Posted on 07/01/2013 1:57:51 PM PDT by bestintxas
Are rising interest rates, care of the Federal Reserve, really bad for the home mortgage market? Reading the headlines, you would think the world has ended with a one point move up in the annual percentage rate or APR on a typical mortgage. But don’t accept the simple answer when pondering the world of mortgage finance. Today, getting a mortgage is more a function of politics than of interest rates and only the best borrowers need apply. In fact, during the 2000s, let us recall that there was an inverse correlation between mortgage production trends and interest rates. Even as coupons rose from 2004 until 2007, loan volumes actually increased. Production in non-prime loans was relatively insensitive to Fed interest rate movement during this period and more tied to home price appreciation. So long as collateral values rose during the boom of the 2000s, credit flowed and at surprising high rates. Indeed, a June 2013 report by Bank America Merrill Lynch shows future home prices barely affected by rising rates.
If you look at the weighted average coupon for mortgage bonds brought to market between 2004 and 2007 by non-bank firms like my employer Carrington, the coupons started in the 7% range and ended up close to 9% by the end of the period. During the same period, lending volumes grew for agency and non-agency loans alike. It is interesting to note that the average prime lending rate between 1955 and today is over 7%, a stark indication of just how skewed is current Fed zero interest rate policy. But remember that Fed policy has only an indirect impact on mortgage lending.
(Excerpt) Read more at breitbart.com ...
In the meantime, who in their right mind believes higher interest rates mean homes will still be built at same rate?
If that were the only involved factor, then obviously higher interest rates would diminish purchases. As the article states, in an environment of rising home prices, the rate of purchases might go up despite higher interest rates if the expected return goes up faster. Now the rate of increase would be slower than without the higher interest rates, but may still be positive despite them.
The current rates are 'artificial' anyway. So is the 'recovery'. We need a natural housing recovery. One that is less dependent on the Fed and relies on the antiquated concept of banks loaning out mortgages at market rates.
With the high tax load being levied on wage earners in this country due to Obama Care and other new taxes, higher interest rates will be the final death blow to not only the home loan market but the supposed economic recovery.
BTW, I don’t believe that the speculative market is very strong right now...so, yeah, an increase in interest rates *at this time* would need to be very small to not slow sales.
That said, a sign that interest rates would go up further might cause a temporary surge in purchases to get in ahead of the high rates.
” With the high tax load being levied on wage earners in this country due to Obama Care and other new taxes, higher interest rates will be the final death blow to not only the home loan market but the supposed economic recovery.”
Yep
One of my favorite quotes. “Some things are so stupid only a college professor would believe them.”
Besides which, if our economy got back in line, CD savings would be paying some interest. That would help retirees, and it would be money back in local economies. It would also allow saving for future needs.
The interest rate situation now has caused a myriad of problems, and it obviously didn't help anyone but the bankers.
“Washington & Wall Street: Rising Rates Won’t Hurt Home Loan Market,and another 40 million illegal aliens won’t destroy America; trust us we’re from the government.”
However, there have been Democratic proposals to eliminate the mortgage interest deduction, because it favors the “wealthy”, discriminates against renters, and Canada has a comparable home ownership rate without it.
“a sign that interest rates would go up further might cause a temporary surge in purchases to get in ahead of the high rates.”
Always logical, but this is short term-only. With our long term outlook seeing rising rates, this will spell trouble ahead for the housing market as seen here.
http://www-bcf.usc.edu/~gpainter/Role_of_Interest_Rate_Painter_Redfearn.pdf
Riiiiiiiiiiight. And higher gas prices and higher food prices are just peachy for the consumers, right, Obama lovers?
Since 1982, interest rates have been gliding down. When people buy homes, they tend to look at how much home they can get for the monthly payment they can afford. When interest rates are going down, they can afford a higher priced home, since the payments are lower with a low interest rate. All you had to do was hold onto a home while interest rates were going down, and the interest rates did the work for you, adding to your equity.
From now on into the next few decades, interest rates will be going back up. This means that people will not be able to afford the same price house they could before, but must settle for a cheaper house, in order to have the same monthly payment. The effect of this will be drastic, as it will lower the price of all houses, robbing them of the equity they built up as interest rates went down.
This doesn't necessarily mean that people will lose money, though, it just means they need to shift strategies. It will be true that a homeowner will not be able to sell their home for the same price as when interest rates were low, however, if they finance the home themselves, the higher interest payments would go to them, not a bank. In the housing boom years, interest rates were so low that mortgage companies had to be leveraged up tremendously in order to get a return, and many banks and credit unions got rid of the paper as soon as they could. This will change when rates go up, because it will be a more attractive investment to keep the mortgage. It will actually help to cut out a lot of the bad risks that were taken before in the bubble years.
If a person doesn't own a home now, it will be better to just save money in a bank and buy a home outright, avoiding the interest payments, but still gaining the discount from the lowered prices.
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