Quick, Buy That House Before Rates Rise! NOT!

I had to laugh at an advertisement on CNN’s main page this morning.  You can see the ad below in the right side of the image next to the atrocious front page story.  What it shows is a chart of interest rates and the recent uptick after QE3.  And it’s accompanied by a note that says:

“Record-low Rates Tick Up.  Refinance before it’s too late”

This thinking is used by many real estate professionals to create a sense of urgency either in refinancing or in buying a home.  But the reality is that there is no rush.  It’s not going to be too late to refinance or buy a home if you don’t do it tomorrow.  How do we know?  Well, because the Federal Reserve has told us many times already that rates are going to be at 0% until “at least mid-2015″.  That means there will not be any mind-bending rallies at the long end of the yield curve.

But the funnier part about this ad is the “tick up”.  Just to put this into perspective, I pulled up a long-term chart of 30 year mortgages.  Do you see that “tick up”?  I circled it in the bottom right hand corner.  If you have a super magnifying glass you can see it.  Scary stuff.  I’m being a bit of a smart ass, but hopefully you get my point.  With the Fed promising to stay at 0% until mid-2015 they’re going to do everything in their power to keep rates low.  And since long rates are primarily a function of short rates (which are an indication of the Fed’s view of economic strength) then we can pretty confidently bet that there won’t be a huge surge in interest rates in the coming 2 years.  So, as I often say regarding these big personal finance decisions like buying a home – take your time.  Be prudent.  Don’t rush it because of some misleading advertisement.  You have time.  Take advantage of it and be smart.

 (30 year mortgage)

(scary advertisement)

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Yep, I was asking this same question and you were spot on with it being a knee jerk reaction after the QEnfity program started. You called it correctly that they would start back down after the dust cleared. (paraphrasing.)

    This like the GOLD rush. BUY NOW going to 3 Bazillion…

  2. True, I believe rates will sit where they are for quite some time. What is changing though (at least in my area, and yes, all RE is local) is the price. As rates stay low and move lower home prices are moving up (and inventory is almost non-existant). What I struggle with is if this upward move in prices is sustainable – the economy sucks, unemployment is terrible and wages remain flat (or are they declining?) – and yet home prices where i want to buy continue to move higher. Have made offers on m ultiple homes, some above asking, I have great credit, more than 20% to put down, lenders willing to lend and still nothing…

  3. Ah, but when the FED talks about “keeping rates low” then they’re talking about short term rates and even those rates aren’t controlled by the FED.

    After the crash of 1973 short term rates were also extremely low and there wasn’t a FED around.

  4. Cullen with QE3 targeting MBS won’t this incentivize banks to make marginal housing loans that since the sub prime crisis they have been careful too avoid. Now I don’t expect the banks to underwrite sub-prime and interest only mortgages but they may approve loans to people with marginal credit that since 2008 has not been able to get access to lending. And the banks will quickly sell these low quality MBS to the Fed and retain the better quality MBS.

    This will be more stimulative to home pricing than QE2 but not as stimulative as the pre-bubble lending. There is a lot of inventory to burn through but there should be some small benefit to new home starts and home related employment boost. In addition there is the wealth effect for current home owners and lower mortgage rates will give a small boost to disposable income for those who refi.

    Anyway I’m concluding this will be mildly stimulative program to employment rather than a useless endeavour. Am I off in my thinking?

  5. Banks are not loosening the standards. BofA, Wells, Chase, etc have exited either the wholesale channel or correspondence channel or both. They are taking things to retail channel but again the underwriting standards have been tightening not the reverse. Banks want to lend only to cleanest credit out there.

  6. I don’t follow this – greed does not work like this. If the Fed is backstopping 40B/month of MBS than as a bank I might loosen some standards. Said differently, I might qualify a creditor who before QE guarantee program commenced was marginal. Those who have terrible credit would still not qualify but a few more who are borderline would pass through. And those more marginal loans are the MBS that the banks would pass on to the Fed.

  7. I’m a Realtor and have never told anyone “buy before it’s too late”. Buyers come to me and tell me “I have to buy before it’s too late”. They get their ideas from mainstream media, not from Realtors. Sure, some Realtors repeat what the media says, but rarely do we convince someone to buy or sell – they come to us convinced. Much like a car salesman doesn’t show up at people’s homes and try to convince them to buy a car – the car buyer shows up at the dealership with that decision made. This myth that Realtors convince buyers to buy before it’s too late also falls the logic test – because I’m effectively then telling sellers they are idiots to sell now because prices are going up.

    Meanwhile, in my town, prices are up over 10% y-o-y. So I wish I told some buyers last year “buy before its too late” because for a few of them it is too late and they’re out of the market. And as more and more buyers see prices appreciate, they get anxious and jump in with more fervor. In my town it feels a lot like ’04 right now. Another bubble? I have no idea. Just tell me if you want to buy or sell, and I’ll help you do that.

  8. Because ultimately these MBS are on Fannie and Freddie’s Portfolios. Although the FED may have purchase them, all parties in the loan are still at risk for non-performance, ie buybacks. Banks don’t want to do marginal loans because the buybacks percentage on those are higher and Fannie will start to penalize you. It filtered on down thru all the channels.

  9. The old adagem housing is local applies to your neck of the wood. As long as there are still money flowing to silicon valley pricing will continue to hold and trend up. Other places aren’t do lucky..LA is still kinda sucky..OC is slightly ok in certain area and not doing well in other areas. I still see appraisals getting cut left and right for a lot of the loans we see coming thru. The inland empire is a mess. In your neck of the woods, Tracy and the surrounding areas are still in bad shape. Again housing is very very local right now.

  10. There is something that does change at the end of 2012. Unlimited Congressional support for Fannie and Freddie expires, and is not likely to be renewed. The Fed’s QEternity may be a transparent substitute for an ironclad Treasury guarantee, or it may not. It will certainly give MBS holders who are concerned about the loss of an absolute government guarantee a way to unload their bonds. Perhaps this was Bernanke’s intention all along. And if the banks can continue in slowly metering out foreclosed properties into the market, they can get prices up. How much remains to be seen. This will most likely be a very slow process.

  11. Interesting to read on how buybacks work. I’m curious, when did “buybacks” come into existence? They were not a deterrent pre-sub prime crisis.

  12. While interest rates may not rise, I am not sure you can say the same for prices. As the inflation many tell us is not happening continues to increase, home prices which seem to find a bottom will begin to regain their value as a hedge against that inflation.