Posted on 08/14/2005 12:07:58 PM PDT by ex-Texan
Rising rates yet to pierce mortgages
Rising interest rates are supposed to be an economic sedative, but the hyperactive real estate market has retained its vigor even as the prime lending rate has climbed to a nearly four-year high.
One of the biggest reasons for real estate's unusual behavior is that home mortgages are less expensive than they were 14 months ago when the Federal Reserve Board began to push up the short-term cost to borrow money.
That inflation-fighting effort has raised the prime rate from 4 percent in June 2004 to 6.5 percent now, making it more costly to buy cars, appliances and almost anything else on credit.
Meanwhile, home mortgages have remained a relative bargain. The average rate for a 30- year fixed-rate mortgage stood at 6.05 percent through Thursday, down from 6.41 percent during the first week of June 2004, according to HSH Associates, an industry research firm.
Those low financing costs mean home buyers can qualify for larger loans a major factor why real estate prices have continued their steady ascent in neighborhoods scattered across the country.
The trend troubles Federal Reserve Chairman Alan Greenspan and many other economists, who worry that cheap mortgage money is contributing to a real estate pricing bubble that could trigger a traumatic recession.
"It's very hard to understand the psychology of any market,' said UCLA economics professor Edward Leamer. "But it's fundamentally clear that the housing market is in a fragile and dangerous situation.'
The risks of a real estate meltdown aren't the same across the country because mortgages aren't the sole factor influencing home prices. Other key considerations include an area's desirability, the supply of available housing and the strength of the local job market.
The housing markets most susceptible to a sharp downturn in prices are in California, Massachusetts and New York, according to PMI Group Inc., a mortgage insurance provider based in Walnut Creek.
Based on a recently completed analysis, PMI predicted six major metropolitan areas face at least a 50 percent chance of enduring a drop in home prices within the next two years: Boston-Quincy, Mass.; Nassau-Suffolk, NY; San Diego County; Santa Clara County; Orange County; and a two-county area east of San Francisco.
In the nation's 50 biggest markets, the average risk of a price decline during the next two years stands at 21 percent, PMI said.
After years of rapid price appreciation, things appear to be slowing down in some markets, such as San Diego County, where a mid-priced home sold for $493,000 in June, more than doubling from $232,000 five years ago, according to DataQuick Information Systems.
But San Diego home prices have gained just 6 percent during the past year, tapering off from the double-digit growth that had prevailed since early 2000, said DataQuick analyst John Karevoll.
"We are monitoring San Diego very carefully because that appears to be where other markets might be heading,' he said.
"The average rate for a 30- year fixed-rate mortgage stood at 6.05 percent through Thursday, down from 6.41 percent during the first week of June 2004, according to HSH Associates, an industry research firm."
Something doesn't jive.
Interest rates are going up while mortgages rates are going down. Topsy turvy world.
I think most ARMs are tied to the prime, not the 30 year. I wonder if some people are going to be in for a big suprise when their 3 or 5 year adjustment hits.
Most first mortgage ARM's are tied to the 1 year treasury and 6 month and 1 year LIBOR Rates. Most home equity lines are tied to the prime. You are seeing a situation right now where short term financing (3/1, 5/1, and 7/1 ARM's) have almost the same rates as the long term rates (30 year fixed). The only real reason to go with a 5/1 ARM over a 30 year fixed is an interest only loan. The people that currently have ARM's right now will see their payments go up in the next 1-3 years. If they anticipated that they would be out of their homes by then, but aren't you could see some major problems.
Fixed 30-year mortgages are tied most closely to the 10-year rate, not to the short-term rates controlled by the Fed. (Because mortgage principle is paid back over time, not at the end of the term, and because most mortgages are paid off sooner than 30 years due to moving or refinancing, the 30-year mortgage is not most linked to the 30-year bond rate.) As usually happens when the Fed tightens, short rates are up while long rates remain pretty stable, i.e., the yield curve has flattened.
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