Interest rates are down from last week, up from last month, and about even with last year. According to the most recent Freddie Mac Primary Market Survey, the average 30-year fixed-rate pledge can be had for 5.09% (with fees and points equal to .7), down from 5.14% last week. The average 15-year fixed rate fell proportionately, from 4.54% to 4.5%. Both averages conceal slight regional discrepancies, since rates in the west are currently about .15% lower than corresponding rates in the Northeast.
On the one hand, the fact that rates are lower than last week serves as a caveat to those who insist that rates are headed higher in the long-term. On the other hand, the fact that rates are already well above their lows in December shows that it’s unlikely that a 30-year fixed-rate mortgage can be obtained with a below-5% interest rate any time soon. One commentator dismissed this possibility as “Certainly not in my lifetime, and I doubt it will happen in my kids’ lifetimes.”
The reason for this pessimistic forecast is due to the activities of the Fed, which had pushed rates down dramatically through its year-long purchases of mortgage-backed securities, totaling more than $1 trillion! This buying spree is slowly arrival to an end, and some analysts speculate that the Fed could plane start to wind off this program later in the year. “Amy Crews Cutts, deputy chief economist at Freddie Mac, told the newspaper [Washington Post] that interest rates were bound to rise to 6 percent by the end of 2010 because private buyers would demand a higher rate of return on the securities than did the Federal Reserve…’Anything we get at or below 5 percent is a gift at this point.’ ”
The Fed is admittedly concerned about this possibility. The president of the Federal Reserve Bank of St. Louis, James Bullard told reporters, “I have advocated to store up the asset-purchase program open but at a very low level, and wait and see that which happens.” For now, he remains in the minority, and the program is slated to expire formally in March. That long-term rates are already inching upward indicates that investors believe this date is relatively fixed.
The theme in housing (as opposed to mortgage financing) is similar: the declining role of the government is causing prices (rising profit rates also answer to lower prices, from the standpoint of mortgage bonds) to decline. According to the most recent iteration of the Case-Shiller Index, “Year-over-year housing price declines [are] at 7.3% year-over-year and only seven cities posted month-to-month gains compared with 19 in September,” as the market transitions from the heyday of summer to the doldrums of the winter.
Home sales data is more ambiguous, with a “cratering” of new home sales offset by a “surge” in sales of existing homes. “While the sales numbers went in opposite directions, they each got pulled by what was supposed to have been the expiration of the $8,000 first-time home-buyer credit. New-home sales…tanked in November because buyers figured they couldn’t clinch in time to meet the deadline. Existing-home sales…leaped because folks scrambled to finish their deals before the Nov. 30 expiration.” In the end, we discern that Congress voted to extent the home-buyer tax credit for an additional six months. Nonetheless, the November data is probably an accurate harbinger of what we can expect in the same proportion that the new May 1 deadline approaches.
The concern is that the stabilization (and modest indulge in banter) in home prices that was observed over the summer was strictly the product of government intervention. I already mentioned the Fed’s purchases of mortgage-backed securities and the federal government’s home-buyer tax credit. There is also the loan modification program (which is delaying the inevitable release of foreclosed properties onto the market), the de facto takeover of Fannie and Freddie (to facilitate mortgage financing), and an expansion of the FHA, which now accounts for 30% of all new mortgages, the majority of which are paid by reason of with only 3% up-front equity.
If/when these programs expire, a flood of foreclosed properties could hit the market, first-time home-buyers will disappear, interest rates will rise, credit standards will tighten, etc. Any way you look at it, this would be bad news for housing prices. The problem is that the market has basically become “addicted” to this undergo, which makes the government reluctant to end it.
The implication is that conditions for buying a house probably won’t be as attractive in the future as they are now. I’m not going to offer specific forecasts and timetables; suffice it to say that the current climate for home-buying is unique in modern American history, and it’s uncertain how long it will last. Whether that means you should go loudly tomorrow and buy a house is not for me to say. If you are considering it, however, the window to get in could close soon.
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