Posts Tagged ‘economy’

Gaining Perspective

February 9, 2011


There are times when you need to view something from a different angle to better understand it.  We tilt our heads when appreciating abstract art.  We walk around a new car to take in all the lines.  We step back when we place an arrangement on the table.  Changing the view gives us new perspective in order to better understand what we are looking at.

 

The same can be said when looking at factors and indicators of the economy, housing sector and interest rates.  We have all heard that interest rates are at historic lows, but just how low is that?  Did you miss out on this recent refinance boom?  Is this refinance boom even over?  Just where are rates right now anyway?

 

Interest rates have been tracked and recorded for the past 39 years.  In that time if there has been one constant, it would be change.  Consider these facts on 30-year fixed rate loans:

 

  • The average interest rate from one month to another has only held unchanged 14 times in 39 years.
  • Interest rates have dropped 2.69 points from 1972 when the average rate was 7.38% to 2010 where rates ended at 4.69% on average.
  • Over the past 39 years interest rates climbed as high as 11.07 points above the yearly average of 1972.
  • Interest rates have dropped as much as 14.22 points since their highest in October of 1981 when that single month boasted rates at 18.45%.
  • The highest yearly average interest rates occurred in 1981 at 16.63%.
  • The lowest rates on record happened last year in 2010 at just 4.69%.
  • Over 39 years the average interest rate was 8.92%, almost double 2010’s yearly average.

So yes, we really are at historically low interest rates!  Yes, this is still a fantastic time to review your current home loan to see if refinancing makes sense for you!  No, you most definitely have not missed out on these low rates!  And yes, it is a fantastic time to buy a home.  Not a bad view from that perspective.  Give us a call to review your current loan or to help you with a pre-approval for your new home.

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Are You Confused Yet?

February 19, 2010

If you are not in the mortgage industry or pay particular attention to this topic in the media, you may be confused by the talk of impending changes by the Federal Reserve and how that will affect the housing market.  So let’s break this down so your mom can understand this.

When you secure a home loan, more often than not, the lender who provided you the mortgage loan is not the one you end of sending your monthly payments to.  Shortly after you close on your loan you can receive a letter stating you now have a new mortgage lender to work with.  Understand this does not change the parameters of your loan, it only changes who collects your monthly payments and (if you have an escrow account) who sends the payments out to your insurance provider, and local municipalities for property taxes, etc.  Behind the scenes some investor now holds the loan so that the original lender can in turn lend out more money.

When the housing market started getting soft and interest rates dropping, investors started slowing down on purchasing these investments.  Look at this from their perspective, they make less return on their investment and a much higher percentage of those loans were going into foreclosure.  So they stopped buying as many as they had in the past.  The trickle affect of this was that the original lenders had less money of their own to lend out to consumers like you and me.  The Federal Reserve stepped in and starting buying many of these loans to keep the market going; and it worked.

The reason for recent hubbub is that this particular program from the Federal Reserve is set to end on March 31 of this year.  Uncle Sam will then stop this support, that to date has purchased $1.3 trillion worth of mortgage loans.  (Just for fun, 1 trillion is a 1 followed by 12 zeroes; and 1.3 trillion is very close to the size of our federal deficit.  But what are a few bucks between friends?  Whoa.)

This is where the “what happens next?” question comes into play.  The big item of speculation now is the impact this will have on the housing market and the overall economy.  Industry forecasters are predicting anything from modest bumps in interest rates (less than a 1% increase) to a noticeable climb (a 2% increase or more) and everywhere in between.  Now, unless you have a crystal ball, no one knows exactly what will happen.  But let’s put some things in perspective.

Historically speaking, rates at 7% are still low compared to what they have been.  Anyone hear of a rate at 11%?  Any takers for relatives who once had a mortgage at 13%?  Also keep in mind the rule of supply and demand.  If interest rates suddenly or drastically increase, the amount of buyers will decrease – it now costs more to secure a home loan.  So if there are fewer buyers, there will be proportionately more homes on the market available to purchase.  As the quantity of for sale homes increases, the price will decrease due to an increase in supply for the available market.  So while the cost of securing a loan may increase, the size of your loan may decrease.  Again, it’s all relative.

My point in all this?  The marketplace is always moving and adjusting to outside forces.  If you don’t like the way the pendulum is swinging right now, hang on.  Like the weather in Michigan – it will change.