Why mortgage rates are still heading higher
The Fed has cut interest rates again, but long-term fixed-rate mortgages may go up.
The Federal Reserve cut interest rates by three-quarters of a percentage point Tuesday, but don't expect mortgage rates to go down too. In fact, home loans could be heading higher.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.
The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher HSH.com.
Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.
That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.
"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.
ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.
Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.
With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.
For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.
Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.
Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.
But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.
"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."
So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.
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Written by David Goldman, CNNMoney.com staff writer
The Federal Reserve cut interest rates by three-quarters of a percentage point Tuesday, but don't expect mortgage rates to go down too. In fact, home loans could be heading higher.
Consider recent history: The Fed issued an emergency cut of short-term rates in early January, and then trimmed more just a few days later - but the 30-year fixed mortgage rate has responded by bouncing up from 5.6% to 6.4%.
The Fed's main tool is control over the short-term fed funds rate, which determines what banks charge each other for overnight loans. Long-term mortgage rates are mostly tied to the 10-year Treasury yield, which is determined by bond traders worldwide.
"There is a long disconnect between the fed funds rate and fixed mortgage rates," said Keith Gumbinger, vice president of mortgage and consumer loan information publisher HSH.com.
Inflation drives long-term fixed rates. When the Fed cuts short-term rates, the intent is to lower borrowing costs for corporations so that they'll invest and hire. But this economic growth can lead to inflation.
That in turn leads bond traders to demand higher rates on their long-term bonds - and that drives up mortgage rates too.
"Mortgage rates are determined by how fearful the market is of inflation," said Gumbinger.
The Fed began a series of cuts to its key interest rate last September, taking the rate to 2.25%, from 5.25%.
ARM borrowers may get help. There is more of a connection between Fed rate cuts and short-term and adjustable rate mortgages (ARMs). In fact, homeowners with ARM loans could see lower rates from further interest rate cuts.
Adjustable rate mortgages are pegged to a number of different indexes, including the one-year Treasury yield and the international Libor, or London Interbank Offered Rate, which tend to move with the Fed funds rate.
With Tuesday's rate cut, the cumulative effect of the Fed cuts could entirely offset what would have been a significant rate reset for many homeowners.
For instance, a borrower with an adjustable rate of 4.5% could have faced a rate reset up to 7.5% before the Fed started cutting rates in September. Before the rate cuts, that homeowner would have seen an increase of $370 in monthly payments on a $200,000 loan.
But after Tuesday that rate could reset only a little higher. And for some, the rate might not go up at all - and may actually drop - according to Greg McBride of Bankrate.com. "The Fed rate cuts far are more significant to [borrowers with ARMs] in terms of staving off delinquencies on loans," he said.
Long-term rate solution. Sending long-term fixed rates back down will be more complicated than fixing inflation, because the continuing housing crisis is also exacerbating the rise in long-term fixed rates.
Generally mortgage rates are about 2 percentage points higher than the yield on the 10-year Treasury, which currently stands at 3.29%.
But the housing market is in such turmoil that rates are even higher right now, with lenders concerned that borrowers will not be able to pay back loans.
"The 30-year fixed rate mortgage should be at 5.5%, but instead it's above 6%," said McBride. "The 30-year jumbo loan [a large mortgage that is not federally guaranteed] is a full two percentage points higher than it should be."
So for long-term fixed mortgage rates to go down, the Fed must successfully make banks more willing to lend again.
--
Written by David Goldman, CNNMoney.com staff writer
Sacramento County sees slowdown in housing slide
The Sacramento-area housing market is still declining, but a surge of buying by investors in February helped spark the first major slowdown in Sacramento County's long slide since 2005, DataQuick Information Systems reported Thursday.
February sales of new and existing homes in Sacramento County – the largest sector of the region's real estate market – fell just 7.7 percent from February 2007, the La Jolla firm said. That's the first single-digit decline in year-over-year home sales in Sacramento County since August 2005.
Likewise, the 1,015 existing Sacramento County homes that closed escrow in February were only six fewer than in February 2007. It was the first time in at least two years that year-over-year sales didn't fall by double-digit percentages.
DataQuick officials attributed the change partly to more investors buying foreclosed homes.
Investors who have been holding off have decided "to swoop down and grab what they perceive as a bargain," said DataQuick analyst Andrew LePage. "That's a natural part of the real estate ecosystem."
But experts warn not to bet that the worst is over based on only one month's data. February tends to be a slower winter month that is considered unreliable for trend-spotting.
Still, there's no doubt the steep drop in home values – median prices in Sacramento County are almost 28 percent below last year's figures – and relatively low interest rates have sparked interest.
LePage said investor buys accounted for 18.6 percent of February closings in Sacramento County. That's up significantly from 12.7 percent in November and December. DataQuick counts investment homes as those where the property tax bill goes to an address different from the purchase site.
DataQuick said that median sales prices rose slightly in February from the previous month in five counties: Amador, Nevada, Placer, Sacramento and Yolo counties.
Overall, sales remained weak, though real estate broker Tom Zipp of Citrus Heights said Thursday that rising investor activity "traditionally signals the bottom part of the market."
