In the fourth quarter we saw home prices continuing to decline thereby compounding two of the biggest threats facing the nation's economy: faltering consumer spending and tight credit markets. The S&P/Case-Shiller national home-price index for the fourth quarter fell 8.9% from a year earlier, the largest drop in its 20 years of data. And the Office of Federal Housing Enterprise Oversight's index -- which tracks only homes purchased with mortgages guaranteed by home-loan giants Fannie Mae or Freddie Mac -- was down 0.3%, the first year-to-year decline in the measure's 16 years. When home values decline, owners feel less wealthy and less likely to spend. Reduced values also lessen the owner's ability to borrow against the home to finance significant purchases or refinance credit debts. In addition, lower housing prices erode the value of banks' collateral, prompting them to tighten their lending standards, which further damps economic growth.
A top Federal Reserve official indicated the housing slump and its broadening impact on the economy probably will probably keep the central bank biased in favor of more interest-rate cuts. Since September, the Fed has reduced its target for short-term interest rates by 2.25 percentage points to 3%.
But some mortgage rates are actually rising, and those that are falling haven't fallen that much. The average interest rate on a standard 30-year fixed-rate mortgage was 6.38% yesterday, little changed from September but up from 5.61% in late January. Interest rates on jumbo mortgages -- those larger than $417,000 -- were at 7.35%, also close to their September levels.
Rates on adjustable mortgages have come down, but not by as much as the Fed has cut the rates it influences. A three-year ARM, for instance, carried a 5.43% interest rate yesterday, down from 6.29% in mid-September. Still, lower short-term rates should help millions of homeowners who took out ARMs with low teaser rates that are set to jump higher.
There are two reasons mortgage rates haven't responded more to the Fed's rate cuts.
- Long-term Treasury yields, which are the benchmark for most mortgage rates, have risen recently, perhaps because of increased concern about inflation as the prices of oil and other commodities soar.
- The spread between mortgage rates and Treasury rates has widened as investors and banks become increasingly reluctant to make home loans.
The good news is that the Seattle and surrounding areas have been holding their values. While we see some over priced homes hit the market then take price cuts, the overall appreciation is still happening. Our economy is strong with several new commercial construction projects and new jobs emerging. In deed this may be a blessing in disguise for the market to have helped slow our growth and save us from massive foreclosures. RealtyTrac reports several of the hardest hit states, notably Nevada, California, and Florida, were models of boom and bust economics, having gone through explosive growth and spiraling prices over the last few years.
Although we are seeing our share of foreclosures happening, I strongly suggest considering to help your neighbor out. If you have good credit and can document your income you are a prime candidate to invest with someone who is in risk of loosing their home. If you can purchase the home for a lower rate and payment and provide an opportunity for someone to keep their home by paying you rent, we could all pull together to help each other get through the rough times. Realistically, people will do anything to keep from loosing their home and are willing to give up some equity to you for helping. I am seeing more of these win-win agreements happening and am happy to help put this together for you. Donald Trump once said "stay alive till '95" in 1990. Let me now say let's stay alive another 5 - don't give up!