SellAustinTexas

The Fed reiterated last week that in March of 2010, they will be ending their Mortgage Security Buyback program, a big part of what has kept interest rates low throughout 2009. It won’t be a sudden drop-off, rather a slow decrease in these purchases until March, when there will be no more.

With the Fed no longer spending the tens of billions of dollars monthly on mortgage securities, we will only have the private sector to fill in the gap. When that happens, we can naturally expect mortgage rates to rise. “The difference in monthly mortgage payments of 5% or 6% can be measured in tens of thousands of dollars over the life of a loan,” one writer explains.

The Atlantic Monthly writes that the credit markets need securitization, and warns that it will only become more difficult to borrow money (and those loans will come at higher interest rates) as the Fed program ends. “If you think banks aren’t lending enough now, then you’d find a world with no securitization much worse. Yet, that might be what you get if the Fed ends its program.”

Why would the Fed remove such a successful program? The analogy of a bike with training wheels is often given – if you want an economy to strengthen, recover and stand on its own, at some point you need to take the wheels off. If the Fed keeps rates too low for too long, inflation will rise higher and you will expect to see rates rise anyway. Home loan rates will increase as demand is met, naturally, with or without the Fed.

We can expect the end of the first quarter of 2010 to be a telling time for the economy’s recovery, but the heavy favor of the buyer and borrower is going to change. These will be some of the last months we’ll see that are such great markets for buying a home or land. If you are considering buying, you should begin your search now.

Reasons to Buy a Home Now

The Buyers Market

1.  High Inventory: There is currently a balance of supply and demand that leans in the buyer’s favor. High inventory leaves a buyer with many available choices, and in all price ranges.

2.  Negotiating Power: The high inventory also allows for decreased prices and more negotiating power for the buyer. Not only can a homebuyer find their dream home, but they can do so for a great rate.

Home Prices

3.  Home Prices: Prices have come down a great deal from years past, and will only continue to rise over time.

4.  Interest Rates: With interest rates also at the lowest point in years, a single housing payment is going farther than it did in the past. Interest rates will not remain this low, and are expected to rise again soon.

Tax Savings

5.  Tax Deductions: Buying a home allows for many tax deductions, such as mortgage interest, mortgage insurance and real estate taxes. This means that after taxes, your mortgage payment will be lower than a rent payment would have been.

6.  Tax Credit: The new tax credit for homebuyers has been extended through spring, with an $8000 credit for new buyers and a $6500 credit for repeat buyers.

Personal Savings

7.  Appreciation: Home prices always move upward in the long run, appreciating the value in a home.

8.  Equity: If you have an amortizing loan, each mortgage payment is building equity in your home. It is such a gradual change many people don’t notice it, but it is allowing you savings.

9.  Rising Rents: Rents are expected to continue to rise.

Incentives and Extras

10.  Material and Non Material Extras: With the buyer’s extra sway in negotiations, you are able to ask for things that may not have been previously included, such as material items (like appliances) or non material items (such as a home warranty) as part of the purchase of the home.

11.  Home Improvements: Many sellers are working hard to make their homes move in ready, with extra home improvements and updates.

12.  Maintenance Costs: With updates and repairs before the home’s purchase, a buyer can save money in maintenance along with having a newer looking home.

On Saturday, the Austin Statesman wrote about first time homebuyers taking advantage of the tax credit. The group includes many young professionals who may not have made a home purchase without the incentive, like 25 year old Helen Rodriguez, who says, “it’s the cushion that made me comfortable making this purchase at this point in my life. Without it, I don’t think I would have been comfortable buying.”

Others also include some artists and other creative entrepreneurs, like Tim and Carli Price. They had been house hunting for two years but “could never find anything in our price range that wasn’t ready for a bulldozer,” he says. But after the tax credit, they were able to find an affordable home that met or exceeded all their expectations.

Mortgage companies in Austin are reporting on how many first time buyers the credit is bringing in – about 45% of Sente Mortgage’s loans were to this group, according to Vice President Kenton Brown. “That’s a majority of the purchase activity we’re seeing now.” He says the credit is “creating a trickle-up effect,” that is, allowing home owners to sell their starter homes and move into larger ones.

“Not only does it get first-timers in the market as homebuyers,” says Don Reed, senior loan officer at Integrity Home Mortgage in Austin, “but the tax credit acts as a boost to consumer spending when they get their refund check from the IRS.”

For all the benefits of the tax credit, buyers need to be aware that the deadline is coming and action needs to happen now to take advantage of it. “Don’t dawdle — it takes at least four to five weeks to process a mortgage application and hold the closing,” the Statesman writes. Also, a bump in interest rates is looming: some experts say to expect it next summer, some say sooner. Ed Solter, president of Presidential Mortgage Co. in Austin, is expecting a 1% bump in the first quarter of 2010. Even if legislators were to pass an extension or even expansion of the tax credit, it’ll come paired with higher rates. Now is the time to start your home hunting if you also want to take advantage of these great deals.

Still thinking that house prices are going to decline further? Are you still anticipating the “deal of a lifetime” just around the corner? You’re about to be out of luck. It’s natural to look at the national economic news and think that we are going to see a further erosion in home prices but it looks like things are pointing up for Austin’s economy. We have seen a decline in high-end home prices but the average home price in Austin has remained relatively stable. The $8,000 first time home buyer tax credit is also about to run out (see the previous post). But by far the biggest reason: Interest rates are anticipated to go up and that is going to price a lot of people out of the market. Compared to the week prior to August 24, 2009, the national 30-year mortgage rate is up 4 basis points from 5.14%. Compared to three months ago, the 30-year rate is up 20 basis points from its average rate of 4.98%. Why are interest rates going up? The massive government spending has the potential to lead to long term inflation, causing interest rates to rise. Ted Jones, Senior VP and Chief Economist at Stewart Title explains it best:

“…let’s assume a loan amount today of $100,000 with a 30-year fixed-rate residential loan at 5 percent. Nationwide at the time of this writing, the average 30-year rate was 4.85 percent per Freddie Mac. Fannie Mae forecasts an average rate in all of 2009 of 5.13 percent. So the 5 percent is a reasonable assumption.

So if rates go up just 1 percent to 6 percent per year, then prices must drop at least 10 percent for that same buyer to qualify for the same monthly payment. A 1.5 percent increase in rates to 6.5 percent requires a 15 percent price decline, and a 2 percent increase necessitates a 20 percent price decline to qualify. Note: This 1 percent interest rate change to a 10 percent price change is only true when interest rates are 5 percent as they are today.”

Interest rates vs. price changes

Admittedly, at the same loan-to-value ratio, as prices decline so does the down payment. Since, however, many buyers select the price range of homes they consider buying based on their monthly payment potential, rising rates may force future buyers into less expensive homes and hence properties they find less desirable.

So, if you are waiting to buy your first home or if you are waiting to make that second home investment – don’t wait much longer! Postponing that purchase is going to price you out of the market and you are going to have to settle for something less or just wait for the next recession. Don’t get burned. Thanks to Ted Jones for letting us reprint part of his blog which can be found here.