Rates Going Up & Tax Credits Coming To An End.  What this means for Buyers and Sellers

In the second quarter of 2010, we will have 3 major factors working against the housing market at the same time.  They are; climbing interest rates, expiring tax credits and worsening lending guidelines.  What I’m going to outline for you now is how this will impact us and why it is so urgent for your sellers and prospective seller to act NOW.

1.)    Rates: Interest rates have been at their historic low point (5%-5.5%) for so long now, most people have forgotten that the average 30 year rate is somewhere between 7% and 7.5%.  On March 30th the Federal Reserve will cease buying all the low rate mortgage bonds.  This means buyer will qualify for less house since interest rates will likely be around 6%-6.5% by June and probably in the 6.5%-7% range by the end of the year.  This is the optimistic forecast.  If inflation shows up we’ll see rates spike sooner.

2.)    Tax credits expire: Buyers will no longer be provided incentives by the government to purchase houses.  You probably have some decent statistics about what % of sales over 100K are 1st time or move up homebuyers.  This will put a significant dent in demand

3.)    Worsening lending guidelines: Buyers will qualify for less house because lending guidelines continue to become more restrictive.  The pendulum is not done swinging.  We can currently qualify buyers at 50% of their gross income.  This will fall to 41%-45% by mid year and we are unlikely to see any improvement until we’ve had a few years where loans stop defaulting.  Also, the minimum credit score required to purchase FHA is about to move from 620 to 640.

Looking at those three factors we can see less demand, tougher qualifying through higher rates, and tougher qualifying through lower debt standards.  These three combined will put another layer of significant pricing pressure on housing over and above some of the REO pressure that exists already.

Here is a tangible example of what we’re talking about:

Today Sally Seller sells her 200K home to Billy Buyer.  Billy gets a 200K loan at 5.5% and qualifies for the $1135 payment…everyone is happy.  Months from now Sally Seller tries to sell her home to Billy Buyer for 200K but the market is at 6.5%.  Billy can't qualify for the extra $130 per month.  For Billy to qualify for that $1135 payment when rates are 6.5%, Sally has to sell her 200K house for 180K.

This is JUST due to interest rate pressure, we’re not even considering Billy’s debt ratio or the fact that because the tax incentives are long gone, there will be fewer of Billy.

Sellers must understand the consequences of waiting in this market.  Many sellers believe waiting means give it a year and the REO market will be out of the way and we'll be fine.  The reality is as interest rates climb on a 200K house they will lose 20K in sales price for every 1% increase to rates.  We're at 5%-5.25% now and we're headed into the 7%-7.5% range.  You can do the math quickly.

Sellers must take advantage of this opportunity to sell NOW.  Some people will feel they don’t want to "give away" their house but the reality is they can cash out for significantly more value in the first half of this year, especially in the first quarter, than they will in the next 2-3 years.  

As always, if there is anything you need we are here to serve you.