Wednesday, October 29, 2008

Rate Cut of .5% to 1.25% Lending Rate

When asked for my predictions about future prospects, I often say that I don’t have a crystal ball. This has become clear when even our best and brightest such as Bernake and even Greenspan underestimated how intertwined our economies truly were, and no one in the world foresaw this crisis happening and at the magnitude that it has affected the global economy.

Why did this happen? When you sign those documents closing your home purchase, you sign a document that talks about what percentage of loans the bank you are signing with sells. The reason why Wells Fargo and Bank of America did not fall into the subprime mortgage mess is that they have followed the same high standards in qualifying their buyers and they tend to hold on to the loans that they make. It is in their best interest to qualify the right buyers for the long run. Many of the other lenders would sell a high percentage of their loans in the form of mortgage backed securities and it would no longer be their problem. This created less accountability and incentive to simply get volume. Subsequently mortgage backed securities were investments made by financial firms around the world. When it came time for these 1, 3, 5 year ARMS to be refinanced, already stretched homeowners found that home prices were not increasing, they could not refinance and even if they did, the monthlies were beyond their financial affordability.

This afternoon the fed reduced rates by half a point to 1.25% lending rate. They continue on trying to jump start consumer spending and the economy. It is yet to be seen if this will in turn lower interest rates on the loan side of the house. The concern is not the cost of money but banks that don’t want to issue loans in order to maintain liquidity.

That’s the 10,000 foot high level view, but bringing it straight down to the regular homebuyer what does this mean to us? I am seeing all types of price drops that fluctuate as much as 20% - 30% especially on bank owned properties (even higher in more questionable areas.) The main deals seem to be on condominiums and townhomes which have seen major hits. Most homeowners in the well situated neighborhoods are holding tight.

If they are selling the prices are inching down. Buyers are simply too nervous, can’t qualify and waiting for more of a drop before jumping in. If you are a home owner and have a secure job and finances, do not panic and ride out this downturn. As a homebuyer, it is time to really keep your eyes open for some great deals and if you can qualify for a loan take advantage of the low prices before other people figure this out. Recent articles have shown that home sales are rising in California, but primarily from people picking up these deals.

Here are the most recent rates as of 10/28/2008:

Rates on 30 yr-fixed:

* Conforming - 6.375% (0 Pts)
* Conforming-Jumbo - 6.625% (0 pts)
* Jumbo - 8% with 1pt cost

If you have not already, be sure to ping me if you want me to keep an eye out for some good buys in the market for your home buying criteria. It is a great time to big up your primary home or even an investment property.