Posts Tagged mortgage rates

The Federal Reserve announced that it will end the purchase program of mortgage backed securities as scheduled this month. I give this three hips and a giant hooray! After providing about $1.25 trillion in economic support, ending this program will force the private sector markets to fill the gap that the Fed has left. And I have all of the confidence in the world that they will do so. However, they will likely not do so at the same returns that the Fed was seeking. Rather, I suspect, the private sector will demand greater yield on their investment than did the US Government.

So what does this mean to the “average Joe” trying to buy a home? I suspect it will mean slightly higher interest rates. If the secondary markets begin demanding a higher return, it is going to force mortgage originators to write at higher rates. I don’t think this rate will have to be dramatically higher, but could be in the range of 500 basis points (0.5 percent). That’s a tough pill to swallow if you’re right on the edge of taking out a loan. If you have the option, I would recommend locking a rate quickly.

For the broader market, I think this is a promising move, thus my cheers at the beginning of this post. If the Fed is willing to cease this program, it must have confidence that the private sector will step forward to continue the function. Lacking that confidence, the program would have been extended to ensure that credit markets remained liquid. I take this as a very positive sign that the mortgage markets are healing.

It will be very interesting to see what happens with the first time home buyer tax credit at the end of April. I can feel the demand that this program is generating in the market. Homes that are in the range of both size and price to be attractive to first time home buyers are seeing significantly more demand than larger, more expensive homes. So, a final word of encouragement to those who own small homes and have been thinking about moving up – do it now!

As 2009 draws to a close, I am wondering how well the first time home buyer tax credit worked this year. Rather than simply speculate, I will look to market numbers to answer the question. According to the National Association of Realtors (NAR), first time home buyers accounted for 47 percent of all real estate transactions that were completed thus far in 2009. That figure represents an all time high percentage of first time home buyers, eclipsing the mark of 41 percent that was seen last year and the previous record high of 44 percent in 1991.

Up to $8000 coming back to First Time Home Buyers

Paul Bishop, NAR Vice President of Research notes, “It’s interesting to note the last cyclical peak of first-time home buyers was during the last noteworthy economic downturn, with first-time buyers starting the chain reaction that led the nation out of recession.” Well, I’m all for pulling out of the recession, so I sure hope that an upward trend of home sales continues in 2010.

In addition to the tax credit received by first time home buyers in 2009, there were additional factors that contributed to the increase in the number of first time home buyers. Interest rates were phenomenally low throughout the year. I would hope that they remain low through the next year, but prolonged periods of interest rates this low have not often been observed in our economic history. Additionally, home prices in many areas fell during the past year. So, bottom line, there was a product “on sale” with very cheap financing that someone (Uncle Sam) was paying the consumer to buy. Sounds like a good recipe for success. To those first time home buyers who purchased a home in 2009, congratulations! To find out if, and how much, tax credit you received, click here.

There are three great programs run by federal government that allow first time home buyers to buy a house with little to no money out of pocket. FHA loans are available through the Dept of Housing and Urban Development. The Veteran’s Administration offers US military veterans a $0 out of pocket opportunity and The The US Department of Agriculture sponsors Rural Housing Service Loans.