Rates Stay Low – So What’s The Hurry?

The interest rate predictions at the beginning of 2012 were that rates would gradually rise into the 5.5% area. This was based on the assumption that the economy would gradually be improving and The interest rate predictions at the beginning of 2012 were that rates would gradually rise into the 5.5% area. This was based on the assumption that the economy would gradually be improving and there would be a shortage of capital interested in buying mortgage-backed securities (MBS). As we end the year rates are very close to 4% and there is no immediate indication that a surge higher is anywhere near.

The market did not understand or believe the effect that the Federal Reserve buying of MBS auctions would have. Many chickens have come home to roost in the American economy but the condition of the European is even worse and even the mighty Chinese market has begun to quiet. On top of all this, international banks are required to increase their capital significantly under new regulatory agreements. Mortgage securities are in high demand between the Fed buying and banks buying to meet these capital demands. Since mortgage origination volume is much lower than normal, simple supply and demand creates pressure to hold rates down. And finally, the Fed has stated they expect their funds rate to stay near zero into the middle of 2013.

The Affordability Index currently says that housing is more affordable for the average family than at any time since the index was created. Rent vs. own comparisons consistently show that a comparable house can be purchase more economically than what it can be rented for and that doesn't include tax benefits for interest deductions on home mortgages. Home prices have been dropping and have been peppered by distressed sales of one type or another.

There is a lot in this story to convince a buyer to be patient and wait as things continue to move in their direction. There is a huge "shadow inventory" and a large unemployment level that would suggest many bargains are still available. So why would you think there might be pressure to get into the purchase market quickly?

Some interesting things are happening in the shopping market. Realtors are complaining that they can't find enough homes to show perspective buyers. Nice homes are selling in very short time periods. Average homes are selling in standard sale times and the inventory is generally shrinking. Buyers without the patience to work through a foreclosure, bank repossession or short sale are having a difficult time finding a home to buy that matches their desires. Although the distressed sales make the price index continue lower the decline is slower and appears to be creating some pockets where prices are increasing slightly.

The job reports are also changing direction and job creation is increasing. The unemployment rate has dropped slightly and is still high. But there is now 91% employment and that portion of the market is feeling less threatened. Consumer spending has increased and is looking more healthy. This is the point in a market when we are not out of the woods yet but the fear is subsiding and the silent majority is moving back toward comfort levels.