As discussed in my earlier blog and contrary to the rest of the real estate industry's predictions, mortgage interest rates have resumed their fall back towards historical lows. Once again, just seeing today's rates as being low on the charts means nothing without understand the underlying economic forces.
With the Federal Reserve continuing with its record monetary accommodation, hundreds of billions of dollars in fresh capital is flooding the capital markets. This capital is slowly being leveraged through the economy as creditors tentatively increase their risk appetite. Still, with
the economy going through a uneven recovery and facing commodity headwinds, many investors, specifically pension funds with heavy upcoming obligations, are choosing to go defensive and stay in US Treasuries, keeping interest rates low. Since pension obligations are only increasing, they will likely continue to buy down lower rates of return to meet their actuarial demands.
Meanwhile, lending standards remain tight as Freddie Mac tries to right itself from continued heavy losses. This means there will be few qualified buyers on the housing market, keeping house prices low. However, as the junk mortgages from 2005-2008 is worked through over the next 12-18 months, lending standards will likely loosen as the mortgage markets gain confidence about the quality of loans and the lower priced collateral. Once credit really starts to flow through the mortgage funding system, buyers who were merely “willing” will become “able” to compete for houses, driving up prices.
So what does this mean? For buyers with the best credit, they can afford to wait another 6 months or so while interest rates continue to work their way down. Since we're already getting close to zero, the discount in rates will be limited. And with so many unique distressed deals, interest rates should be a small factor in the final decision. For buyers with ok credit or modest downpayments, the ability to buy is the limiting factor. Once financing becomes easier to obtain, pricing will likely be moving up sharply, so timing will be critical.