Where are home values headed?

If you are like me and watch the housing market on a regular basis...you must be wondering the same thing I am...why are homes selling with multiple offers and prices going up so fast.   It wasn't too many years ago sellers couldn't sell a house, but now they are flying off the selves like they did back in 2006.  Oops...did I reference the last decade?  Sorry...I don't want to make it sound like the housing market is behaving like it did in the run up to the housing crisis we witnessed in 2007, but there are some things taking place that look awfully familiar. 

In the run up to the housing crisis we saw some markets take off like a rocket...values going up at a neck breaking pace and then those markets were the first to tank when things went sideways.  Some of those same markets have had a good run the past few years....and they are now seeing their values peak and in some cases drop.   Could this be a sign to those other markets that moved up and down a little late before and after the crisis that values may not be headed higher much longer?

Of course real estate is very local in how it behaves, but buyers out there waiving inspections, waiving financing, putting in escalations clauses....well...you get the picture...you may want to use some caution here and have a plan for each house you are looking at.  I am not saying you shouldn't do what you feel is needed to get the house you want, but you should have a plan and stick to it...and not get too emotionally invested in a house. 

Keep in mind that rates will likely move higher and that may feel like a motivator to get into contract on a house now, but as rates go higher typically that will pull some buyers out of the market and could create an opportunity for values to come back in line with reality.  I wish more buyers were as motivated back in 2011 when the market was priced in the buyers favor than now....when it can be a bit frustrating to be a buyer. 

How Low Can Rates Go?

The short answer is this low. Rates have trended lower for the past week due to much of the uncertainty with the debt ceiling issue as well as some of the economic reports that were released showing the economy is still on very shakey ground. Interest rates are back to their lowest levels in the last three years. Many borrowers dont know rates have dropped because the news has been focused on the congressional debate of the debt ceiling and the concern over a default.

Now that congress has agreed on a package and the president has signed off on it we are back to a situation where default is not something that is an immediate concern for US Bond investors. With the big default issue gone and poor economic data interest rates have dropped substantially over the past week. Last week we learned that the GDP of the previous two quarters was over stated and the economy actually grew at a slower pace than thought. We also have seen with the consumer confidence and retail numbers that most people arent feeling very optimistic about our economic recovery...if there is one.

As it typically goes in the market as investors flee stocks due to concern over future growth they flock to the save investments of bonds and fixed interest investments. Investors have been buying up bonds and thus driving down the yeilds and home buyers and folks refinancing are now a direct beneficiary of this behavoir.

So you may not have heard rates are at their lowest levels yet on the national media networks I am here to tell you its time to act. By the time the national media picks up on the low interest rates its typically too late and the best rates have passed. If you get this story and know anyone who would benefit from knowing rates are really low again please forward or pass along.

I may not be around in the afternoon this week as its Seafair in Seattle and I will be trying to poke my head out of the office to watch the Blue Angels tear up the Seattle Skyline. Love those guys!

When will Greece end?

Its been how long now since the news of Greece defaulting on its obligations hit the news? It seems like its been years, but that may not be the case. Whatever the amount of time has been the news of Greece and its financial woes has really helped mortgage bonds perform well and keep rates down. As Greece goes in for another round of austarity plans and another round of approval within the EU another key event is taking place that may have an impact on rates...just as Greece has had an impact.

Believe it or not the Quantatative Easing 2 is drawing to a close this week. Many have speculated that interest rates would go up as the Fed exists the bond purchase plan they have been doing for over a year now. So far the markets havent made their move. Even though the June 30th date is this week it seems Greece is still carying more weitght than the QE2 ending. I dont know what to draw from this, but I would guess that Greece stability, QE2 ending, and the CPI figures from last week all spell out a future with interest rates going higher.

Oh..this sounds so familiar...how many years have I said rates will be going higher? I feel like the kid who has cried wolf one (more like 50) too many times. I guess I have to qualify what I mean by higher rates and what time frame I would expect. I do think rates will climb higher...I dont expect them to jump higher as the economic outlook isnt exactly red hot, but inflation does seem to be present at the producer/manufacturer level and that will eventually move into the price of goods. Also...like it or not the Federal Reserve has been keeping rates lower than they may have otherwise been with their bond purchase plan.

So don't become too complacent on rates being in the 4% range as it may not last indefinately...though it could last through the year.

why high oil prices will push rates higher

There are so many things that affect mortgage rates: Geopolitical news, currency exchange, stock market, employment...you name it. The main thing that will push rates higher or lower is inflation. The reason inflation is ultimately the largest influence on interest rates is that inflation erodes the return an investor will receive on a bond investment. If a bond yields 3% and inflation is around 1% (as it is now) an investor is actually going to receive a 2% net return on their money.

If inflation moves up to 2.5% (still within the target range for the Federal Reserve) that same bond will only net .5% which is not very attractive to investors. So as inflation rises investors will require a higher yield on treasury's and mortgage bonds. If inflation moves up to 2.5% you will likely see the yield on a bond also move up to 4.5% to net the same 2% yield.

