Taking a new interest in interest rates

America’s economic rebound depends on a real estate recovery, but many are asking –“what’s it going to take to get it all going?”

Historically, housing always leads the economy in recoveries, and this one will be no different. Fortunately, policymakers and both presidential candidates recognize the need to get the housing market moving. The two housing stimulus bills this year (which include the homebuyer tax credit and higher loan limits), as well as the $700 billion U.S. Treasury plan and the Federal Reserve’s recent actions are all designed to assure the return to a steady mortgage flow and help to revive the housing sector.

This will take some time, but the most important factor driving home sales is affordability. As economic engines gain momentum in various parts of the country, the overall economy can begin to stabilize. How long this takes is yet to be seen, but over the past two years, housing affordability has improved, with incomes rising, home prices falling in many markets, and conforming mortgage rates at near historic lows.

Many Spokane residents want to buy a home, and have been conserving resources and budgeting in order to manage the financial responsibility and to accumulate the required down payment and closing reserves.

The New Era

Nationwide, we are entering “a new era” of conservative lending and it will present challenges to homeownership for some. But, in the midst of our changing economic climate you may be wondering why REALTORS® believe that homeownership is still considered “affordable” today?

Interest rates are the key. The top-left chart in the next column shows estimated payments on a $150,000 mortgage at interest rates of 6 percent, 7 percent and 8 percent for a 30-year fixed loan. For “easy-math” purposes, a 1-percent increase in the mortgage loan rate raises the monthly mortgage payment by approximately $100.

In the righthand side of that graph, you can also see how the extra $100 per month saved by a 6-percent loan (over a 7 percent loan) could help the homeowner acquire a loan amount of $166,500 instead of $150,000. Lower rates enhance purchasing power. With higher interest rates, purchasing power dwindles.

The second graph below shows lending rates over the past 30 years, as high as 14 percent in the 1970s, and well above 10 percent in the 1980s.

*Source: Conventional, conforming 30-year fixed-rate mortgage statistics by Freddie Mac. (All November rates, except October 08.)

This is why today’s historically low interest rates continue to keep homeownership affordable for those who can qualify during this economic recalibration, even with a return to conservative lending guidelines.

For those waiting for “the bottom of the market,” consider today’s value pricing and abundant inventory, along with the best interest rates in three decades, as three of the strongest “buy now” beacons that illuminate homeownership opportunity.

The Local Impact

Locally, home values have generally appreciated an average of about 6 percent annually over the past 10 years across the Spokane region, and thankfully, we did not experience extreme bubble conditions as did other parts of the country. The affordable conditions noted above continue to provide Spokane residents a chance to appreciate the value of home ownership.

While it’s true that readers may hear that nationwide unemployment numbers have recently moved upward, this is impacting regions outside of Spokane with more force. According to Rich Hadley, CEO of Greater Spokane, Inc. earlier this month, “We’ve created 19,000 new jobs in this region and 18,000 more people are here. Seventy-five percent of them are from the outside. That’s a pretty good statement about where we’re headed.”

Spokane residents with job stability and qualifying household incomes have the opportunity to choose home ownership by responding to housing incentives and affordable conditions that exist here.

Previous housing recoveries have shown that as sales rise, housing inventory thins, and this has a stabilizing effect on home prices. The current efforts to revitalize the credit markets will start the cycle and build momentum all across the U.S. Looking at middle-ground assumptions, existing home sales nationwide are forecast at around 5 million this year, and are projected to be 5.4 million in 2009, according to economic forecasts from the National Association of REALTORS®. Following national declines of 5 to 8 percent in 2008, home prices are projected to increase 2 to 3 percent next year.

Locally, home sales in Spokane County will most likely reach about 5,000 at the end of 2008, with the median sales price of existing homes projected to keep within 3-5 percent of the 2007 median sales price. Combined inventory of new and existing homes remains elevated, but the lower level of housing starts this year will help overall absorption.

For today’s qualified buyers, this could be just the time to take advantage of historically low interest rates, affordable prices and powerful economic incentives like the first-time buyers’ housing stimulus tax credit, which is only available until July 1, 2009 ( www.federalhousingtaxcredit.com).

The Spokane Association of REALTORS® advises readers to take a good look at the opportunities that exist in the Spokane market, and don’t give up the dream of home ownership. Talk to any Spokane REALTOR®. They are informed advocates and could possibly be your guide to home ownership in this new era.