If you missed the lowest mortgage interest rates, you may be wondering what’s happening. Why are they going up when the Fed is expected to cut federal funds rate by as much as three-quarters of a point?
The bubble has floated from housing to stocks and burst in both investing arenas. Now there’s a bubble in commodities. According to Realty Times mortgage expert David Reed, as long as commodity prices keep going up, mortgage rates won’t come down again any time soon.
Economic indicators don’t move up or down in a vacuum. And right now commodity prices are rising on the weaker dollar and world demand for corn and other grains to produce ethanol and food. Gold is near $1,000 an ounce hedging against a weaker dollar. Oil is setting new records almost daily, the latest at $106 a barrel.
That’s keeping inflation higher than the two percent rate the Federal Reserve is comfortable with.
Reed points out that if inflation were in check, we could have seen mortgage interest rates as low as 5.00 percent, but that train has left the station. Instead mortgage rates are closer to 6.25 percent today.
‘Today’s Unemployment Report showed that we actually lost 63,000 jobs last month,’ says Reed, ‘but instead of mortgage rates falling on the news, the street rate has barely nudged since yesterday.’
That’s a bad sign that inflation is really taking off.
So here’s what’s likely to happen. Buyers will be more hesitant about buying homes. Since mortgage interest rates aren’t as accommodating, home prices will have to drop further, and in the meanwhile, housing inventory will stack up higher than the 10 months on hand we already have.
There’s pent up demand from buyers, but as long as they’re on the sidelines, there will also be pent-up demand to sell from sellers, those with homes on the market and those who have been waiting to put their homes on the market.
The Federal government will have to step in to avoid a depression, and the only thing they can do now is sweeten homebuying incentives, like they did in 1987 and 1997. Why will this be necessary?
Today’s homebuyer thinks a home is only an investment. The NASDAQ has never recovered to its 2000 highs because people want the big return on their investment. They could likely look at housing the same way – not interested if it only returns two percent a year. Never mind that two percent a year is the historical norm. They want more.
It will take a while, but people will start buying homes again, but only with incentives. And the whole housing crisis will be over because once those incentives are given, they’re mighty hard to take away.
Written by Blanche Evans for www.RealtyTimescom. Copyright