All Aboard the Rate Train: Destination Unknown

Are you out there buying a home and your Mortgage Broker is telling you all different rates. Rates varying from 4.875% up to 6% and then back down. I would understand if this type of variation would cause you a little concern and may even cause you to say is this person trying to take me?  The answer is very simple: The market is unstable and has been a rate train without a distinct direction.

Items like oil prices rising 40 + days in a row and job losses appearing to slow down leading to expectations of consumer spending increasing. The largest overlooked factor is the rampant printing of money done by the government. Simple supply and demand here. Increase money supply decrease in the demand. This is especially true from the foreign investor market which is invested heavily in bonds. As the value of the dollar decreases and the other factors increase Inflation becomes a concern. Inflation by definition erodes the value of a fixed income investment ie: bonds.

The Cause: Massive pulling out of the bond market and major sell-off. This is what lead to the sudden hike in the interest rates. That hike scared many of our buyers right out of the market. This is a problem in itself. If buyers vacate the market we will end up with an entirely different problem. We have to have buyers and sales and the inventory is down now but there are many homes in the wing. The banks are releasing these slowly. If they continue to increase the inventory and buyers leave the market oversupply would become an issue. They will not allow this to happen or so I hope. We have already seen them come back down a bit from where they shot too.

Bottom Line: If you are riding the rate train or you are house shopping talk to you lender and ask them to give you a worst case payment. Base what you are shopping for off your worst case pricing. If they go back down get excited and if they stay there you are prepared. Keep in mind that the median home sale in Sacramento County is at 2002 levels. The rates in 2002 were in the high 6% all the way to the mid 7% range. Historically the average fixed rate last time I checked was in the 8% range. Rates have been as high as 18-19% in some cases and homes were still bought. The next time you hear yourself say that is a high rate I urge you to ask yourself  “Compared to What?”