Mortgage interest rates during much of 2009 were lower than they have been in 40 years. What goes down, must go up – right? To give you a heads up, an expert will tell you what is likely to happen just prior to the inevitable rise in rates.
Economic trends and Federal Reserve actions have combined to allow home buyers to purchase homes with a 30-year mortgage below 5%. It’s been four decades since you have seen such low rates. Conventional wisdom says the rates will rise again. For instance, in the 1980s, the average mortgage rate was a whopping 12.70% and in the 1990s the average rate was almost twice as high as it is now.
So, how can you tell when the rates will start to rise again? Watch the inflation rate. Mark Dotzour, Chief Economist with the Real Estate Center at TexasA&M, points out that the expectation inflation will remain low in the US for an extended period of time caused the US Treasury rate to fall between 3.2% and 3.5% for much of the second half of 2009.
With extraordinary levels of federal deficit spending, Dotzour feels it is unlikely that the low-inflation scenario will be popular when the economy starts to rebound. As a result: expect mortgage rates to rise when signs of improvement appear.
Dotzour says there is a second factor contributing to the low mortgage rates. It is the Federal Reserve Bank’s unprecedented purchase of nearly all the mortgage-backed securities issued by Fannie Mae and Freddie Mac in 2009. This amount is huge – totaling more than $1 trillion for the year. And this program has been extended through the end of March 2010.
“The Fed has never done this before in its history,” said Dotzour. “They are doing this to stimulate the economy by keeping mortgage rates as low as possible.” Dotzour says when the Fed stops buying these securities from Fannie and Freddie, mortgage rates are likely to increase, possibly quite abruptly.
So, Mark, how far will rates go up when the Fed terminates its buying program? “That question is difficult to answer precisely, because this action is unprecedented,” he says. “But many experts think that rates could move up one-half to one percent.” Bottom line: When the economy recovers and the Fed stops purchasing mortgages, rates will rise.
The home supply-and-demand balance in the Austin area is right where it should be – where neither buyer nor seller has a distinct advantage.
It’s basic Econ 101. Too many homes for sale means the buyer has a big advantage and vice versa. But what is “too many?” The standard formula considers the number of months it would take to sell all the homes currently available, at the recent pace of sales.
Real estate economists generally agree that a 6-months supply, using this formula, represents a balanced situation. If you have, say, 10-months of inventory, it is a buyer’s market. Or 3-months’ inventory, you have a seller’s market. The Austin area was almost perfectly balanced at year’s end, with a 5.4 month’s supply.
Of course, averages can be deceiving. This 5.4 months’ number takes Austin’s housing market as a whole into account. But, in actuality, the market differs by price point and by location. For instance, homes priced under $400,000 are moving at a good pace, while the McMansions priced above a million bucks have “for sale” signs sitting in the front yard a lot longer. But the market as a whole is in a balanced state right now.