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Watching the storm from the fence

As we continue to do business with clients who are buying and selling real estate every day, I thought I might share some free thoughts for the fence sitters. I’ve been watching the national (and World) economy most of the year and reading expert opinions about what may happen in the future. Some of my conclusions may apply to you, some may not. It seems fairly likely that we will see a significant increase in interest rates being offered to residential mortgage applicants. These mortgage rates really have a couple of components to them – one, the cost of the money for the lender that is offering the mortgage and two, the spread that they price in as the amount that they wish to profit on making that loan. Both of these components are headed up. The first component is based on the Fed funds rate which is just about as low as it can be.

The Fed is being backed into a corner by inflationary pressures to raise their funds rate, and while many think that they should have already started to raise rated to curb inflation, equally as many people believe that because we are in an election year the Fed has been pressured to delay the raise, as not to appear to be meddling in the election. Component two of the rates has tremendous upward pressure coming from the perception of how risky a loan is to make. The crisis caused by the sub-prime forclosures has been priced into the rates, the coming additional turbulence from “Alt-A” forclosures, has not. (See some of our other articles for a comparison of subprime to Alt-A loan volumes and reset dates). Putting these two trends into perspective leads me to believe that we will see significant increases in residential rates by November/December.

If you are watching from “the fence” because you are worried about the national economy, and think that you may want to make a buying decision sometime in the next 2-3 years, you may factor in the cost of a loan into that decision. 2008  could represent the end of affordable mortgage rates for a few years.

If the “storm” does make it to Central Texas, you will be comfortable in your shelter, and safely off the fence! The time to patch the roof is before the rains come.

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