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Are Cheap Mortgages Disappearing?

Lots of buyers have been waiting on the sidelines . . . waiting for prices and interest rates to drop.  Have they missed the sweet spot? 

The yield on a 30-year fixed jumped from 5% last week to as high as 5.45 %, the highest level since February.  Guess the Chinese are getting a bit nervous . . . they’ve decided it’s safer to buy short bills than long bonds.

Thanks mostly to the rapid rise in 10-year bond yields, a lot of the Fed’s efforts save the housing market (bond and agency debt purchases, ultra-low lending rates) are being undermined.

Even though easy financing got us into the current mess, the feds are still at it – an $8,000 tax credit and EZ financing from the FHA. They’re convinced that if they can just put out enough new credit, it will somehow make the problems caused by having too much credit before go away.

It’s not that I’m against putting more buyers and sellers together.  The FHA loans are definitely creating more activity and liquidity, which the economy needs, it’s just that I’m wondering out loud if we’re really doing ourselves a favor in the long run.

Will the FHA buyers of today be a wave of foreclosures some time down the road? Already, approximately 17% of homeowners are ‘underwater’ (owing more against their property than it’s worth).

Writing in the Financial Times, John Authers says:

“The latest US mortgage delinquency figures are horrendous, with more than 6% of prime mortgages in arrears – more than double the long-term norm. A quarter of sub-prime loans are delinquent.”

Harvard historian Niall Ferguson adds:

“The peak of foreclosures has yet to come. They will go from 40 percent of all home sales to literally 100 percent by the end of the year.”

Wow . . . I’m not sure how to really compute that, or even what it all means, but it doesn’t sound particularly rosy.

So, while we tend to be a bit insulated in Pasadena and surrounding areas, many neighborhoods could see prices drop even more than they already have, just so the economy can absorb all the REO offerings coming down the pipeline.

But if U.S. debt is becoming less attractive to foreign investors, and mortgage rates are on the rise, the cheaper prices don’t mean as much for those who need financing. Price and terms will always do their little dance . . . the higher the terms, the less house you can afford.

So, is it a good time to buy, or not?

I don’t know.

Mortgage rates are still at historical lows, but I don’t see how that’s sustainable over the long haul.  If you’re on the cusp, waiting too much longer might not be a great idea, unless you have a lot of cash to put down.

On the other hand, there will always be sellers who can and will offer seller financing at attractive rates, so if you’ve got a decent down payment (10% or more), you’ll never be totally left out in the cold no matter what happens in the institutional lending community.

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