This past week my good friend, Brad Kelly of Metrocities mortgage sent me one of his best ever messages. I don't normally do this but this one just "nailed it!" I've already used it to convert some prospects and get them off that fence. The information is just very timely, to the point and needed to be shared with all of you. Enjoy and use it as you see fit. As usual, comments are welcome. Talk to you soon. ~ Bob
"It's something I say all the time and it's even more true now. People are sitting on the fence waiting for interest rates to come down (heck, they lowered rates last week and their going to lower rates on Wednesday January 30th at the Fed Meeting right?). People are also waiting for home prices to bottom out (there was a report out today that said home prices dropped their most in 6 years so they'll keep going down, right?). With all this news, how can someone argue against waiting?
Actually it's easy to argue against waiting. Here's why people need to get off the fence.
- Interest rates are at historic lows. Yes the industry has been saying this for years now - guess why... it's true. When you look at the last 40 years interest rates on the standard 30 year fixed rate bottomed out in June 2003 reaching 5.25% - 5.375% with no points. Even with rates declining for the first half of 2003 and bottoming out at 5.25%, the average rate for 2003 was still just over 6% (that means it dropped fast to reach the bottom and climbed fast to get off the bottom).
- Over the last 25 years (the best statistics available only go back as far as 1983) the 30 year fixed rate has AVERAGED 8.66% (that's a heck of a lot higher than it is today).
- I gave you the low point already, now how about the high point. Over the last 25 years the high point was 14.75% in July of 1984.
- Earlier this month there was one particularly volatile day in the markets and everyone got really scared. On that day, for about 3 hours, rates dropped again to 5.25%. After 3 hours rates climbed again and by the end of the day they were back over 5.875%. This almost never happens to this degree, but it did happen that one day. What it shows you is that the market doesn't like to be at the bottom and will rebound off of it fast (not usually this fast - but fast). In 2003 the bottom held for all of 6 days.
- Today rates are around 5.75% - 5.875% with no points. That means they are about 9% below the highest point in the last 25 years, nearly 3% below the average of the last 25 years and only about 1/2 percent higher than their lowest point in 40 years. That means they are pretty much at the bottom. Can they go lower? Sure, but the safer bet is rates will go up in the long run.
- Just 1 year ago rates were about 1/2 percent HIGHER than they are right now.
- During the last 12 months rates drifted as high as 7%. (Is a rate under 6% souding better and better? It should be.)
- Let's talk quickly about the Fed. I can't say this one enough... The rate that the Fed changes IS NOT the 30 year fixed. Quite often when the Fed lowers rates, the 30 year fixed rate actually goes up. There is no direct correlation. The Fed changes short term borrowing rates between banks and rates at which banks can borrow from the Federal Reserve itself. This will change things like prime rate which affects equity lines of credit, credit cards and other short term loans. What the Fed SAYS about the economy and the future is what moves the 30 year fixed rate. Mortgage rates have already priced in what they think the Fed is going to do and say. The market is just waiting to see if they were:
- right - and rates stay the same - this almost never happens by the way; or
- wrong - and the Fed thinks things are not as bad as we think or things are going to get better sooner rather than later - then mortgage rates usually get worse; or
- wrong - and the Fed thinks things are going to get worse - then maybe mortgage rates get better
- Now - what happens with a 1/2% rate increase? If you were looking at a $250,000 loan at today's rates but decided to wait and rates went up 1/2%, then the same monthly payment would only get you a $237,000 loan. You just LOST $13,000 in purchasing power or a little over 5% because rates went up a mere 1/2%.
- And remember - if rates really do go down significantly, you can usually refinance.
You should have taken away 2 things from this quick lesson on interest rates:
1) Rates really are at historic lows; and more importantly...
2) YOU CAN'T POSSIBLY TIME THE MORTGAGE MARKET so don't try
Have they been declining? Yep, they have. Will they continue to decline? No one knows for sure, despite what the news is telling you.
- If you own a home right now this is easy - the value of your home may be down but guess what - the price you'll pay on your next home is down also. If you wait for your home to increase in value, the price of the home you are going to buy is going to go up as well so you won't gain anything there. And in the mean time, while your waiting for your value to go up, interest rates may be going up as well so the same monthly payment may buy you less tomorrow than it would today. Waiting could be costing you money.
- If you are looking at your first home then you may be tempted to try to time the market. Prices have been declining and you aren't sure when it might end. Here's the problem. No one knows when it might end and the way the economic reports are compiled, you are seeing data that is 60 to 90 days old or older. By the time the reports show that prices bottomed out and are on the rise, they'll have actually been going up for around 6 months and you'll have missed the bottom. Again, there is no way to time the real estate market either.
- Massachusetts has seen some pretty good declines in prior months - Pricing appeared to peak in the Fall of 2005 and prices started dropping here before most of the rest of the country. The worse report shows our prices are about 9% lower today than the peak (again that peak was over 2 years ago). We've seen slow steady declines over the 2+ years. Now one report just showed the largest 1 year decline (7.7%) Nationally for housing. However that was Nationally. The Boston portion of this report showed a 3% year over year decline. While Nationally they are hitting the high point, locally we appear to be slowing our declines which could mean that we will come out of this faster than the rest of the country. There are no guarantees one way or the other, but the local data is very different from the National averages.
- Now I need to remind you of the big problem - all this wonderful data is OLD. This most recent report, which was published today, January 29th, is actually from November. We've had two more months of sales already and no idea what has happened to pricing.
- People like to talk anecdotally about homes selling for tens of thousands of dollars below their original asking price. Here's the thing though... they are now SELLING. And anecdotally I can tell you that the stories are now changing. When the home is priced right it is selling quickly and there are even instances of multiple offers. These are things we haven't heard of in a long time but it's starting to happen. This is the kind of thing that, in the past, has lead to a change in the market and potentially increasing prices.
- Finally, let's say you do wait and let's say that prices drop another 3% this year. If, during that same year, rates go up 1/2% then you lost 5% of your purchasing power. Prices may be down 3% but in losing 5% of your purchasing power, you have lost money by waiting.
Now I'm not saying we're out of the woods and everything is rosy. But there is enough data out there to suggest that things aren't as bad as the media makes it out to be.
And, again, it is important to remember that YOU CAN'T TIME THE REAL ESTATE MARKET EITHER - so don't try. I hope you found this informative and maybe a little helpful."