April 29, 2010

Jack Be Nimble, Jack Be Quick . . . Interest Rates Are Headed for an Uptick

Say it isn't so, say it isn't so
Housing may cost a bit more dough
So in the coming months, move fast, not slow
'Cause interest rates may rise before you know


Ok, ok . . . so I'm not Maya Angelou.  And I know . . . I know, in an earlier blog post, 5 Great Reasons Why You Should Get Excited About the Real Estate Market in 2010 and Beyond, I said things are looking up and you have a lot to look forward to. 

What can I say?  The Fed pulled a fast one.  Recently, at the annual meeting of the American Economic Association in Atlanta, Federal Reserve Chairman, Ben Bernanke, gave a speech in which he said, "we must remain open to using monetary policy as a supplementary tool." (Huh?! English, please!!). I believe what he means is that he's not opposed to using monetary policy in the form of higher interest rates to prevent a housing price bubble from recurring. 

[Sidebar:  The Fed controls monetary policy (the quantity, availability, and cost of money) and can use a variety of tools to grow, stabilize, or slow the economy.  Interest rates are one such tool used.  When interest rates are low, money flows, and the economy expands.  When interest rates are high, money slows, and the economy contracts.]  

We all know that during the housing boom, life was good.  Interest rates were extremely low.  Housing prices were extremely high.  Credit was easy.  Everybody was making out like fat cats.  But then came the aftermath.  Adjustable-rate mortgages ballooned.  Homeowners could no longer afford to stay in their homes.  And it seemed as if Chicken Little was right: "The sky is falling! The sky is falling!"

Many analysts agree that low interest rates contributed to the housing bubble.  Money was easy and everybody went crazy.  Lenders, builders, realtors, buyers, sellers, appraisers, mortgage underwriters.  Even the Fed!  Because even though it kept interest rates low, it failed to sufficiently regulate the market. 

Insufficient regulation contributed to a proliferation of nontraditional mortgages (e.g., adjustable-rate, interest-only, subprime) and relaxed underwriting standards.  The combination of low interest rates and under-regulation caused people to go buck wild and the economy collapsed.  The Fed is well aware of this and is prepared to prevent such a financial crisis from happening again.  As such, higher interest rates appear inevitable. Not only because the Fed has the authority to set monetary policy, but also because the Fed will end its mortgage-backed securities purchase program by the end of the first quarter of 2010.

[Sidebar: The MBS Purchase Program is a Federal Reserve program in which the Fed purchases $1.25 trillion of fixed-rate agency MBS securities guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae.  Purchases began in January 2009 and will end at the end of the first quarter of 2010.  One goal of the program is to "provide support to mortgage and housing markets." Once that support ends, interest rates will rise in order to attract investors].

So, what does all this mean for you?  It means that if your clients are considering purchasing or refinancing a home, they should do so sooner rather than later.  Remember, the homebuyer tax credit expires April 30, 2010 and interest rates likely will reach or exceed 6% by midyear or sooner.

While I still believe there's a lot to look forward to, the increase in interest rates changes (just a bit) my picture-perfect, pie-in-the-sky, rose-colored outlook.  Nonetheless, I'm keeping my chin up and so should you!

Posted by: shana@lakeviewtitle.com