San Carlos Home Mortgage Rates are Creeping Upward.

June 28, 2013

On the Rise.

What was easily the most talked about topic this past week in real estate circles was the home mortgage interest rates — specifically, the fact that they're on the rise.   We're not talking about a little temporary blip of 1/8 or 1/4 of a point.   This latest rise has been a steady climb of the base rates over the past two weeks.   A spot check of the 30-year fixed jumbo loan (loan values from $625,500 – $2,000,000) shows an average jump of nearly 0.5 point.   This is a very relevant datapoint since this loan is rapidly becoming the one of choice in a market of $1M+ homes.

That increase not sound like much, but when you consider that rates were recently in the high 3% range, that represents an increase of about 13% in just two weeks.   And it was such noticeable uptick that it prompted an article in the San Jose Mercury News, which is well worth reading.

All About the Bonds.

What got us our rock-bottom low interest rates in the first place is the very reason that they're on the rise right now:  Bonds.  Back when the market plummeted in 2008 (gee, that wasn't so long ago!!), the Federal Reserve embarked upon an aggressive bond buying spree in an effort to stabilize the bond market and keep long-term interest rates low.  This policy has been in place since the crash, but it was never intended to be a permanent action by the Fed.   There was never a question of if the Fed was going to extract itself from the bond buy-back market, only when.

Those who watch this market far more closely that I do are speculating that indeed that time may be upon us in the coming months.   Recent comments that have been swirling around the Federal Reserve seem to indicate that national economy may finally be at the point where it makes sense to “loosen the training wheels”, if you will, and let the economy stand more on its own.   If the Federal Reserves takes an official stance that it will reduce it's buy-back rate, then bond rates will almost certainly rise — and will take home mortgage rates along with it.

Effect on the Local Market?

What effect will an increase in interest rates have on the San Carlos real estate market?  There's no easy answer to that question, because everyone will be impacted differently.   As a general rule of thumb, as rates increase, buying power decreases.   But the degree of this effect is highly dependent on how much money is being borrowed.  The buying power for someone who is leveraging as much of the bank's money as possible is going to be impacted far more significantly than a buyer who has a 50% down payment.   For a buyer who is borrowing 75% on a $2,000,000 purchase, the recent 0.5 point increase alone knocked out about $200,000 of their buying power.  That's pretty significant.

But as we've seen so far this year, buyers in the San Carlos market have brought unprecedented amounts of cash to the table for their home purchases, so it's hard to speculate how much of a damper this will be for those buyers.

The other factor to consider is demand.  No matter what happens, there are still far more home buyers than there are available homes to buy.  Even if an uptick in rates serves to shake the fringe buyers back into renting, we will still be in a seller's market until that balance is achieved.   Even as late as last week, there was no indication that multiple offers are going away any time soon.

If there is a positive effect to the rate increase, it will be a stabilizing effect in home prices.  That is obviously not what home sellers want to hear, but in the broad scope of the health of the economy it's probably just what the doctor ordered.   San Carlos home prices have been on an absolute tear since mid-2012, which has prompted many to bring back the “B” word when discussing the housing market — Bubble.  Home owners have seen their home values appreciate as much as 30% or more during that short time, so there should be no tears shed if the values start to level off a bit.   And it's in everyone's best interest to avoid a bubble market — it was only 6 short years ago when the last bubble left many homeowners without a chair to sit on when the music suddenly stopped.

September 1: A Big Day.

The next scheduled Federal Reserve meeting is scheduled for around September 1.  In that meeting, many anticipate the Fed will discuss and ultimately take an official position on their bond buy-back strategy.   Much of the uptick in rates that we're seeing lately is actually in anticipation of the decisions that will be made in this meeting.  And the recent actions tell me that institutions are hedging that Fed will definitely start to slowly wean itself from the home mortgage business.

Stay tuned..

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