Next Wednesday (3/31) is a monumental day for the mortgage industry. It is the day that the Federal Reserve has said it will stop buying mortgage-backed securities in an effort to keep mortgage rates low and bolster the housing market. The expected outcome of this move is an increase in interest rates which have been hovering around 5 percent this week for a 30 year fixed rate loan.
Traditionally, as mortgage rates increase, home prices decrease. Rochdale Securities Analyst Dick Bove estimates that the housing prices will fall 10-15 percent when the government stops subsidizing home prices. Bove acknowledges that if the Fed does pull the plug on mortgage-backed securities next week, the effect of the subsidy will most likely still linger until June. That is why real estate experts feel that this spring may be the best time to purchase a home.
“We’ve known this was coming for months,” said Michael Clapp, general manager at Keller Williams Realty Northeast, about the federal government’s plans. “Yet buyers haven’t responded because the public has been lulled to sleep by the historically low interest rates for the past several years.”
“As the rates increase, those who have been sitting on the fence will probably make a quick decision,” predicts Clapp. “Now is the time to make the decision (to buy a house) rather than waiting. Purchasing power dramatically decreases as the interest rates begin to rise. Today, you might qualify for a $200,000 mortgage. But if the rates increase, that might reduce it to $180,000. That can make a dramatic difference in getting the house you want versus settling for another home at a lesser value.”
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Toll Brothers, Inc. (TOL): http://finance.yahoo.com/q?s=tol
Lennar Corp (LEN) – http://finance.yahoo.com/q?s=len
KB Homes (KBH) – http://finance.yahoo.com/q?s=kbh
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