As the real estate market begins to show signs of life and recovery I’ve been getting a lot of clients and Realtors(R) asking me what’s ahead for real estate and mortgage rates in 2010. I’ve been doing a lot of research and man there are a lot of differing opinions out there on what will move mortgage rates and what experts are predicting for 2010. I’ve boiled it down and I’m going to make it simple for you to understand.
Rates are going up in 2010, no doubt about it. Here’s why:
1. The US Government and the Federal Reserve are wrapping up their Mortgage-Backed Security Purchase Program and when all is said and done they will be the proud owner of $1,250,000,000,000.00 (or $1.25 Trillion) in mortgage loans funded through Fannie, Freddie and Ginnie Mae. The purchase program announced late 2008, was effective in dropping the 30 year rate from the 6.25% to 6.50% range to around 5.00% for almost all of 2009. The Fed has already drastically reduced the funding of this program, as a result rates have begun to rise and by the end of the 1st quarter in 2010 the program will end and rates will return to the range they were in prior to the program’s inception.
2. The US Government’s MASSIVE fiscal deficit has the Treasury auctioning off record levels of Treasury Notes. The sale of these notes is how our Government funds the US debt. Unfortunately for us, not only are we going more and more in debt as a country, but the sale of these Treasury Notes is in direct competition to raising money for mortgages. In other words there is only so much money to go around in the world. If more is going to finance the US Government’s debt, then less goes into funding mortgages and Wall St. has to raise rates to find investors for new loans.
3. INFLATION is the 4 letter word for mortgage rates. You see as an owner of a mortgage at say 5% interest, you have a fixed rate of return every year (5%) for your investment. But when the costs of goods and services you’re buying and using are going up, your 5% return buys less and less every year. So what do you do? You adjust the rate you want to receive to cover the increase in costs and services. If inflation goes up 2%, you might want 7% instead of the 5% you wanted last year. We’ve seen relatively low inflation thus far, but rest assured it is coming. History tells us that virtually every extended period of low interest rates is followed by inflation.
Low interest rates are to the economy like coal is to an old steam engine locomotive; you keep adding more and more getting the train up to speed to reach your destination by the scheduled time. Well this train, which is the US Economy, doesn’t have any brakes, so as the Fed starts to raise interest rates to slow down the economy it’s virtually like trying to stop a train at the correct station with no brakes. Can you imagine trying to add just the right amount of coal that you get to the station on time but you have to coast into the station and stop with no brakes? Exactly, it’s virtually impossible and that’s what the Federal Reserve is doing with the economy, they need to get things moving and get us there on time but history tells us we don’t have the brakes to slow things down, the economy is turning all this liquidity (money) so fast that inflation is almost a foregone conclusion at some point in our future.
4. So where does this leave real estate for 2010? This will largely depend on your location, the local employment picture and the number of foreclosures in that area. What I’m seeing here it Salt Lake County (Utah) is a steady increase in demand and some appreciation is already being seen in established sub-markets that aren’t still suffering from oversupply by speculators and builders run wild. I’m forecasting a continued shakeout of foreclosures for many Salt Lake areas and homes appreciation ranging from -5% to + 3% depending on your sub-market. I believe the first six months of 2010 will be relatively hot for the Salt Lake market, we’ll have a temporary slowdown as rates are rising through the summer and we see the tax credit expire in June. Towards the end of the year things will get back on track as people continue to realize this could be there last chance to get in on a deal.
I think most importantly the market is signaling us that the bottom is near and this could be the best opportunity to get in. Today interest rates on a 30 or 15 year fixed mortgage are virtually at an all time low, the Federal and State governments are throwing huge amounts of money at you and me to buy a home and all indicators point to us being at the tail end of things. I find this quote by Warren Buffet particularly interesting and applicable at this moment, “We simply try to be fearful when others are greedy and to be greedy only when others are fearful”
If you want to cash in on this opportunity you need to get moving!