Mortgage Rates, Tapering, & The Real Estate Market

Here is a great piece from our partner Barry Habib at MBS Highway. MBS which stands for mortgage backed securities is the market we watch to which way mortgage rates are trending. Barry provides real-time quotes and advide on whether clients should lock their mortgage rate or float their mortgage rate. Over the years Barry’s advice has saved clients literally millions of dollars.

We’d like to share Barry’s thoughts on the housing and mortgage market. In addition, to the effect of tapering on mortgage rates:

The housing market continues to show strength and resilience.  The latest Mortgage Application data shows that Purchase Applications are actually on the rise.  This is in line with strong Builder Sentiment, as well as rising prices.

Home buying remains a wise decision, as rentals are both tight and expensive.  Real estate prices should continue to be pressured higher due to low inventories and demographics.  For example, there are currently 6 Million Americans between the ages of 25-34 that are still living with parents…the highest number on record.

Yes, it’s true that interest rates have moved higher, but from extraordinarily low levels.  The recent rise of about 1% would add approximately $120 to the monthly payment of an average existing home that was purchased with 20% down, when compared with the lower rate offerings in early May.  Over the course of three years, the 1% rise in rate would cost a borrower an extra $4320.  However, even conservative estimates are calling for 20% home value appreciation over the next three years.  With today’s Median Existing Home Price of $213,500, this would result in about a $43,000 appreciation gain over three years.  This is quite the bargain when compared to the $4320 additional cost due to higher rates.

I am convinced that tapering will be announced at the September 18th Fed Meeting.  There are three Fed Meetings left before the end of year, September 18th, October 30th, and December 18th.  The Fed has stated that they want to start tapering before the end of the year, which rules out a tapering announcement at the December Fed Meeting, as it will be too late.  Additionally, there will not be a press conference after the October 30th meeting, so that Fed Meeting can also be ruled out.  Regardless of what people in the media are saying, this leaves September 18th as the most likely Fed Meeting for this announcement to be made.

Tapering may not be as bad for interest rates as many believe.  Bernanke has told us that the Fed’s tapering will not include reinvestment of principle or proceeds.  This is huge, yet no one is talking about it.  I also think that the Fed may decide to taper more Treasuries than Mortgage Backed Securities.  And we also know that there is less supply coming to the market because refinances have slowed.  That lower supply means that even though the Fed may purchase less Bonds with tapering, it could still be stimulative because there is less supply coming to the market.

No one can predict everytime what will happen in the markets, though Barry has a terrific track record since the 1980’s taking his advice has been a lot more right than wrong with mortgage rates.


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