What Fed Rate Cuts Mean To Homeowners and Buyers

With the federal reserve cutting the fed funds target rate from 5.25% to 4.75% and the discount rate from 5.75% to 5.25% earlier this week, many people assume that mortgage rates will now go down as well. But this isn't necessarily true.

Banks can borrow from each other (federal funds) or directly from the federal reserve (at the discount rate) to help meet their reserve requirements. (Wikipedia provides a good basic explanation of reserve requirements and the role of the federal reserve: http://en.wikipedia.org/wiki/Federal_funds_rate#See_also)

Most banks set their prime rates based on the fed funds rate target. And that is what we saw this week; major banks lowered their prime rates following the fed's cuts.

Rates for home equity lines of credit (HELOCs) are often based on the prime rate. And therefore most homeowners with a HELOC will see their rate reduced by .5% (matching the percentage of the prime rate decrease).

But mortgage rates (home loans) are based on investors' expectations of inflation. If investors feel inflation will go up in the future, today's mortgage rates will increase. Whether the investors are right or not doesn't matter; it's their expectations of future inflation that impact mortgage rates.

And with the fed's rate cuts, many investors are betting the cheaper money environment will cause an increase in inflation. Because of this expectation, mortgage rates actually increased this week despite the fed's actions.

So while the fed rate cuts may help alleviate the recent seizures in the credit markets, don't expect mortgage rates to automatically go down because of them.

Is Now A Good Time To Buy Bend Real Estate?

A lot of people have been asking me lately if now is the right time to buy real estate in Bend. So I've consulted the only infallible source I know of for answers to questions of this magnitude.

Me: "Magic 8 Ball, is now a good time to buy Bend real estate?"

Magic 8 Ball: "It depends."

And as always, the Magic 8 Ball is correct!

"It depends" is the right answer because whether now is the right time to buy real estate in Central Oregon depends on what your goal is.

If your goal is to buy a yet-to-be built house from a builder in the hopes that you can "flip it" and make a nice profit when the house is complete in 9 months (a la 2004, 2005 and early 2006), then "don't count on it" as Magic 8 Ball would say.

But if your goal is to buy a place you really like in a neighborhood you really like and you can get it today for a price that seems reasonable TO YOU and you qualify for a loan that won't strain your budget (the old rule of thumb is that about 33% of your gross monthly income should go towards your housing costs) and you plan on living in it for at least 5 years (more, if necessary), then Magic 8 Ball's answer would be "As I see it, yes."

Some may argue that given today's market, the answer should be "no" regardless of a buyer's circumstances. And if buying at the lowest price is your biggest concern, then I'd tend to be somewhat in agreement. But buying a place to call home is about much more than price to most people - with the exception of engineers and accountants (sorry, I couldn't resist!). And besides, trying to time the bottom of any market is a fool's errand.

Each property has its own unique"character" or "soul" that is hard to define but "you know it when you see it." And when a property "feels right" to you and your family and all of the above mentioned criteria fit your situation, regardless of what your well meaning friends and acquaintances might say, then "signs point to yes" - now is a good time to buy real estate in Bend, Oregon.

I'll post again soon as to whether I think now is a good time to sell real estate in Bend. Make sure to subscribe to www.BendHousingNews.blogspot.com for the latest Bend Oregon real estate news.

August Sales Volume Up From July But Down From A Year Earlier

There were 183 residential properties in the greater Bend area (Bend, Tumalo and Alfalfa) reported sold to the MLS of Central Oregon for August.

This is good news when compared to July's anemic 145 units sold, but it is still the lowest sales volume for the month of August since at least 2001.

To help put things in perspective, there were 239 residential units reported sold in August 2006. Before last month, the lowest number of reported sales in August since 2001 was 221 in August 2002.

There are currently 2324 residential properties listed for sale in the greater Bend area. At August's sales rate, this represents an absorption rate of 12.7 months. A market is generally considered balanced when 5 to 6 months of inventory is available. Needless to say then, we're still in the thick of a buyer's market.

On the pricing side, the median reported sale price in August was $350,000. This is 7% below August 2006's median price of $377,495 but up 4% from July.

Large Share Of Area Houses For Sale Are Vacant, Investment Properties

I ran a search on the Multiple Listing Service of Central Oregon earlier today. What I found was pretty amazing.

What made me think to run the search in the first place was a recent article in the Wall Street Journal discussing the number of investment property loans that are now in default.

According to the WSJ article, 27% of all "home purchase" loans in 2005 in the U.S. were to people buying investment properties. In addition, 28% of all mortgage loans in default as of June 30 were for non-owner occupied properties. Coincidentally (?) these two numbers are nearly the same as the percentage of non-owner occupied, existing houses listed for sale today in the greater Bend area (Bend-Tumalo-Alfalfa).

The results of my MLS search showed that 41% of the residential properties currently listed for sale in Bend are vacant. Of these, just under half (47%) are existing homes - not newly built construction.

When coupled with currently rented homes also listed for sale, non-owner occupied existing houses account for close to 26% of all the residential properties listed for sale in the Bend area today. This number would be even higher if recently built new homes bought by speculators looking to flip them for a quick profit were included.

So approximately 1 in 4 residential properties for sale in Bend today are owned by investors. That's not usually an indication of a vibrant real estate market.

On the bright side: Buyers looking today have a lot of houses to choose from. Job markets, both regionally and nationally, are still historically strong. People still want to move to Central Oregon. It is easier now than ever before for people to keep their current jobs in higher paying areas, move to Bend and telecommute. Interest rates are still low, though the crazy easy money days of the recent past (which was a big part of the problem) are history. And median prices locally are still relatively low compared to most of the big cities in California.

Let's hope that California and other more expensive markets start to see some pick up in sales activity soon. If they do, I think we'll be able to work off the excess inventories without too much pain and get back to a more healthy, sustainable market that's not too hot and not too cold, but just right.