Rates go through the roof « Tahoe & Truckee Real Estate

Rates go through the roof

June 1, 2009, 1:35 pm
Filed under: Financial

Rates have climbed well over 1/2 per cent since last week. Some lenders have increased a full per cent. It seems investors finally got spooked by the Fed’s “shell game” of selling bonds in order to buy bonds. The Fed has been buying both Treasury Bonds and Mortgage Backed Securities in order to keep rates artificially low. This policy is designed to shore up the housing market and revive the economy. Unfortunately, all of the excess borrowing this policy requires, coupled with all the other government spending and borrowing, is now sparking tremendous inflation fears.

It is hoped that the Fed will make an effort to buy up even more mortgage backed securities to push rates back down, but the Fed’s power to do so is diminishing as inflation concerns worsen.

This brings up a further point about buying now versus waiting for more housing inventory to hit the market and hoping for lower prices. First of all, given the current enormous demand (we are seeing as many as 6 offers on a single property time and again) we think it is unlikely that additional foreclosure inventory will significantly affect prices. BUT, even if prices do fall another 5%, we think it is a huge gamble to wait because rates are so volatile.

As recently as last summer, rates were in the mid 6’s. The payment for a $400,000 loan at 5.125 is $2,178. The payment for a 5% smaller loan of $380,000 at 6.5% (where rates were last summer) is $2,402. The payment for the smaller loan (at the higher rate) is $224 higher! Over the life of that smaller loan, the buyer will pay an additional $80,000. Our point is that by waiting to buy later, hoping to save 5% or $20,000, a buyer could easily end up with a much higher rate and end up paying an additional $80,000 over the life of his or her loan.

In short, if you are thinking about buying, now is the time to buy. Don’t gamble with your money wondering if the market is going to drop another 5%. You may loose in the long run with a higher interest rate.

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