Even in dark clouds we can find a silver lining. Take the Euro devaluation, for example. There has been a major shadow cast over our own economy as the value of the Euro has decreased. However, we are also reaping at least one benefit: lower mortgage interest rates.
When the Federal Reserve ceased to purchase mortgage-backed securities (MBS) at the end of March, it was expected that mortgage rates would begin a climb to about 6% by the end of the year.
We were spared an instant beginning to such an increase by private investors who, in an effort to buy back MBS previously sold to the government, began bulk-buying MBS in April. We saw a small, short increase in mortgage rates, but for the most part mortgage rates remained at the level they were at when the Fed was purchasing MBS.
Mortgage rates and MBS prices are in tight correlation to Treasury bond prices and yields, particularly 5-year notes and 10-year bonds. Unlike goods sold on the wholesale or retail market where high demand can generate a higher asking price, the higher the demand for bonds and securities, the lower the yield that must be offered to attract buyers.
The recent decline in the value of the Euro has caused a transfer of wealth from Euros to the currently more stable dollar, generally in the form of treasury bonds, taking yields and ultimately making mortgage rates lower.
How much does this matter?
Consider a buyer whose 31% gross annual income ($58,000) allows him or her to make a monthly payment of $1,500. That monthly payment qualifies him or her for the following loan amounts at fixed rates of:
|
4%: $314,000 4.5%: $295,800 5%: $279,200 5.5%: $264,000 |
6%: $250,000 6.5%: $237,100 7%: $225,300 7.5%: $214,400 |
Current interest rates are hovering at 4.84% for a 30-year fixed rate mortgage.
There is little doubt that interest rates will increase again – likely to about 6% over the next year. This being the case, the aforementioned buyer can buy nearly $50,000 more home today than what he or she will be able to buy a year from now.
If the same buyer purchases a $300,000 home today, and it depreciates by 5% over the next year, he or she will, on paper, lose $15,000 in home value. However, he or she will still end up with nearly $35,000 more home.
Photo Credit: Wikipedia
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