Question Details

Deborah Madey, Real Estate Pro in Red Bank, NJ

For those of us who experience spring markets......What impact do you believe that today's rate cut will have?

Asked by Deborah Madey, Red Bank, NJ Wed Jan 30, 2008

Sidenote: Even Jim Cramer said he wanted to buy a house now. Comments welcome from all!

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Answers

7
The fed has cut rates an unpresedented,1.25% in less than two weeks to.... ( did someone pull the fire alarm?)

1.Prevent a recession
2. Jump start the housing market.

Bank of America`s Refi`s are up 22% in the last 7 business days.

Stimulus package?
FHA secure?
Rate freeze for five years?
No, 1099 for short sales?
What have I forgot?
What`s next? Lowering the qualify to buy.

I picture the Administration, Senator's, and Congressmen. Throwing buckets of gasoline on a huge pile of wood. I see a flaming arrow, flying through the sky, towards this pile of wood.

Activity, more lookers right now in AZ, however the big "Spark" will come in the form of relaxed lending guidelines.

Will the arrow hit it`s target? Yes, it just has to be close.

I feel what ever Realtors are left , need to gear up for Spring , because fall will be busy. It is an election year
2 votes Thank Flag Link Thu Jan 31, 2008
Mr.P, Other/Just Looking in Arizona
MVP'08
Short answer: check rate trend surveys, e.g. here: http://www.mortgage-x.com/general/rate_trend.asp

Quote:

Over the next 30 days: Over the next 90 days:
rates will rise significantly: 0.0% rates will rise significantly: 0.0%
rates will rise slightly: 10.3% rates will rise slightly: 6.9%
rates will remain unchanged: 34.5% rates will remain unchanged: 27.6%
rates will decline slightly: 55.2% rates will decline slightly: 65.5%
rates will decline significantly: 0.0% rates will decline significantly: 0.0%

So the 30, as well as 90 day sentiment is that rates will decline slightly.

Long answer:

- 15Yr Fixed and 30Yr fixed are correlated with the 10 and 30Yr treasury. So we need to examine the effect of the FED funds rate cut on the long end of the yield curve.

Argument: rates to go UP. FED rate cut has the potential to boost growth and increase inflation. Growth boost implies stock market will go up, shifting investor money from treasuries to equities. Treasuries go down (yields go up) => mortgage rates go up. This is in expectation of increased inflation.

Argument: rates to go DOWN. However, rate cuts are not working, and stock market is probably headed lower. Treasuries are bought up, sending yields lower. Mortgage rates come down.

Argument: rates to go DOWN. Less people are able to quality for the best possible terms, decreasing the supply of available investments. So the rates have to go down to encourage more buyers into the market.

Checking bankrate.com for the 5-year history of the 30Yr Fixed (best possible terms), we see it trade in a very tight range of 4.9 - 6.4%. Furthermore, 90% of the time it is bounded to a range of 1%.

W/ respect to various mortgage rates (including ARMs and indices affecting ARMS), mortgage.x is the best source.

Noteworthy graphs:

http://www.mortgage-x.com/general/indexes/average_contract_r…

This graph shows 1 Yr Constant Maturity treasury vs. two mortgage indices. 1Yr CMT is much more correlated with the FED funds rate. As you can see, no matter how low the 1 Yr CMT yield goes, there is a floor on the mortage rates. This graph does not include values beyond Jan 2007 (you can fill in the rest using bankrates graph, although the 30Yr shown by bank-rate is probably lower than the 30Yrs shown here).

For up-to-date wholesale mortgage rates, you can check mortgage professor's web-site.

The 12-day history of 6 fixed, 8 adjustable rates shows that rates bottomed out on Wed, Jan 23rd, though that rate did not last long. On that day, equity markets tanked huge despite the FED emergency rate decrease. 30Yr was available at 4.92. For comparison, during the following days, 30Yr in that graph has been steady in 5.3-5.4 range.
1 vote Thank Flag Link Wed Feb 6, 2008
Hi Deborah:

Where I am in Marin, we are already seeing a positive impact of the feds rate cut to the market here.

This is not only due to the fact of lower interest rate, but the main benefit is the psychological effect it has on the buyers. There is a positive outlook brought on by the rate cut news, Bush bail out plan, as well as the increase conforming loan ceiling, etc, we have seen a surge in sales report on the sales board and MLS>

Good vibe indeed.

Sylvia
1 vote Thank Flag Link Wed Jan 30, 2008
Sylvia Barry,…, Real Estate Pro in Novato, CA
MVP'08
Contact
I think the psychology of hearing about rates under 5% will excite the buyers that have it on their radar. If you are not in the market, it is unlikely to bring you into the market.

We agents and current consumers pay day to day and hourly attention to this stuff, most consumers don't really tune in that closely to all the real estate pricing and foreclosure meltdown news until it starts to affect them personally. Fewer than one consumer in ten understand the correlation ( more accurately: lack of correlation.) between the Fed rate, the prime rate, and new fixed rate mortgage rates.

I received an email from my loan officer: there may even be a inverse correlation. An inverse correlation would mean that as short term rates go down, long term fixed rates go up.

There are many plausible macroeconomic reasons to argue that would happen. Investors who set long term interest rates have to consider the effect that possible inflation will have on the
( distant ) future value of money. Lower short term rates are perceived to increase the possibility of higher inflation in the future. To offset the lower future value of the return of the principal due to inflation, the investors set the long term interest rates higher.

Mortgage rates have fallen slightly since the end of last year, that is just one factor in buyers decisions to move off the fences, along with expectations of further home value declines (or future appreciation ), recession, stock market woes, and often more importantly, personal finances, emotions, fears, wants and needs.
0 votes Thank Flag Link Wed Feb 6, 2008
Jim Walker, Real Estate Pro in Carmichael, CA
MVP'08
Contact
I can't comment on New Jersey specifically but here in Atlanta, GA I've seen a rapid increase in activity. As the owner of a staging company more and more sellers are gearing up for spring. There seems to a significant buzz in the air and my phone is ringing off the hook. I guess that explains why I haven't visited trulia in several days.
Web Reference: http://www.rmr-usa.com
0 votes Thank Flag Link Thu Jan 31, 2008
Deborah....

There will be a trickle down from the rate cut but it is not a direct impact. Hopefully it will bolster the buyers sitting on the sidelines who have been waiting. Interest rates seem to be back to the market of 2003-2004 and it is definitely an opportunity market!
0 votes Thank Flag Link Wed Jan 30, 2008
Pam Winterba…, Real Estate Pro in San Ramon, CA
MVP'08
Contact
Rate cuts by the Fed do not have a direct relationship to mortgage rates. Long term (30 year) mortgages are tied to the bond market. Will the rate cut have an impact on the bond market, maybe over time.

As to having an impact on the spring market, maybe the action by the Fed will help to change peoples perception of where things are headed. If people are more optimistic, maybe they will make that real estate purchase that they have been reluctant to do.
0 votes Thank Flag Link Wed Jan 30, 2008
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