With all of the recent strength in the Twin Cities housing market and Minnesota’s relatively low unemployment rate one might be confused about why we’re experiencing all-time lows (ours are even lower) in mortgage rates since typically the beginning of a recovery is followed by higher interest rates. But the truth is that the Minnesota story is not the national or global story. Events on the national and international stage have caused the Federal Reserve and global bond markets to drive US mortgage rates down. This too will end and will carry a cost to those contemplating a mortgage.
First, some context:
Internationally, the story is Europe. There are problems in Greece, Spain, Portugal, Italy, Ireland and some would say in France. As the Euro Zone falls into disarray, fewer investors are interested in Euro denominated assets[1]. They have been selling them and buying up assets perceived to be safer. These have primarily been US Treasuries and US mortgage backed securities. As these assets are bought up, their investment yield drops and as their investment yield drops, so too do mortgage interest rates. Of course as Europe heals, the opposite is true and mortgage rates will undoubtedly rise.
This international problem is disconcerting to the Federal Reserve. Nationally the housing recovery is more anemic than Minnesota, growth is slow but steady and unemployment remains high. Depending on one’s perspective, this is either a positive or negative sign but it is indisputably precarious. To that end, the Federal Reserve is even contemplating an extension of Operation Twist (also known as Quantitative Easing) to extend their efforts of keeping rates low (this has played the largest role in keeping mortgage rates low over the last few years). Even despite this, Ben Bernanke, by stating to congress that “monetary policy is not a panacea” has implied that there’s only so much that can be done without congress’ help. Yeah, like that’s going to happen! Extending Operation Twist could extend this period of low interest rates but it’s only a postponement of the inevitable rise in interest rates.
The Mortgage Bankers Association (the MBA) predicts that rates will end 2012 at 4.2% and 2013 at 4.7% (that’s a full percent over today’s rate). One can only assume that the MBA foresees continued anemic housing growth (but growth nonetheless), steady GDP growth and continued modest improvements with unemployment (overall). They may also be suggesting that Europe will slowly sort their mess out. Who can say? In any event, this begs the question, “What is the cost of waiting until fall of 2013 to buy a home strictly from a mortgage perspective?”
Now, the cost-benefit analysis:
Let’s take an example of a 5% down purchase on a median priced home in the Twin Cities 13 county metro area. Since the current median price stands at $163,000, the loan amount would be $154,850. Using the interest rate from this week’s Weekly Primary Mortgage Market Survey® from Freddie Mac of 3.71% on a 30 year fixed rate mortgage, we’ll compare it to the Mortgage Bankers Associations Projected 4th quarter rate of 2013 of 4.7%. We’ll compare the combined monthly payment and amortization savings over periods of 5, 7, 10, and 15 years in the following chart:
The lower the interest rate, the faster the principal balance gets paid down on the front end of an amortization schedule so it’s important to take this savings into consideration. Of course if one’s loan amount is higher or lower the savings would be greater or less respectively. Lastly, these aren’t assumptions and numbers that I’ve come up with in my mom’s basement. These are highly cited, credible and relied upon sources and assumptions.
Finally, a word for homebuyers:
This has been meant to put the market for current mortgage rates into context, evaluate projections and calculate possible costs of waiting. Always remember that while these are important considerations, buying a home is only partially an investment but is largely personal. While it is not unwise to take these calculations into your decision making process, always remember that you live once and should always endeavor to buy what you want, when you want it and for your personal reasons.
Happy house hunting!
[1]Germany introduced covered bonds, known as Pfandbriefe, in 1770 to finance public works projects. Since then, 24 other countries in Europe have adopted the covered bond structure, each with its own unique laws. In Spain, for example, covered bonds backed by mortgages, known as Cédulas Hipotecarias, were created by a special law in 1981, while in France, covered bonds, known as obligations foncières, can be traced as far back as 1852, with the establishment of the first mortgage bank, Credit Foncier de France. All countries with covered bond laws now allow for bonds backed by mortgages, while only a few allow covered bonds backed by public sector loans: Germany, France, Austria and Spain. In Denmark and Germany, covered bonds may also be secured by ship loans. - Source PIMCO
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