Friday, August 25, 2006

Will Interest Rates Save the Day?

From today's (8/25/06) Sacramento Bee:

"Home loan interest rates fell for a fifth straight week, federal mortgage giant Freddie Mac announced Thursday, offering a sliver of good news for wary buyers and nervous sellers in the capital's troubled housing market."

"The dip announced Thursday means monthly payments on a $300,000 home are already $63 lower for buyers today than they were a month ago. The current rate is still well above a year ago, when 30-year mortgage rates were 5.77 percent. A $300,000 loan taken out in August 2005 cost $1,754 a month compared with $1,892 today."

"I think it has had an effect," said Bob Bronswick, president of the Sacramento-Tahoe region for Coldwell Banker Residential Brokerage. "We've seen a little spike in activity over the last 10 days. I'm not 100 percent sure interest rates have something to do with it, but something has stimulated buyers, particularly in the higher end."

"Folsom homebuyer Richard Laethem said he'll get a fixed-rate loan to buy a home in the $500,000-$550,000 range in coming months. But his belief that prices will keep falling still outweighed any motivation to buy now because interest rates had dipped.
"Right now the reason (we're waiting) is we haven't found something that we're really smitten by, really in love with," said the self-employed software support specialist. "The second reason is we're still afraid prices will drop more."

"Amy Crews Cutts, deputy chief economist at Freddie Mac, said Thursday that she thinks falling interest rates will eventually pry more buyers off the fence and into deals.
"My belief is we'll see a little mini-boom in the home purchases market," she said. "People who have held back thinking they can get a bargain, now they can get back in the market."
David Lereah, chief economist of NAR, called the lull in mortgage interest rates "unexpected" and in a statement, predicted it "could help stimulate the housing market."
But in Sacramento County, where median sales prices have dropped 5 percent from the same time last year, Bob Bader is not so sure. Bader, owner of Arden Mortgage, said he hasn't seen an uptick in mortgage activity after five weeks of falling rates.
"I kind of think the urgency factor for buying a house just isn't there," he said. "It's a welcome trend, but is it enough? Probably not."

Full Article:

Call me naive, but I just don't see how a change in interest rates is going to reverse the housing trend we're seeing today. Most buyers are getting smarter and are starting to learn a thing or two from their friends who bought with creative financing and are now regretting it. Think about it, who doesn't know someone that's in over their head right now with their mortgage? And most of these folks have interest only, adjustable, or neg am loans. Look at it this way, when values were going up, people bought because they thought they could make some money. With prices dropping, people are now thinking they can save some money.

I have a Bay area client looking to buy in Sacramento right now. He has used me 5 or 6 times in the last 10 years to buy/sell properties. He called me about 4 months ago looking for a property in Elk Grove, so I took him around and showed him some listings. I also showed him some statistics on inventory buildup and price declines in the hopes of having him see that perhaps then wasn't the right time to buy. He saw my reasoning and now calls me every month to thank me for the information I gave him. He also asks if "now is the time" and I again give him some stats and let him decide. It pays to be reasonable and patient.

I suspect if any realtors are reading this, alarm bells may be going off. "Is he also telling sellers to sell before they lose money?" they might ask? Panic selling is the term you may be thinking of, and no, I'm not guilty of it. As a realtor, my job is not to advise my clients on any direction they should take, whether it's listing their property or lowering their price. However, I will give my clients information to better help them in making such a decision. I don't always agree with their decision, but I can rest assured knowing they had all the unbiased and available information at their disposal when they made it.

Yes, I drifted off topic there. So, will interest rates save the day? I don't think so. People may not necessarily understand real estate market dynamics, but they do understand trends. That's why so many people bought when the going was good, hoping to squeeze a few more bucks out of their recently purchased house. That's also why there's such a high level of inventory.

Looking forward to the August numbers!

1 comment :

Max said...

I would also say that dropping interest rates give buyers two reasons to hold off on a purchase. Prices in Sacramento are already off 3.5%-5% y-o-y (depending on the source), and now interest rates are falling as well.

I personally believe that this interest rate drop will be short-lived, but the time to buy is when they start ticking up again, not when they're falling.