Bonds may boost home prices

NEW YORK — The bond market turned upside down this week in a move that may end up costing many people more to buy a home.

The phenomenon is called an inverted yield curve — when short term interest rates rise above long term rates — and it hasn’t happened for five years. What it could mean is increased monthly costs for borrowers using ARMs, whose popularity, especially among first-time home buyers, has helped fuel the real estate boom.

“It forces first-time buyers into taking down the expectations for the price of the home they can afford,” said Dave Jenks, realtor with Keller Williams Realty International in Austin, Texas.

Jenks warned that “for sale” signs will hang for more days and sellers will have to be careful not to aggressively price properties. Now, the process of staging an open house becomes more important and sellers have to make sure homes are cleared of clutter and not in need of major repairs to woo buyers, Jenks said.

The unusual market condition comes as a series of interest rate hikes by the Federal Reserve have already made it more costly to borrow money for a home.

The yield curve’s inversion may have occurred because there were very few investors in the bond market this holiday week. It also may be signaling that some investors are worried the economy could slip into recession later this year.

Either way, if long-term interest rates remain below short-term rates, demand for ARMs may diminish.

That’s because the difference in borrowing costs for an ARM and a 30-year fixed rate loan would shrink.

Someone with a $200,000 home loan and a fixed rate 6.25 percent mortgage, for example, can expect to pay $1,231.43 each month. An adjustable rate loan linked to five-year interest rates has a rate of 5.75 percent and monthly loan payments for that $200,000 mortgage are $1,167.15.