Market Matters Beyond the Headlines

Mayor McKae’s Blog March 19, 2010

Subject: Market Matters Beyond the Headlines: Nabbing bargain basement about to end?

I have attached an article from the Wall Street Journal specially formatted for consumers. You are welcome to print it, share it via email or post it on your social websites.

At the end of this month the Federal Reserve will stop buying mortgages in the after market. Many analysts predict a rise in interest rates by year end.


MAKING SENSE OF THE STORY FOR CONSUMERS

Interest rates have hovered at or near historic lows for much of the past 18 months, resulting in lower payments for many borrowers. With the Fed discontinuing its purchase program, some analysts believe a rise in interest rates could range from 0.25 percent to as much as 1 percent by the end of 2010.



The federal tax credit for home buyers also is scheduled to end April 30. The tax credit combined with the expectation interest rates will increase has created a sense of urgency for many home buyers. In fact, 23 percent of California home buyers purchased a home in 2009 due to the perception that interest rates will rise and they would be priced out of the market, according to California Association of Realtors otherwise to be known as C Association of Realtors 2009 Survey of California Home Buyers.

Rising interest rates will have an effect on home buyers. For example, a qualified couple with a combined pretax income of $100,000 per year and debt obligations (excluding mortgage) of $500 who receive a mortgage rate of 5 percent could qualify for a loan of up to $590,000, assuming a 20 percent down payment. If the interest rate were to rise to 6 percent, as analysts at Barclays Capital predict, the same couple could only qualify for a mortgage of $540,000.



By JAMES R. HAGERTY

Is it time to rush out and buy a house before mortgage rates go up?

As the Federal Reserve winds down its intervention in the mortgage market, rates on home loans are generally expected to rise at least modestly during the rest of this year from today's unusually low levels. Some analysts believe mortgage rates will jump to around 6% by year end from 5% in recent weeks, while others see only a slight increase.

Meanwhile, federal tax credits available for some home buyers are due to expire at the end of April, adding to the sense of urgency many shoppers feel.

"I'd hate to miss out on really low [mortgage] rates" or the tax credit, says Jennifer Hale, a veterinarian who is looking for a new home near Minneapolis with her fiancé, Lawrence Nystrom.

If rates do go up sharply, that will have a big effect on home buyers. Richard Redmond, a mortgage adviser at All California Mortgage in Larkspur, Calif., offers the example of a couple with combined pretax income of $100,000 a year and debt obligations (excluding mortgage) of $500 a month. At a 5% mortgage rate, he figures, the couple could qualify for a loan big enough to buy a $590,000 house, assuming a 20% down payment. At 6%, that would fall to $540,000.

Since late 2008, 30-year fixed-rate mortgages have been available for people with strong credit records at around 5%, near the lowest levels since the 1950s, thanks to the Federal Reserve's heavy purchases of mortgage securities. At the end of March, the Fed is due to stop buying the securities. Most mortgage analysts think the immediate effect of the Fed's withdrawal will be modest.



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Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, estimates that the Fed move will add a maximum of about 0.25 percentage point to mortgage rates. "There is a lot of private money on the sidelines," waiting to buy mortgage securities once the Fed stops gobbling most of them up, Ms. Goodman says. She points to banks, money managers and foreign investors.

What happens to interest rates over the rest of this year depends on many factors that are hard to predict, including the strength of the economy, Fed policies and foreign investors' willingness to buy U.S. debt.

Projections vary widely. At the lower end of the scale, analysts at Credit Suisse and FTN Financial Capital Markets forecast that mortgage rates will be in a range of roughly 5% to 5.25% at the end of 2010. Moody's Economy.com projects about 5.7%, and Barclays Capital 6%. Barclays cites a general rise in interest rates propelled by heavy government borrowing and a strengthening economy as the main factors.

John W. Anderson, a broker at Twin Oaks Realty of Crystal, Minn., who is helping Ms. Hale and Mr. Nystrom search for a house, says the tax credit and fear of higher interest rates are motivating buyers "to move a little faster." But he cautions against moving too fast because of the risk of overpaying or ending up with a home you don't really like. "Getting the right home is the No. 1 thing," he says.