Fed Lowers Rates Yet Again

For the 7th time since last September, the Federal Reserve cut its target for the federal funds rate earlier this week. The rate, charged on overnight loans between banks, now stands at 2%, down a cumulative 3.25 percentage points in the last 8 months. The Fed simultaneously cut the discount rate, charged on direct loans to banks and securities dealers, from 2.5% to 2.25%.

What It Means For Mortgage Rates
Though there is no direct correlation between the fed funds rate and interest rates on mortgage loans, many investors look to the yield on 10 year treasury notes as a barometer for 30 year mortgage rates. While treasuries are considered "risk free," mortgage rates generally about 1.5% to 2.0% (150 to 200 basis points) higher than 10 year treasuries to compensate for the risk that a home loan will not be repaid.

With the 10 year yield now at 3.86%, rates on 30 year mortgage loans are right around 6%, certainly at the higher end of the historic margin range. This is an indication that buyers of mortgage backed securities are still somewhat risk averse, expecting higher inflation and/or more challenges in the real estate market.

But since most HELOCs (home equity lines of credit) and consumer rates (credit cards, etc.) directly track the prime rate, and the prime rate typically tracks the fed funds rate, expect to see some relief on these rates immediately.

Foreclosures and Short Sales

Many people have been asking lately about foreclosures and short sale properties. From these conversations, it's become clear to me that there is a lot of confusion about these two vastly different transactions.

A quick and simple way to distinguish the two is to think about "foreclosures" (often referred to as "bank-owned" or REO properties) as those properties that are now owned by the lender (REO is bank jargon for "real estate owned"). A "short sale" is an alternative to foreclosure.

A "short sale" property is still owned by the borrower/homeowner but will require a lender's approval before it can be sold, since the borrower/homeowner will not clear enough from the sale to pay off the outstanding loan amount. The following link does an excellent job of describing the challenges involved with short selling a property.

http://online.wsj.com/article/SB120839380851021529.html?mod=residential_real_estate

Keep in mind that as a buyer, you stand a much better chance (not to mention a much faster and easier process) finding a "bargain" by purchasing a "foreclosure" versus a "short sale."

March Numbers Show More Buyers, Lower Prices

89 single family homes on less than an acre were reported to have closed escrow in the greater Bend area in March. The median sale price was $293,000 or $159.1/sf.

33 more homes were reported sold in March than in February. Sales activity however was down substantially from a year earlier; 159 homes were sold in March 2007.

The median price a year ago was $358,000, reflecting a $/sf price of $182.7 per square foot.