Closed escrows for new and existing homes in Sacramento County clung to a 10-year low for February, DataQuick reported. Placer County sales remained at an 11-year low.
Regionally, the 2,061 escrow closings in Amador, El Dorado, Nevada, Placer, Sacramento, Yolo and Yuba counties barely outpaced February's 1,713 foreclosures, according to Fair Oaks-based Foreclosures.com. Sutter County sales figures were not available.
Those figures reflect a nationwide trend. Irvine-based researcher RealtyTrac reported Thursday that nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates. The overall U.S. foreclosure rate last month was one filing for every 557 homes.
Locally, LePage said first-time buyers are helping "set a floor" in the region's most distressed areas for home sales and prices.
"They're able to buy a house with safe and sane financing and a small down payment," he said.
In Sacramento County only home builders saw a continued big decline in escrow closings. Builders, who are fighting for market share against the increasing dominance of banks selling their foreclosed homes, reported a 32.2 percent drop in closings in February compared with the same time last year.
Other highlights:
• Sacramento County showed a February median sales price of $257,000. That was down 27.7 percent from a year ago. But it was up from $253,000 in January. The median price is the point at which half sell for more and half sell for less.
• Placer County reported a 30.7 percent drop in sales of new and existing homes in February compared with the same time in 2007. Its $364,000 median sales price was down 15.3 percent from February 2007. But it was up from $360,500 in January.
• El Dorado County sales were down 25.3 percent from the same month in 2007. Its $405,000 median sales price for new and existing homes was 15.6 percent below a year earlier. Sales prices were down slightly from $407,500 in January.
• Yolo County's February sales were down 27.2 percent from the same time a year ago. Its $318,000 median sales price was down 19.5 percent from a year earlier, but up from $307,500 in January.
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Written by Jim Wasserman, Sacramento Bee
February sales of new and existing homes in Sacramento County – the largest sector of the region's real estate market – fell just 7.7 percent from February 2007, the La Jolla firm said. That's the first single-digit decline in year-over-year home sales in Sacramento County since August 2005.
Likewise, the 1,015 existing Sacramento County homes that closed escrow in February were only six fewer than in February 2007. It was the first time in at least two years that year-over-year sales didn't fall by double-digit percentages.
DataQuick officials attributed the change partly to more investors buying foreclosed homes.
Investors who have been holding off have decided "to swoop down and grab what they perceive as a bargain," said DataQuick analyst Andrew LePage. "That's a natural part of the real estate ecosystem."
But experts warn not to bet that the worst is over based on only one month's data. February tends to be a slower winter month that is considered unreliable for trend-spotting.
Still, there's no doubt the steep drop in home values – median prices in Sacramento County are almost 28 percent below last year's figures – and relatively low interest rates have sparked interest.
LePage said investor buys accounted for 18.6 percent of February closings in Sacramento County. That's up significantly from 12.7 percent in November and December. DataQuick counts investment homes as those where the property tax bill goes to an address different from the purchase site.
DataQuick said that median sales prices rose slightly in February from the previous month in five counties: Amador, Nevada, Placer, Sacramento and Yolo counties.
Overall, sales remained weak, though real estate broker Tom Zipp of Citrus Heights said Thursday that rising investor activity "traditionally signals the bottom part of the market."
Closed escrows for new and existing homes in Sacramento County clung to a 10-year low for February, DataQuick reported. Placer County sales remained at an 11-year low.
Regionally, the 2,061 escrow closings in Amador, El Dorado, Nevada, Placer, Sacramento, Yolo and Yuba counties barely outpaced February's 1,713 foreclosures, according to Fair Oaks-based Foreclosures.com. Sutter County sales figures were not available.
Those figures reflect a nationwide trend. Irvine-based researcher RealtyTrac reported Thursday that nearly 60 percent more U.S. homes faced foreclosure in February than in the same month last year, with Nevada, California and Florida showing the highest foreclosure rates. The overall U.S. foreclosure rate last month was one filing for every 557 homes.
Locally, LePage said first-time buyers are helping "set a floor" in the region's most distressed areas for home sales and prices.
"They're able to buy a house with safe and sane financing and a small down payment," he said.
In Sacramento County only home builders saw a continued big decline in escrow closings. Builders, who are fighting for market share against the increasing dominance of banks selling their foreclosed homes, reported a 32.2 percent drop in closings in February compared with the same time last year.
Other highlights:
• Sacramento County showed a February median sales price of $257,000. That was down 27.7 percent from a year ago. But it was up from $253,000 in January. The median price is the point at which half sell for more and half sell for less.
• Placer County reported a 30.7 percent drop in sales of new and existing homes in February compared with the same time in 2007. Its $364,000 median sales price was down 15.3 percent from February 2007. But it was up from $360,500 in January.
• El Dorado County sales were down 25.3 percent from the same month in 2007. Its $405,000 median sales price for new and existing homes was 15.6 percent below a year earlier. Sales prices were down slightly from $407,500 in January.
• Yolo County's February sales were down 27.2 percent from the same time a year ago. Its $318,000 median sales price was down 19.5 percent from a year earlier, but up from $307,500 in January.
--
Written by Jim Wasserman, Sacramento Bee
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