Low Mortgage Rates Threatened by Inflation Signals
Mortgage news overall continued to spell opportunity for potential home buyers, but there are also signs that favorable mortgage rates might not last:
- 30-year mortgage rates posted a fifth consecutive reading between 5.85% and 5.88%
- Mortgage foreclosure rates continued to rise
- Southern California home prices reached a four-year low
- Signs are spreading that inflation is taking hold
The combination of low mortgage rates and falling home prices is great for today’s home buyers, but the inflation signals are a reminder that these conditions may not last.
Mortgage Rates in a Nice Groove
As volatile as interest rates can be, it is extraordinary that 30-year mortgage rates have remained virtually unchanged over the past month. However, as remarkable as that stability is, what potential home buyers should focus on is the fact that these rates have settled into this steady groove at unusually low levels. Historically, anything below 6.0% has been quite rare.
Indeed, the stability of these mortgage rates might turn out to be illusory — the last thing home buyers should assume is that they can take their time because attractive rates will wait for them.
Foreclosures and Falling Prices
Meanwhile, there were new reminders that the housing slump has not ended. Foreclosure notices in March were up 57% over a year earlier. While foreclosures actually declined in February, they showed a 5% one-month increase in March, indicating that the larger trend is not over yet.
The foreclosure problem is especially concentrated in a few states, making conditions there more severe. California, with the nation’s second-highest foreclosure rate (behind Nevada’s) is a good example of what happens when foreclosure rates accelerate. Median home prices in Southern California dropped 24% for the year ending March, and with those prices now approaching levels last seen in April of 2004, this slump has become more than just a correction of a hot market. Much of the boom that preceded the downturn is beginning to be wiped out.
Of course, home buyers should not be scared out of the market, but rather thankful to be presented with the best buying opportunity in years. As long as they budget carefully and borrow responsibly, today’s home buyers can avoid the mistakes of recent years while taking advantage of much more budget-friendly prices.
Inflation Risk
Falling home prices are especially noteworthy because few other things are budget-friendly these days. Oil and gas are not the only prices rising rapidly these days. Food costs have soared, and with the dollar reaching new lows, expect more areas of inflation from our import-dependent economy.
Inflation and recession have been competing for attention as the problem-children of the U.S. economy, and inflation is finally getting as much press as the slowdown in growth. Long-term, inflation may actually be the greater threat: history shows that periods of deflation (such as the 1930s) and inflation (such as the 1970s) can outlast normal economic cycles.
This is why potential home buyers might be wise to capture low mortgage rates while they last. Inflation pushes interest rates upward. Notably, 10-year Treasury yields, after a month of stability mirroring that of mortgage rates, recently jumped some 20 basis points in just two days. It would not be surprising to see similar forces take hold of mortgage rates before too long.
Tags: foreclosure, interest rates, mortgage, mortgage rates, US economy
