Record Rates Mean Lower Prices For Homeowners

Record Rates Mean Lower Prices For Homeowners

By Ted Ahern, Guaranteed Rate CFO
February 3, 2009

In the last 45 days, mortgage rates have fallen to record lows with 30 year conforming rates now available below 5%. In late November, the Fed agreed to purchase up to $500 billion in mortgage backed securities as well as purchase $100 billion in additional Agency debt. The announcement resulted in an immediate 100 basis point tightening in mortgage yields which at the time were well over 6%. Lower rates translate into improved affordability for homebuyers as projected monthly housing costs decrease. Mortgage applications have sky-rocketed as current homeowners find it beneficial to refinance their mortgages and lower their monthly debt burdens. The unanswered question remains if and when low mortgage rates will begin to make a significant impact on home purchases.

Home prices have fallen significantly over the last two and a half years and they are beginning to attract purchasers although some may be waiting for the credit crunch to show greater signs of ending. The recent decrease in mortgage rates has caused the economics of buying a home to shift materially with the current environment strongly favoring buyers. Sales of existing homes have increased in the last seven months as existing inventory is slowly but steadily being pared down.

Home sales are currently running at an annual rate of 4.7M units which is about where the rate was 10 years ago. However, during the last decade, the population of the United States has grown by almost 10%, seven million new jobs have been created, and the percentage of households owning their own homes has risen from 66% to 69%, an increase of 3.2 million homeowners. Prices, interest rates, inventory, and motivated sellers make the current market one of the best in a generation to purchase a home.

Market participants continue to closely gauge the stock market, mortgage rates, and consumer confidence in attempting to find out if and when the economy has bottomed. Many are also looking to the Obama Administration to pass a significant stimulus package that will stabilize foreclosures, job losses, and falling consumer spending over the next several months. Stock market investors are still reeling from the 40+% decrease in global stock prices in 2008. Oil has dramatically fallen to $40/barrel from a July high of $147/barrel paralleling broad declines in most commodity markets. Prices at the pump have fallen almost 50% since the summer giving some relief to beleaguered consumers. The dollar has strengthened with the drop in oil, a quick slowdown in Europe and a general flight to quality. Ten year interest rates are now in the 2.0-2.5% range as the stock and commodity markets try to find direction.

ted ahern
Ted holds an MBA in Finance from the University of Chicago and is also an Adjunct Professor of Economics at Lake Forest College.

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