Watching some so-called experts parade in front of the news cameras this morning, it was funny to hear some of the comments.
One "expert" said the Fed's recent cut (exactly one week ago) has had no effect on housing.
This shows how little understanding some "experts" have about the way short-term rate changes have little or no impact on home loans.
Do they really think that fence-sitting home buyers see the Fed cut, get in their car, buy a home, get a mortgage, and close within a week?
Next, an economist from Standard & Poors said, "Most mortgages are priced off the 10-year Note".
I have no clue as to what that means to me or my buyer clients. And oh by the way, I have a Bachelors Degree in Economics.
Do YOU know what "Most mortgages are priced off the 10-year Note" means to you???
Here are some facts that are refreshing.
The consumer is still feeling pretty confident as the Consumer Confidence index for January was reported at 87.9, which was stronger than expectations of 87.0.
Adding further strength to the report is an upward revision to December's index reading from a previously reported 88.6 to 90.6.
WARNING: If the Fed does cut short-term rates to banks by 1/2 percent tomorrow as expected, the long term picture may not be so good for Mortgage Bonds.
So you, my gentle reader may wonder, "Why would a short-term rate cut be BAD for Mortgage Bonds?"
Here is the logic as explained to me by my trusted mortgage banking maven:
First, he Fed has already cut the short-term rate they charge banks for funds by 1.75% since September 18th, bringing the Fed Funds Rate down to 3.5% from 5.25%.
Second, add to that the 1/2% cut in just the Discount Rate back in August.
Third, add in the President's Stimulus Package and another 1/2% cut tomorrow by the Fed and you have a whole lot of ammunition to boost the economy too hard and too fast.
When the economy gets boosted too hard and too fast, the potential for higher inflation soars like a rocket.
Inflation erodes a mortgage banker's Return On Investment (ROI).
If a mortgage bank makes a long-term loan now, like a mortgage loan, the bank will get 5.5%-6.5% ROI.
Next, if inflation rises later this year to 4.5%, the 4.5% inflation rate eats into the bank's yield such that the true, honest, after-inflation ROI to the bank would be just 1% from a 5.5% mortgage loan.
So what happens next?
Well, mortgage banks will pull back available funds and wait for higher rates, higher ROI to the bank.
Insurance companies and pension funds that fund a huge chunk of our mortgage loans will switch to investments in stocks as the stimulus package adds a boost to the economy.
With less cash available to home buyers, mortgage rates will rise rapidly.
This is a good time to get the message out to your friends who may be waiting on rates to drop further before getting a loan approval, and buying a home while prices are hovering around 2003 prices.
As always, loan applications never peak at the lowest point for rates...they do so when rates start moving up and the average "Joe Sixpack" home buyer gets off the fence after the train has left the station.
Warn your friends of this common error.
It is wise to get your friends into a loan application now, especially those above $417k, but below $625K.
This way they can pounce on the lower rates once the Conforming loan limit is raised by Congress to as much as $730,000 in selected markets.
Gentle reader, a final thought from one who has helped over 2,000 families buy and sell homes over the past 25+ years...
Skilled, experienced investors who know how to time the market buy on BAD NEWS. (Falling home prices, dim economic forecasts, pundits preaching economic tragedies)
Consumers, "The Average Guy/Gal" tend to wait, and wait, and wait to buy on GOOD NEWS. (Home prices rising, home values improving, supply dwindling)
Some average folks lose out on opportunities because the say such nonsense as, "I'm waiting to buy until I think we've hit the bottom of the market".
How does the average Joe/Josie decide when the bottom hits??? When he/she is absolutely, positively, 110% convinced that rising values are here to stay, long after values have ticked upward.
They tend to follow the herd.
I call the folks who follow the herd "Sheep".
I call money-making investors "Lions".
Sheep eat grass... lions eat sheep.
All I have to do is look at the REAL investors, the lions, who have been scooping up deals on homes at prices 80% of the 2005 market peak... homes that were purchased by sheep who followed the herd too late.
Not a sermon... just a thought.
Opportunities Are Everywhere...We Can Help You Find Your Dream Home.
Erick Blackwelder or Peggy James of Erick and Company - Exit 1st Choice Realty, Woodbridge VA. Realtors®, call 703-590-2252 list your property for sale or to purchase a property in Lake Ridge, Westridge, Old Bridge Estates, River Falls, Middle County, Cannon Bluff, Meadowbrook Woods, Blooms Crossing, Manassas Park, Beaver Creek, Hunter's Ridge, Brittany, Manassas, Montclair, Dumfries, Occoquan, Dale City, Nokesville, or anywhere in Prince William County.
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Exit Realty Associates
8998C Lorton Station Blvd
Lorton, VA 22079
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