So how does oil work into this...?? Oil is used to manufacture & deliver just about every product in the world. So if a farmer has to pay more for oil/gas to harvest their crop that will force them to charge more for their product to offset the higher cost to them. Then the company that delivers the produce from that farmer to the store is paying more for oil which again adds another increase in that same product to offset their costs. This occurs for just about every product and as the consumer has to pay more for the goods they consume inflation moves up.

So you can see that the speculators of oil forcing the price per barrel to artificially move higher are actually going to eventually drive prices higher at your local store which will then drive mortgage rates higher as investors will not buy mortgage bonds or treasuries if they feel inflation will erode their returns.

So don't just get mad when you are at the gas station paying $4 a gallon gas. The speculators who are keeping the price of oil above what most economists say it should be are costing us a lot more than a higher cost at the gas station...they will ultimately cost us all a lot more for mortgage interest rates and all the good and services we consume on a daily basis.

What can you do? Contact your senator/representative and lets see if we can get something done to limit the type of investor who can speculate on Oil futures. I am a supporter of free markets, but the this case..there are too many unintended consequences that will negatively impact our economy and the recovery of our housing market to leave open to a Wall Street hot shot speculating with our future.

What a week!

This week is full of news that will certainly have investors (and me) keeping a close eye. The Federal Reserve president Ben Bernanke is holding a first-ever news conference tomorrow. It will be interesting to see what he has to say about the state of the economy, concerns about budget deficits, how oil prices are effecting business growth/profits, QE2, and the future outlook. This public pow-wow could be a huge market mover if Bernanke provides an honest look into our collective situation.

Another big event to watch this week is the auction of $99,000,000,000 (99billion) in Treasuries. That's a big number...a very big number. Given the down-grade by Standard and Poor of the US's credit outlook from 'Stable' to 'Negative' I would imagine investors won't be chomping at the bit to buy up Treasuries with a yield at the lowest level in months. If the auction results are poor we could see rates take a quick jump higher as bonds will fall and the yields will climb as a result.

As if those two juicy events weren't enough...the Case Shiller 20-city index for February showed prices collectively moved 3.3% lower year over year. This is the 8th straight monthly decline. With the housing market still struggling to get its feet under it and the general state of the economy as it is...guess what I am going to say.

If you are looking for a home loan...you should be making application as soon as possible and once you have found the lender/broker you want to work with you should lock in your rate immediately. The past few years we have seen rates rise and fall several times. I have blogged, tweeted and screamed from the roof tops that rates are going higher. I have been surprised (happily) that rates have remained at the levels they have for so long. I will warn you that at some point the interest rates will start a climb higher that we will not see reverse for a very long time.

That is all pretty depressing huh? Well, I guess the optimist would say that today is a great day to get a mortgage! Have a great week!

Safe Haven Trade to Unwind

Mortgage rates had a nice run from February through most of March. Much of the improvement with rates was due to major disasters in New Zealand and Japan along with the unrest in the middle east. Geopolitical concerns and unrest drive investors to the bond market as a 'safe' place to put their money when there are times of uncertainty. This played out nice for mortgage rates as the increase in the demand for mortgage bonds drove down rates. Though the situation in Libya and mess in Japan are still front page news events their immediate threat has passed a bit and mortgage rates are starting to trend higher. Along with the average investor starting to pull out of bonds the Treasury department has began to unwind their holdings of mortgage bonds and the Federal Reserves QE2 program ends in June. All these events along with the 1.6 TRILLION dollar budget deficit will need to be funded with new bonds being issued in the market place. 1,600,000,000.00 LOTS OF ZEROS!! That's a lot of supply that will hit the markets which will likely push rates higher through the next year. I have tried to stress to my clients that rates have been extremely low the past four years...and that typically rates are around 7%-8%. When...and I did mean to use the word 'when'... rates go up many will have a harder time affording homes due to the higher payments that will come along with those higher rates. We are living in a very unique time. With these low rates and the drop in prices buyers have a great opportunity to jump into home ownership with rates they will be able to brag about for decades to come. If you need a home loan...now is the time to lock it in!

Whats up with advice?

So I have been tweeting and blogging and FB-ing for weeks now that its a prudent choice to lock in your rate if you are a current homeowner shopping for a refinance or a new buyer trying to figure out if you should lock or float on your interest rate. I have been very consistent on my advice. I have said...'lock' and 'lock today' and 'lock now'...you get the picture. Along the way each day rates seemed to improve a bit and my advice may have seemed wrong.

I am certainly capable of admitting when I am wrong (just don't ask my wife), but in this case I stand by my advice and still suggest its the time to lock. Though rates have managed to improve over the past few weeks due to the events in the middle east and the disaster in Japan (that is still playing out) the improvement has been part of a defensive play for investors. The fundamentals are still pointing in the direction of economic recovery and real signs of inflation...both of which are ultimately going to drive rates higher.

So if you have been reading my posts, my tweets, my Facebook page and think I have lost my mind...I haven't. I just think those out there who are playing the float game will eventually (likely very soon) get burned on the volatility working against them and when rates do move higher I don't see them coming back down again...unless there is an even more devastating natural/human disaster than Lybia and Japan have experienced.

What are the odds things will get worse than what we have seen...those are the same odds that we will see rates get lower from here.

Lock 'em if you are looking to do a loan in the next 30 days!