Are current mortgage rates and housing prices nearing the bottom?
September 26, 2011
Falling markets scare some people, but opportunists have the opposite reaction--they worry about missing the best prices if they wait too long before acting. There are reasons to believe that between current mortgage rates and housing prices, there might not be a better time than the present for potential home buyers to get into the housing market.
Indications are that both current mortgage rates and housing prices are more likely to rise than fall in the months ahead.
Current mortgage rates and inflation
Thirty-year mortgage rates bottomed out at 4.23 percent last October, and rose to 4.84 percent by April. Why, then, isn't there reason to believe that mortgage rates could fall once again? Because last October they weren't getting squeezed as much by inflation as they are now.
Lenders expect to earn more than just the rate of inflation, which is why 30-year mortgage rates historically have averaged 4.43 percent more than inflation. However, the margin of mortgage rates over inflation has been seriously squeezed over the past couple years.
In April of 2009, 30-year mortgage rates were a healthy 5.51 percent over the prevailing rate of inflation. By April of 2010, this margin had dropped to 2.90 percent, and as of April of 2011 it was down to 1.64 percent. Unless there is a reversal in the rising trend of inflation, expect mortgage rates to start to rise in response.
Housing prices
Meanwhile, although housing prices have continued to fall, there is reason to believe that this too may not last much longer. An analysis by The Economist shows that U.S. housing prices are roughly back to parity with the cost of rent. During the peak of the housing bubble, home prices rose above 150 percent of the cost of renting.
Renting and buying are two alternatives open to consumers, so their prices can be expected to influence each other. With housing prices finally back in line with rental costs--and with rents rising--don't expect home prices to get much lower.
Taken together, current mortgage rates and home prices may represent the best opportunity you'll see for a while.
