1. During the housing boom there was cheap amounts of money everywhere. The Federal Reserve lowered the prime rate to the lowest level ever. With interest rates this low every company and person in the world jumped into the mix to borrow money to buy anything from real estate to cars to new factories to produce goods in. Since the money was so cheap many people could afford the payments on whatever they were buying without putting any money down that consumers often went out and borrowed as much as they could and got two or three of whatever it was they were buying.
2. In the time period between 2002-2007 interest rates on a 30 year fixed were anywhere from 4.75% to 7.5%. Historically mortgage rates have been in the 8.5%-13%. This was mainly in the 1970s-1980s. With rates so high back then people had to save up as much money as possible to put down on the house just to make the monthly mortgage payment. With rates so low in 2002-2007( historically speaking they are still low today) there was a influx of new buyers that could get approved on mortgages and buy expensive homes that 8 years ago they could not dream of owning.
3. Mortgage rates started their climb back up in mid 2005. This was the mid point of the housing boom. From 2002-2005 there were the most homes ever built in a year by year comparison in the history of the United States. Homes were going up as fast as they could because there was somebody buying a home for investment, vacation, or primary residence. This drove prices up through the roof. Of course everybody thought that prices were going to keep going up because real estate as a whole has never ever gone down and is considered a solid investment.
4. So why did mortgage rates start going back up in 2005-2006? The reason is that with all of this cheap money floating around the world now the banks, hedge funds, and investment companies needed to start making a better return on their money. They had to much cheap money out there and it was a lot of cheap money that if something were to happen like a couple trillion dollars in adjustable rate mortgages adjust and a bunch of homes go into foreclosure they could protect themselves in case of a some of that happening. I mean that would never happen…oh crap. Spoke to soon.
5. Now in early 2007 rates are up about 2% more than what they were over the past two years. This kind of is in line with historical fluctuations but now the banks are starting to reel in what is becoming the mortgage disaster.
6. Real estate prices peak out across the country and prices don’t just level out they start declining rapidly. People that took out mortgages now owe way more than what their house is worth. The banks are panicking because now they cannot approve anybody on a loan. This is bad because now they can’t just do loans and sell them in bundles like they have been doing for the past 5 years they are getting stuck with them.
7. Foreclosures start popping up every where. It does not matter what town you live in even the so called rich people are feeling it. The economy is tanking because now there are no new houses being built which causes people in construction to get laid off, the finance sector starts crumbling and the nations largest mortgage lender (Countrywide) sees their stock price drop $40 in the matter of a month from $50 a share to $4.
8. So why is it easy to make mortgage rates predictions now? Its pretty simple. Interest rates are never going to get as low as they were during the housing boom ever again. It will be bad business and will let people, including the banks take on too much risk without any reward. The banks are giving away cheap money just to make it look like they are writing business (to please shareholders).
9. Mortgage rates are probably going to hold in this 6.75%-8% range for a couple years. Interest rates cannot go down because it has been proven that the average consumer has no restraint and feels like they can buy whatever they want. The market can’t raise interest rates back over 10% because now all of the people that are currently in 30 year fixed rate loans in the mid 6%’s will not take out another loan because now they will have to pay 4% more than what they are paying now if they want to take cash out of their home. The banks don’t want you to save money and pay cash for your purchases they would rather you take more money out at relatively the same interest rate. If people start paying cash then the financial sector will falter. More finance jobs will be lost and banks will go bankrupt. I really think this is a good thing because now people will not be paying interest on anything.
10. To all the people who played it smart and locked in a 30 year fixed rate mortgage in the 5%’s you should feel happy about what you did. Interest rates are never going to get that low. To the banking industry, sorry about your luck. I guess there is a learning curve for everything. So over the next two years while this housing mess starts to cool down we can all learn from our mistakes and know what and what not to do when it comes to mortgages.
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