Something unusual happened this past week. Mortgage rates that had remained relatively stable for the past year suddenly jumped ½% to 4%. Now home- buyers are wondering what is going on. Did we hit bottom for mortgage rates? Several factors are at play when we try to find answers.
First off, the US Federal Reserve has had two main goals: One is to reduce unemployment and the other is to stabilize the housing market. Since 2009 the Fed has purchased some $3 trillion in US treasuries and mortgage backed securities. In this latest round the Fed is buying $85 billion per month, $40 billion in treasuries and $45 billion in mortgage- backed securities. Over the past four years we’ve seen the unemployment rate grind slowly lower and housing prices grind higher. With both of these indicators improving the Fed is coming under pressure to reduce their purchases. Rumors are flying as to whether the Fed will taper purchases in the coming months. This uncertainty has caused selling in the bond market. When prices go down, the yield goes up. The drop in bond prices and corresponding jump in yields has spread to the mortgage market. Mortgage rates usually follow in tandem to bond rates with the 10- year note as a benchmark.
Added to this we have notable improvement in home prices. The S & P Case Shiller index shows that home prices in 20 cities have risen 10.9% since the crash of 2008. With home prices improving and mortgage rates near rock bottom those who can afford to buy a home can get more “bang for the buck.” With a low mortgage rate the average buyer can purchase a home for $279,000.
Still another factor playing in the market is the fact that home- owners who saw the value of their home plummet in 2008 decided to hang on until prices went back up. This has created a shortage of re-sales on the market. This is excluding the foreclosure market. Many buyers still want to shop for the right home at the right price and are not interested in buying a foreclosure that needs umpteen thousands in repairs or is in the wrong location.
The jump in mortgage rates and the shortage of re-sales has made buyers scratch their heads wondering is they should chase the market. If you are able to buy, this is probably a once in a lifetime shot. However, you still need patience to wait for the right buy. The one wild card is that you have no way of knowing how many other sellers are ready to put their homes on the market. We know that there is a big pool of potential sellers willing to sell if prices keep rising.
Another interesting dynamic is that buyers are finding that it is cheaper to buy than to rent. Plus if they plan to stay in their home for at least 10 years they most likely will profit from appreciation.
To sum up, be cautious but be ready to act if you find the home you are looking for.