The average interest rate for 30-year fixed mortgages dropped for a fourth week in a row at the end of January to 4.32 percent, according to data released by Freddie Mac. Average rates on 15-year fixed mortgages also dropped from 3.44 percent to 3.4 percent.
The news came as a surprise to many economists who believed rates would rise with the news the Federal Reserve is cutting back its asset-purchase program in $10 billion increments, starting in December. The Federal Open Market Committee (FOMC) decided at its January meeting to cut mortgage-backed security purchases from $35 billion to $30 billion, and long-term Treasury purchases from $40 billion to $35 billion beginning in February. Thus total quantitative easing now sits at $65 billion per month.
Low interest rates are enticing for those looking to start investing in real estate. But broader macroeconomic phenomena make real estate a dicey proposition for 2014.
Market Correction on the Horizon
The housing bubble prior to the recession was inflated due to lax credit requirements by financial institutions. It burst primarily because the monthly payments on millions of 2/28 and 3/27 adjustable rate mortgages (ARMs) ballooned all at once, causing mass foreclosures. Most of the borrowers were unqualified anyway, with 40 percent of all subprime mortgages being approved via automation by 2007, according to University of Connecticut law professor Pat McCoy.
Financial institutions tightened credit requirements after 2008 and have not changed them much since. This basically put an end to subprime lending, but housing prices continued to plummet. The Federal Reserve stepped in and announced a third round of quantitative easing in mid-2012, which included purchasing $40 billion in mortgage-backed securities every month. The housing market reacted, experiencing a year-to-year gain of 0.2 percent in June 2012, the first such increase since 2007.
Home prices have been on a tear since QE3 commenced, rising or remaining steady every quarter since Q2 2012, according to the S&P/Case-Shiller Home Price Index. But with QE3 now being tapered, the artificial bubble that has blown up since 2012 is due to correct itself. Home prices today will not be the same come December, based on the fact the Fed is no longer pumping them up.
Cash Buyer’s Dream
Residential property sales for the month of November were all cash deals 42 percent of the time, up 3 percent from October, according to RealtyTrac. This has mostly been fueled by wealthy investors looking to buy cheap and rent the properties out, and by retirees selling their current homes for less expensive ones in different areas.
The market is particularly ripe for those with enough cash on hand to acquire their first investment property and build from there. Whether it’s through savings or by liquidating future structured settlement payments through a company like J.G. Wentworth, having cash upfront will get you the best deal possible.