who took your advice.
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