Fed Lowers Rates, DOW Soars

The Federal Reserve cut it Fed-Funds Target Rate by .75 percentage points today to 2.25%. The Fed has now cut the rate by a full 3% since September.

Though many investors had hoped for a full point reduction, the 75 basis points was only the second time the fed has cut that drastically since at least 1994. And any disappointment on Wall Street was quickly put aside, as the Dow Jones Industrial Average recorded a gain of more than 420 points, a surge of 3.5%.

Commercial banks began lowering their prime rates by an equal amount, to 5.25% from 6%. Some variable rates, especially Home Equity Lines of Credit (HELOC), are directly tied to the prime rate so consumers should see some immediate relief.

Mortgage Rates

Many of the Fed's rate cuts to date have not fully filtered through to home buyers. Though the Fed started cutting rates in September, rates rose above 6% in February from about 5.5% in December. They've only recently dropped below 6% again.

Among "Jumbo" loans, rates are actually higher now than they were last July, mainly because investors are reluctant to buy securities backed by such loans.

FHA Raises Conforming Loan Limits

The Federal Housing Administration announced today that mortgage loan amounts backed by Fannie Mae and Freddie Mac will rise to a maximum of $729,750 in more than 70 counties across the U.S. The previous maximum amount for these loans, known as "conforming loans," was $417,000.

While the counties now eligible for the highest amounts are in California, New York and other high priced areas, the new conforming limit in Bend was increased to $447,500.

Lower "jumbo" rates
It is anticipated that allowing Freddie and Fannie to guarantee loans up to the new limits will encourage lenders to reduce interest rates on loans above the previous threshold of $417,000, so called "jumbo" loans. Prior to the credit crunch which began last summer, the difference in rates between conforming and jumbo loans was around .25 percent. The current tighter credit market has seen this spread increase to as much as 1 percent.

What this means locally
The new loan limit will not only help Central Oregonians qualify for bigger loan amounts. Another, perhaps bigger, benefit locally is that increased conforming limits in our "feeder" markets (particularly California) will help those people wanting to move here improve the chances of selling their existing houses, as more buyers will be able to afford higher priced homes there. The new conforming limit in San Diego is $696,500, Sacramento $580,000 and Riverside-San Bernadino $500,000.

The new rates are supposedly temporary and set to expire Dec. 1 of this year.

Here's a link to a table showing the new limits by MSA:
http://online.wsj.com/public/resources/documents/loanlimits0308.xls

I'm Not Calling A Market Bottom But.....

After seeing the median home price in Bend climb by about 50% in 2 years (2004 to 2006), I'll be among the last you'll hear claim that we've hit bottom as far as prices are concerned.

But what about interest rates?

The average rate on a 30 year fixed rate loan is now about 6%. The lowest rate we've seen on these loans in the last 40+ years is about 5.25% The highest rate since 1970 was close to 18.5%, in 1981. http://www.freddiemac.com/pmms/pmms30.htm

With interest rates currently near historical lows (not to mention the accelerating rate of inflation), it is highly unlikely that we'll see interest rates go significantly lower any time soon. It's a better bet that rates will increase this year.

Purchasing power versus purchase price

Which brings me to the main point of this blog entry: While most people are concerned about the price they pay when buying a home, you may want to pay more attention to interest rates these days.

Let's say you could afford to buy a house you really like for $350,000 today. Putting 5% down ($17,500) and paying 6% on a loan for the balance would equal a payment of about $2000 a month.

But maybe you're hesitant because you think prices will come down even more. Let's assume you're right and prices do fall further, say 10% this year (a dramatic decrease by almost every account). If that were to happen, a year from now you could buy a house comparable to the one you like today at $350,000 for just $315,000.

Now let's also suppose that mortgage rates start returning closer to their historical average (about 8.5%) and a year from now the rate on a 30 year fixed is 7.25% (certainly a possibility, especially considering that rates were at about 6.7% less than 8 months ago and inflationary pressures are increasing).

Under this scenario, even though you pay a lower price, your payment would go up $50 a month simply because interest rates ticked up a bit closer to their historical average!

What to do

If you've even remotely considered buying a home in the next couple of years but are waiting for prices to fall further, talk to your bank today to find out the loan amount you qualify for and what the corresponding payment would be. This is a fast and easy process and costs you nothing. You can then start looking at houses and be in a great position to buy the home that's just right for you.

Feel free to call me to discuss your situation in more detail or to begin your search for a new home!