WeeklyBasis 10/27/08: Are Home Prices Or Rates More Important?

Fixed and ARM rates for loans up to $729k are up about .5% from last week, which continues a .375% to .5% up/down trend for the past few months. Rates on above $729k are consistent because they continue to be priced more on lenders’ willingness to lend than on market forces. Most lenders are phasing out high-limit conforming loans by November 20, there are two major institutions that will allow these loans to be locked until December 15. Then the $729k cap will expire on December 31. New high-limit conforming loan caps will be announced November 7, and it’s widely expected to be $625,500.

There is a Fed meeting today and tomorrow, with futures markets predicting a 100% chance of a 50 basis point rate cut tomorrow. In anticipation of this stock markets are rallying at the cost of all bonds including mortgage bonds, and when bond prices drop in a sell off, yields (or rates) rise.

This same trading phenomenon has caused mortgage rates to rise after the last nine Fed cuts since the credit crunch began last August. This time, the rate rise is happening before the Fed announcement, but it’s possible rates will stay at this level for the days immediately following the Fed announcement.

For home buyers, this extreme volatility creates questions about whether they should buy at all. But with home prices being so much lower than they were in recent years, the longer-term price of the home takes precedence over short-term rate movement. First looking at price, the S&P Case Shiller home price index today showed home prices across 20 US cities declined 16.6% in August, and that all 20 cities have been in year-over-year declines for 20 consecutive months. Then, looking at how rates are fluctuating by as much as .5% week to week, we know that market volatility can provide refinance opportunities that can be done easily and inexpensively after a buyer closes on their home—even if it’s within a few months after closing. When looking at home price changes versus rate changes, the math clearly supports the claim that lower home prices outweigh higher rates.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.75% (6.87% APR)
15 Year: 6.625% (6.74% APR)
5/1 ARM: 6. 75% (6.87% APR)—See Jumbos for Lower Rates

Super-Conforming ($417,001 to $729,750 cap by county) – NO POINTS
30 Year: 7.0% (7.12%)

Jumbo ($729,751 – $1,500,000) – NO POINTS
30 Year: 7.25% (7.36% APR)
7/1 ARM: 6.25% (6.21% APR)
5/1 ARM: 6.0 % (6.11% APR)