Time is running out on low home mortgage interest rates and the Federal Home Buyer Tax Credit!

The Federal Reserve (Fed) kept the Federal Funds (interest) Rate unchanged at their meeting this week (a big deal).  This is the rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed.  This is often confused as being the same thing as mortgage interest rates.  The fact is that they really have nothing much to do with each other except that the Fed determinations tend to dictate how the economy and inflation are trending.  If the Fed feels that inflation is going up, it will increase the Federal Funds Rate to try to combat inflation by increasing the cost of borrowing money.  This causes the buyers of mortgages to fear they will lose value and demand that buyers pay a higher rate of interest to get a mortgage loan.

Sorry, I couldn’t think of an easier way to state the above information!  Just remember: if the Fed is worried about inflation, they will raise their rates.  Investors will worry and charge you more to get a home loan!

Unfortunately, there is a much bigger problem that will likely cause home mortgage rates to rise very soon.  There is a distinct possibility that mortgage interest rates might rise ½ to 1 percent at the end of the month when the Fed quits buying mortgage-backed securities.  They and the Treasury, which quit a few months ago, have been the only buyers of these for about a year now.  These securities are the investment pools that are created when folks like Fannie Mae, Freddie Mac and big banks sell the mortgages they have issued.  They do this to get their money back to make new loans.  Their profits are based on the loan fees, not the long-term collection of the interest.   It is expected that when the Fed quits buying, private investors will demand a higher rate of return than the Fed was paying, equaling a rise in mortgage rates.

Sorry, not an easier way to explain this one either.  Basically it is supply and demand in action.  If there are no buyers at 5%, then the seller of the security raises the rate until there is a buyer.  It would be nice if other buyers would buy at the same rate, but no one thinks there is anyone that will.

The recent, huge rise in pending sales and buyers out looking is, of course, primarily due to the expiration of the Federal Home Buyer Tax Credit at the end of April.  A buyer must have a purchase & sale agreement mutually agreed to by April 30^th.  They will have until June 30^th to close it.  As such, it is pretty much impossible at this time to close a short sale by June 30th, so there is a transition to non-distressed properties taking place by those agents and buyers smart enough to understand this fact.

Until very recently, there was zero interest in Congress for extending the Tax Credit.  However, the continued sorry state of the economy along with the fact that everyone understands that the expiration of the Tax Credit will cause a slump, has caused some discussion to take place about extending it.  Likely higher interest rates and the fact that this year will have the highest foreclosure rates yet, are additional reasons why the housing market will remain severely depressed in most areas of the country.

If I was a buyer right now, I would not bank on an extension and would find my home by the end of April.  First time home buyers will generally quality for a $8000 tax rebate after the closing of the purchase.  Other buyers may qualify for up to $6500.  Obviously, restrictions apply and you should talk with a REALTOR or your CPA.  Happy Hunting!