In a surprising turn of events, home sales have experienced their first annual drop in over two years. In the short term, mortgage rates have gone back down after hitting a two year high this summer. The rising mortgage rate significantly slowed home sales through September. This increase is favoring dual-income households with higher and higher credit ratings in an attempt to prevent a repeat of the housing bubble burst in 2008. With the two week long government shutdown drastically reducing the income of thousands of government workers and government contractors, people were sent scrambling to make up the difference which only contributed to the problem. Therefore, we can expect home sales to remain a bit sluggish for the next month as well, but it isn’t all bad.
Some paranoia persists about the decrease in sales, expected after the rush to get in before the mortgage rates peaked, and the National Association of Realtors’ declaration that housing affordability is at a five year low. However, foreclosures have been on a steady decline, and the NAR expects that distressed homes, 22% of sales in August, will soon make up less than 10% of home sales.
Home values have been rising steadily, and, in conflict with the overall trend of rising mortgage rates, the fixed 30 year mortgage rate is now down to 4.13%, which is the lowest since June, and may fuel a rise in home purchases that will be felt in a month or two as we get through the lag between contracts signed and completed sales. So what does this all mean?
First off, it only reinforces the sensible mortgage advice “get a fixed rate.” While there are ways to deduct the interest on your mortgage from your tax return, making the interest rates less of a factor for some people, the recent government shutdown and the ongoing debt crisis make it abundantly clear that government subsidies are not something to rely on in the long term. The massive fluctuations and dramatic turns of events in the mortgage sphere should remind potential home buyers that although low interest rates offered by ARMs might sound tempting, it’s only really tempting fate. Don’t fall for it.
Secondly, for families feeling the pinch in the microclimate recession created by the government shutdown and other items popping up in our news feeds, 30-year interest rates hitting a new low might offer some relief.
Although in the long-run, 30 year mortgages end up costing the homeowner significantly more than shorter loans, it actually might be a wise decision to consider refinancing your 15-year mortgage into a 30-year for the time being.
It makes sense that, as prices recover and foreclosures decrease, the market will self-correct and prices will return to normal. The key to profiting from it is to get into the market while prices and interest rates are still favorable. The average family could save between $250 and $700 a month as a result of refinancing to a 30-year, which can help swat a few moths away from your wallet if you are stuck between a rock and a hard place.
While various external factors like the government shutdown and fluctuations in sales trends are unsettling, the fact that the unemployment rate has been on a steady decline shows that the economy is recovering. As more people become financially secure, especially younger couples, the real estate market will normalize further. Making sure that you are part of that generation by keeping a level head in unlevel times will help build an even more secure market that will hopefully be as booming as the pre-2008 bubble without any of the looming disaster.
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