George
Bernard Shaw is credited with having written the line, “England and America are
two countries divided by a common language.”
In other words, while speaking the same language, quite often two people
can’t understand a word the other is saying.
That, I fear, applies to us in the mortgage world more than we would
like to admit. We get all nerdy and
start talking about debt-to-income ratios and disclosures, all the while the
person with whom we’re speaking zones out and starts thinking, “Today’s
Tuesday, right? It’s two-for-one tacos
down at Felipe’s for lunch!” Tacos beat
nerdy mortgage talk every day of the week and twice on Tuesdays.
These
past few months, there’s no way you could turn on the radio or television and
NOT hear or see someone talking about the Fed and whether they were going to
raise the funds rate. Regardless of the
news station, they bring on “the expert” to explain what this means to you and
me . . . and that’s when he or she might as well be speaking Swahili with a
Ukrainian accent. Sure, the words are
all in English, but they’re arranged in sentences that sound like this: “Cats
explode microwaving pool cues on leather Sundays.” You’re not sure if you should run for your
life or buy stock in these furiously awesome felines. Before you do anything hasty, take two more
minutes and read on – I promise to make sense of all this for you.
What
the Fed does with the funds rate DOES have an effect on all of us, sure, but
it’s not as severe as you might think:
• From
May 2004 to July 2007, the Fed funds rate moved up from 1.0% to 5.25% - sounds
pretty dire, right?
• In
that same period, the mortgage rate rose from – are you ready for this – 6% to
6.75%
As
I write this, the Fed funds rate is .5%, and the projections by the Fed
indicate that by September 2017, that rate will be at 2.6% – that’s about half
of the Fed’s increase in the May 2004 to July 2007 period indicated above. In the words of David
M. Blitzer, Managing Director and Chairman of the Index Committee at S&P
Dow Jones Indices (he
must have really big business cards to fit that title on them), “These
data suggest that potential home buyers need not fear runaway mortgage interest
rates.”
While
we all want to give Davey a nice warm hug, there is a bit of urgency that I
would like to inject into the conversation here – and I’ll keep it in plain
English, I promise. Over the past year,
home prices have averaged an increase of about 5%, which means a $200,000 house
is now selling for $210,000 – and the prices are projected to increase by
another 5% this coming year. So,
according to Mr. Blitzer, a potential homebuyer doesn’t have to buy TODAY to
make sure the rates are reasonable, but they should start looking NOW. Every $10,000 increase in a 30-year mortgage,
is about a $50/month increase in the payment – that’s $600/year, which is a lot
of tacos (twice as many on Tuesday)!
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