Monday, July 11, 2005

Real Estate Update

Bubble, bubble, on the wall

will home prices really fall??????? Everything you read today about real estate mentions the dreaded "housing bubble". While there is no consensus on the issue, this media "hysteria" tends to confuse the public. Many of the so called experts are reasoning that interest rates are bound to rise significantly and that will cause a slow-down in the housing markets. Of course it will, depending on how quickly rates rise. The 30 year fixed rate mortgage is currently below 5.5%, near historic lows. Other methods of financing include 1% start rates, making for an extremely low house payment.

Why are the fixed rate loans so low, you ask?

Fixed rate loans are tied to the 10 year Treasury Bond. These bonds are around 4% right now, and fixed rate loans range about 1.5% higher. This low yield on bonds was unexpected, given that the Federal Reserve Board has tightened rates to the banks, hence bank prime rates have gone up to nearly 6% recently. While scratching their heads, economists are pointing to foreign investors. With a recession looming in Europe, the prime rates are dropping over there, and investors are looking for higher yields. The safety of U.S. Treasury Bonds is quite attractive, and more buyers means lower rates on the bonds.

Well then, what would cause home prices to fall?

To put it simply, an oversupply of homes. This could be caused by buyers deciding not to buy, causing the inventory to build up, or by too many sellers rushing to get their homes on the market. Either of these could be caused by a sudden increase in interest rates or some sudden sharp increase in unemployment. To put it another way, consumer confidence would need to change pretty dramatically to cause prices to start falling. The early 90's saw that happen in Southern California because of the massive lay-offs in the aerospace industry. Other areas of the country have been impacted by large lay-offs. Current data shows that nationally, unemployment is at a 4 year low.

If you are thinking about buying or selling in the next year, you should get in touch with us. Our experienced, dedicated agents will be happy to meet with you and help you think through the process now, so you can have peace of mind when you are ready to act! Just call us or go to our website at www.Hismove.com, and we'll take it from there.

May God richly bless you and your families,

Bart Smith

posted by Justin Smith @ 7/11/2005 02:00:00 PM