Good Time to Buy

As we head into the last quarter of the year, it is interesting to look back at where we have been and then forward to what lies ahead. Back in November, hardly a long time ago, most forecasters believed that mortgage rates would rise to 5% or higher this year. Don’t laugh. 

At the end of the first half of 2019, heading into the summer buying season, the mortgage market saw rising interest rates with word of a stronger economy and a surging stock market, but with revised economic news that the tightening policy from 2018 had slowed the economy more than previously reported. Then two developments have had a pronounced impact on financial markets: The Fed cut rates for the first time in over a decade and the Trade War has expanded to include 10% tariffs on an additional $300 billion of goods coming in from China effective September 1. 

The Fed decided to rekindle the economy by lowering the Federal Funds Rate to boost the economy by reducing the cost of capital for businesses and freeing up cash flow for households. The markets believe that the FOMC will make an additional cut to the Federal Funds Rate 25 bps again later in September, then keep policy on hold through the end of 2020.With these recent moves by the FOMC, we have seen the effects in the Bond Markets, especially with the 10-year Treasury (which many people follow as an indicator for mortgage rate direction), which has dropped to almost the lowest point ever recorded.

How does this affect mortgage rates, and ultimately the real estate markets?

This is one of the most frequent questions I get, and one of the biggest misperceptions with the general public: that with the FOMC lowering short term rates, mortgage rates should drop in line with this. This is absolutely not the case. When we see reductions in short-term consumer rates, like the .25% FOMC rate cut in June and the expected .25% rate cut this month, mortgage rates are much slower to react, and there is a significant lag time to see what effect the stimulus has on the economy before the mortgage markets weigh in. 

The bottom line: This is a great time to buy!

Even though they haven’t fallen as far as many have expected, mortgage rates haven’t been this low in over three years. Lower mortgage rates have not yet proved to be a panacea for the housing market, but should boost sales later this year. Home prices are still higher than they were a year ago, but the gains have been moderating. 

Low mortgage rates, however, are enticing, and buyers are saying they don’t want to miss out on that potential savings. The average rate on the 30-year fixed is a full percentage point lower today than it was a year ago.

Doug Duncan, chief economist at Fannie Mae: “We do expect housing market activity to remain relatively stable, and the favorable rate environment should continue supporting increased refinance and purchase activity.” 

Based on the most recent Santa Barbara Real Estate market numbers, I can note a few bright spots. The median home prices are now nearing all-time highs which were set in 2007 and a 4% increase over 2018, while total sales are up over 13% in 2019 vs. 2018, with the largest increase in condo sales. 

One last thought: as interest rates decline, buying power increases. For every .25% decrease in interest rates, it increases the affordability of a higher loan amount by 3%. Someone would could afford a $1,000,000 can now afford a $1,030,000 loan with the same payment.

Mark Hall
Home Mortgage Consultant, Wells Fargo Home Mortgage 
NMLSR ID 233293 
c. 805-895-1996 
mark.c.hall@wellsfargo.com