Interest Rates Going Up

Buyers usually assume that when the Federal Reserve cuts the short term interest rate, the mortgage interest rate will also drop. It's a lot more complicated than that. The Fed's most recent cut will probably cause fixed mortgage rates to go up. Adjustable rates may go down, which is a relief for people who currently have adjustable rate mortages (ARMs), but I think most people have heard enough horror stories about ARMs that few home buyers will choose that option anymore.

Suppose you can buy a $200,000 house with 20% down at 6% interest today. Your principal and interest payment would be $959.28 per month. Suddenly interest goes up to 7%. Your P&I payment will be $1,064.48. This might be enough that you now longer qualify for a loan.

Some buyers are waiting for the market to hit bottom before they buy. Experienced investors know that it is impossible to time their purchases perfectly. If, in the hypothetical situation I described, the interest rate went to 7%, the price of the house would have to drop to $180,233 in order for the P&I to be $959.28. This would be a 10% drop in price. I think the chances of interest rates going up more than 1% are greater than the chances of property values dropping more than 10% in the next few months, especially in the under $250,000 price range where most of the sales activity is occuring.

So it's a gamble. While waiting for prices to drop, buyers may see interest rates increase to the point where their buying power is severely reduced.

Hummingbirds!

A hummingbird zoomed by as I was watching the mourning dove on her nest on my back porch yesterday. I watched the hummer and saw her land on a branch about 4 feet off the ground. Then she thought better of it and flew away, but quickly came back. I could see a tiny bag of woven grass attached to the branch, so I went for my camera. I fired off this shot while the hummer mom bravely buzzed around my head. I left quickly so she wouldn't feel harassed any longer.

The inside of this nest is less than 1" in diameter! Another day, another reason to be grateful for a home in Tucson.

February Residential Sales Statistics

The February Residential Sales Statistics have been published. The Arizona Daily Star chose to further suppress real estate sales by exclaiming that the median sale price has dropped below $200,000. It was $199,900 in February 2008, or 9% lower than in February 2007.

Of course they didn't mention that the average sale price in February 2008 was $262,155, which is a 1% increase from a year earlier.

With friends like the Star, who needs enemies?

Most wizards who are gazing into economic crystal balls say interest rates are heading up. Way up. So get off the fence and buy while the buying is good.