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Dorchester Grandma
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 Posted: Fri Jul 25, 2008 4:37 pm GMT Post subject: Rising interest rate |
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In April my interest using soft second mortgage for first time home buyers would have been 4.25 in the city of Boston, though higher elsewhere. Now that I am getting closer to buying again the interest rate is 5.5 in fact for a regular 30 year fixed not using soft second it is 6.5.
I could kick myself for not finding something back in April. Does anyone have any idea of which way the steadily climbing interest rate might go? Why during such a downturn in home sales is the mortgage rate going up. I am not too savvy about these things so it makes no sense to me |
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admin
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Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston
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| Posted: Fri Jul 25, 2008 5:18 pm GMT Post subject: Re: Rising interest rate |
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| Dorchester Grandma wrote: |
I could kick myself for not finding something back in April. Does anyone have any idea of which way the steadily climbing interest rate might go? Why during such a downturn in home sales is the mortgage rate going up. I am not too savvy about these things so it makes no sense to me |
My take after recently reading a tome on the history of interest rates is that rates have in the past followed inflation expectations and will probably continue to do so in the future. Inflation expectations have indeed been steadily climbing lately. Assuming rates will follow inflation expectations, this then turns the question into: which way will inflation expectations head? Unfortunately, I don't know much about that yet. I see many factors pushing inflation higher (like the fact that the Fed's rate is much lower now than the last time inflation was as high as it is now), but there are factors which would tend to push the other way as well, and I don't have a good view of the big picture just yet.
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Fri Jul 25, 2008 7:24 pm GMT Post subject: |
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Dorchester Grandma said: | Quote: | | Why during such a downturn in home sales is the mortgage rate going up. |
The Federal Reserve sets reserve rates, for example, if the rate is 5% that means for every 100 dollars they lend out, they need to have 5 dollars on hand in their bank. This is supposed to stop the runnings on the bank like in the movie "It's a Wonderful Life". So, lets say that the Fed lowers rates from 5% to 3%, that means the banks can lend out a little extra. The more banks are able to lend out, the more money floods into the market. To give you a sense as to how much money is now flooding into the economy check out this chart:
http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply2.svg
So, the lower and lower the FED lowered rates, the more money was lent out and the more money flooded into the market. Further, people were taking out home equity lines of credit, which was like taking some of the value of the house out and paying it back in a loan. People were using this money to build additions, buy boats, send the kids to college, etc. The problem with this is that the boat manufacturers said, hey lots of people are buying boats, let's make more of them and let's give our salesmen raises. Colleges were able to push the limits as to how much they could charge because people were asked to cut into the values of their homes and pull out home equity. If this didn't happen, college tuitions would have stayed at the affordablity limit and not pushed beyond. The economy wasn't based on what people could actually afford or how much you had saved, it started to push into the limits of how much you could borrow or how much you could drain out of your house. Inventories of stuff, salaries, price levels were now adjusted to the new money that was flooding into the market.
What we're seeing now is that the banks aren't lending out any more because the Federal Reserve is raising rates, meaning that they had to keep more of their money in the bank and lend less. When banks reduce lending, it limits the amount available for people to borrow.
Why would the Federal Reserve raise rates when home prices are dropping one might ask, wouldn't it make sense to lower rates to help support prices, because we all know the lower the mortgage rate the more house price you can pay and get the same mortgage payment. The Federal Reserve rate and the mortgage rates aren't really the same thing, but they are based on one big thing and that is Inflation.
If you lent someone 100 dollars today and told them that you could pay you back in a year; what if that 100 dollars was then worth just 90 dollars by the time you got it back, meaning stuff cost more and you couldn't buy as much with 100 dollars. You would end up charging the person 10 dollars or so interest to cover the loss of value in the money. That is called the inflation premium. Mortgage rates are going up because the banks are afraid that by the time they get their money back, the money you borrowed, it will be worth less and less. They balance things out by charging a little more interest to feel comfortable.
So in a weird way, when the Federal Reserve kept lowering reserve rates, it flooded money into the system and the more dollars that were out there, the less value they had because you had more dollars chasing fewer goods. The dollar was worth less and less, see how it is worth so much less than the EURO.
Because of trickle down economics, regular folk are in serious affordability deep yogurt. Hopefully, we'll get wage inflation before people have to start eating dog food.
You would think that the banks would be concerned that if mortgage rates went up, house prices would drop and they would end up holding the bag on a bunch of foreclosed homes that were worth less than the amount they lent out. Well they've got this kind of public entity called Freddie Mac and Fannie Mae and these organizations would buy these mortgages from banks so the banks were off the hook and aren't responsible for many of these bad loans. Guess who is? This whole bail out of Fannie Mae and Freddie Mac are about US taxpayers covering for the massive losses due to bad deals where people were foreclosed. The US tax payer is covering those losses right now.
It is kind of like all these banks got off the hook and they made their money and got fat. This is why I don't want casinos, people create their own hardships and we as a society don't align responsiblity with risk so the taxpayers have to cover others risks and we dont' get a taste when they win. Until we hold people accountable for their own self created hardships we really have no business allowing casinos. |
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john p
Joined: 10 Mar 2006
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Brian C
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| Posted: Tue Sep 09, 2008 2:24 pm GMT Post subject: |
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Rates have definitely dropped.
I talked with my financial adviser yesterday and he said I could get a 30yr fixed for about 5.75% (no points).
If this rate holds over the winter, it might be a good time to bargain shop |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Tue Sep 09, 2008 2:52 pm GMT Post subject: |
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| The way the yield curve currently looks, I wonder if it is worth exploring a shorter term... |
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DEAMMMMMMMMM
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| Posted: Tue Sep 09, 2008 4:55 pm GMT Post subject: I hate low interest rate |
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Damn it, house price will not go south fast if the rate not getting beyond 7%. I would rather pay higher interest rate and low price for a house. The last thing I want to see is inflation so freaking high, that everyone is making 100,000 a year, but milk and 6 buck per gallon. |
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john p
Joined: 10 Mar 2006
Posts: 1820
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| Posted: Tue Sep 09, 2008 7:56 pm GMT Post subject: |
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Don't worry that much. Downward pressures are still in effect. One big contributor is loan to value.
For example if a person put 15% down on a $500k home in 2005, say his Adjustable Rate Mortgage would be for $425k and he wants a fixed rate today. If house prices have dropped 15% since, his house is going to be appraised at $425k, so unless he can put more money down he won't have the loan to value to get a competitive rate.
I feel so old, I fart dust at this point, but back in 2004, mortgage professionals would say, get into an ARM because if house prices went up in a few years by say 5% a year and you put down 5%, by the end of year 3 you'd have a loan to value where you could refinance AND have more than 20% equity and avoid PMI. This was the prevailing thinking and strategy, it was risky, but this was a common strategy. It took discipline on my part to not jump into this. |
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balor123
Joined: 08 Mar 2008
Posts: 1204
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| Posted: Wed Sep 10, 2008 1:39 am GMT Post subject: |
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| I agree - high interest rates are better. You get the deduction on the interest and the house value is down. Those of us who are good savers do well in such a world. Too bad you can't transfer a mortgage from one house to another when the rates go up. You'll not only sell your house at a loss but also have to pay a higher rate when you move into a new place. |
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