Refinance Rates Moving Up!
This year has provided a unique opportunity for home owners to refinance their mortgage into fixed mortgage rates at levels last seen in 2003. In January of this year fixed mortgage rates reached their lowers levels of the past five years and were around 5.25% as the yield on the ten year bond dropped to 3.33%. This brief opportunity to lock into near historical low levels did not last long as mortgage rates jumped shortly their after.
Since early January the market has been under enormous stress following further fallout in the credit markets. Mortgage interest rates have been under pressure due to the tightening of the credit markets and the spread in mortgage securities has increased as investors are looking for a larger premium to hold mortgage loans. This larger spread has elevated the rates on mortgages, even as the yiled on bonds has declined with the turbulent movements in the stock market.
The market is now under further strain as rising oil prices are adding enormous strain on the markets through inflationary pressure. The yield on the ten year bond has moved well above the January lows and mortgage rates are now trending above six percent. The Federal Reserve will be meeting again in a few weeks and may further reduce the Fed Funds rate which would be good for home owners with adjustable raete mortgages or home equity loans, but it is unlikely to aid in helping bring down the rates of fixed rate mortgages. Those homeowners who have been on the fence when considering a refinance should explore locking into a fixed mortgage or securing a fixed mortgage with a float down option.
The biggest obstacle facing the real estate market is excess inventory
The housing crisis is a daily headline on almost every website, newspaper and blog. The fact that American home owners have lost billions of dollars worth of equity is very concerning and one of the largest items on politicians agendas heading into the elections. Our country is growing at a rate of about two million people per year. This is a key statistic that is often overlooked but will be a major factor in eventually helping to fix the housing market.
The largest challenge facing the real estate market today is excess inventory. The fallout from the sub prime mortgage crisis has been an over abundance of foreclosed homes. This has had a significant secondary impact on the market that is contributing to the ongoing problem. As home values have declined, lenders have tightened their guidelines making it more difficult to not only refinance but to qualify for loans to purchase homes. The net result is that we have a marketplace where inventory is continuing to grow and the demand for the inventory is restricted. Like every major economy this causes prices to decrease.
The solution that should be the major focus of congress is to encourage new forms of lending to stimulate the real estate market. Fixing the demand side of the equation will go a long way towards improving home values.
Government Bailout Options
The long anticipated government housing bailout should be announced within the next two weeks. The economy has seen a number of indirect initiatives in assisting to help the housing market with both fiscal and monetary policy coordinating efforts to help the troubled market. There have been a wide variety of reports on what form of bailout and to what extent the government would become involved.
Critics have argued that the government does not need to increase the tax burden for individuals who did not make poor financial decisions or get greedy trying to refinance their homes into teaser rate programs. However, even the most staunch critics of the government having a direct role in fixing the problem are now beginning to ease on their opposition as the economy heads into a full blown recession and U.S. home values have dropped almost 10% in value over the past twelve months.
There are a number of items all but guaranteed to be incorporated in the upcoming legislation including:
- A larger role for the Federal Housing Administration (FHA)
- Tax incentives to buy foreclosed homes
- Financial incentives for lenders to reduce the balance on mortgages where home owners owe more than the value
- The role of the Fed continuing to grow in oversight of the mortgage market
- Better funding of education and home counseling programs
The real challenge in correcting the downward spiral of the housing market is a simple lesson in economics, supply versus demand. The supply of homes continues to grow with foreclosures and bank owned homes being a large contributor and the demand from buyers is limited because of lenders restricting underwriting guidelines. Fixing this balance will be critical in bringing back the real estate market.
Bernanke catches up with rest of country
The U.S. economy has been a disaster for the better part of the past six months. If you listened to speeches by Ben Bernanke during that period you would have never heard the acknowledgement that the U.S. economy is in a recession.
This finally happend today! The Fed has cut the Fed Funds rate a full two pecent since the beginning of the year. Congress has issued rebate checks in the amount of one hundred and fifty billion dollars, but there has never been an acknowledngement that the U.S. economy was in a recession. The fact that the economy lost jobs in the month of February and one of the largest investment banks in the world Bear Stearns was facing near bankrupcy was a sure sign that things were not well on wall street. U.S. home values have decreased by over 10% over the past twelve months.
Bernanke’s testimony is curious as the stock market staged one of the largest rallies in U.S. history rising by almost 400 pts to start the second quarter of trading. Many investors believe that the worst of the credit crisis is now over and the U.S. economy, while certainly in a period of recession should begin to show signs of life by the third or fourth quarter of this year. The Fed chairman has been active in working to bring the economy out of it’s down turn, no matter how he wanted to phrase this in the past.