Greater Hartford Real Estate Blog

Time for an update on mortgage rates! 

As has been written in this space before (here and here), mortgage rates are currently being driven by inflation expectations.  The Federal Reserve has been focused on supporting the economy by lowering short-term interest rates at the expense of the dollar, which is one cause of inflation (another major one being the huge demand for oil/energy in China).

The graph on the left compares mortgage rates for 30 year fixed loans, in blue, to the rates for 10 year Treasury Bonds, in green.  For the second half of 2007 and the beginning of 2008 they moved in lockstep.

After a series of aggressive government actions in late January, and then the Bear Stearns “deal” in March, Wall Street finally realized that the Federal Reserve would continue to cut interest rates to support the economy.  Whatever it takes.  Thus inflation is a real concern.  This can be seen in the chart as both the blue and green lines find bottoms and beginning to increase (higher rates).

An immediate question that jumped out at me: Why did mortgage rates jump even more than the Treasury rates in 2008?  One factor at play is the difference in duration of the two loans.  30 year fixed mortgage rates are far more sensititve to inflation than 10 year Treasury bonds because they extend 20 years longer.  I’d have to do some serious math to figure out how much of the impact can be explained by duration, so let’s just say that it is one factor and others are also possible.

Last week there was an important shift in the government’s position.  Ben Bernanke, Federal Reserve Chairman, said that the Federal Reserve Board is “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations.”  This is the first direct acknowledgement that inflation is of concern, and Wall Street intepreted the statement to mean that there will not be any more interest rate cuts.

For us in the real estate market, Mr. Bernanke’s statement seems to have hurt more than helped.  Wall Street has reacted by bidding up interest rates - they seem to be using his statement to support their fears that inflation could increase.  Higher mortgage rates tend to hurt sellers as the purchasing power of buyers decreases.

Of course all of us already knew that inflation was beginning to hurt, and if you didn’t, then you must not be driving or watching the news…

Buyers often come to me and say that they want to keep their monthly mortgage payment below a certain amount. It’s typically some amount over what they are currently paying in rent. For every house they will ask me, “What’s my estimated monthly payment?” I like to teach people this simple trick so when looking online, they can determine if they should be considering a property.

Here’s the trick…

At an interest rate of 6% (which is right about where mortgage rates are right now), every $100,000 in mortgaged money equates to approximately $600 a month for the principle and interest portion of a mortgage. Correspondingly, every $10,000 in mortgaged money equates to approximately an additional $60 a month.

Remember, your monthly mortgage payment is comprised of 4 things; principle, interest, taxes, and insurance.

So, if you were to mortgage $210,000 for a home, the principle and interest portion of the monthly payment would be approximately $1,260. You then need to take the estimated yearly tax amount, divide it by 12, and add it to the $1,260. Additionally, you need to take the estimated yearly insurance amount, divide it by 12, and add it to the $1,260. And there you have your approximate monthly mortgage cost.

One difficulty buyers have a hard time accepting is that taxes can sometimes account for 25-30% of the monthly payment allowance and they’re not really taking that into account. They think they can “get more house” because they’ve used an online mortgage calculator that ignores taxes and insurance. It’s frustrating to them (and to me), as I have to explain that if they want a monthly payment of $X, they either have to look in a lower price range, or readjust their monthly payment allowance.

Another catch is Private Mortgage Insurance, or PMI. If you’re not putting 20% down with the purchase, you will more than likely have to pay a monthly PMI fee. As a buyer, you should speak with your lender about PMI because the monthly amount will vary based on the buyer’s profile and the price of the house. This will be added to your monthly payment allowance though, and it is commonly overlooked.

The Federal Reserve Board announced a further 0.25% cut to the closely watched Federal Funds Rate yesterday, bringing the short-term interest rate down to 2.00%. More importantly, they also signaled that this would be the last rate cut for a while.

As has been discussed in previous posts, mortgage rates have recently been moving in the opposite direction as the Federal Funds Rate. Mortgage rates are long-term and are very sensitive to inflation expectations. The Fed’s aggressive rate cutting has fueled inflation concerns, which have been most visible in gas/oil and food price increases as the US Dollar weakened.

With further rate cuts on hold, mortgage rates should be able to stabilize at their current level.

So, the important question will be; will stabilized mortgage rates encourage buyers to delay their purchase as they wait to see if housing prices will drop further since they believe they will still be able to get an attractive mortgage rate later in the summer?

I’m not sure if this strategy will actually work in our area. While sales have slowed in most areas in Greater Hartford, the median price in some towns has remained stable, or even increased.

Only time will tell…