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Today’s Talking Point 10/27/09

Where are interest rates headed?

Let’s take a look at mortgage rates and where they may be headed. Currently, mortgage rates are being held down by the federal government’s desire to help stimulate the housing market, therefore stimulating the economy. The government has, for over a year now, been very active in the purchase of mortgage-backed-securities.

Their goal was to control the interest rate, thus making it easier for a homebuyer to qualify for a mortgage.

The original government program to purchase mortgage-backed-securities was designed to end December 31, 2009. Just a few weeks ago, it was announced that the program would be extended until March 2010. However, no additional funds were allocated to the program. So, in essence, whatever monies were scheduled to be spent have not been increased. Instead, the same amount of money was just spread over an additional three month period.

As the government winds this program down, the private sector will have to step up to provide mortgage financing. While the government was comfortable lending at a five percent interest rate, the private sector will not see that as attractive. With the national debt rising dramatically, and inflation looming down the road, it does not make good business sense to lend money for thirty years at five percent.

The banks will require a higher interest rate. Prior to the government’s involvement, rates were approaching seven percent. Though I don’t believe the banks will jump to that number originally, I do believe this will be their eventual goal.

As a matter of fact, the New York Times just this past week said this about this issue:

“One of those things propping up the market has been the Federal Reserve, which has been buying mortgage-backed securities to keep interest rates low. As the Fed begins to wind down its purchases in the next few months, rates will become less enticing. Analysts expect them to rise to at least 6 percent from the current 5 percent.”

If interest rate go up even by one percentage point, to six percent, as the New York Times suggests analysts are predicting, that will raise the cost of purchasing a home. Some buyers are sitting on the fence right now, concerned that prices still might fall.

In reality, even if prices fall another ten percent, if interest rates rise one percent, the buyer’s monthly mortgage payment will actually be higher. We must help educate the buyer that it is more than just price that makes a good deal. Instead, they should consider cost, which has as its components price and FINANCING.

If a buyer is considering purchasing anytime in the near future, because of this potential spike in interest rates, they should purchase now.

Tomorrow, we’ll unveil why ‘short sales’ have been more difficult than they should have been, and why that’s about to change.

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