How Does The Ebb And Flow Of Mortgage Rates Affect The Real Estate Market In The US?

The rise and fall of mortgage rates is a constant content of financial news. In fact, just recently the real estate market in the US had been assailed with an all time low rate, brought about by the downturn in the employment rate of the nation as contained in a certain official report. For the general population this might not mean anything as much as the rise and fall of stocks and bonds, which some of them have probably invested. However, for the potential homebuyers, the outcome of this flow and ebb of mortgage rates is invaluable. You see, when rates are lower, more people have the capacity to purchase expensive real estate since interest rates would be lower. Hence, potential homebuyers as well as sellers would probably be always on the lookout for this phenomenon, to make the most of the opportunity presented. Sellers of real estate as well would be looking forward to this event since they would be able to attract more buyers due to the low mortgage rates.

Photo Credit Tutt, Taylor and Rankin Sothebys Intl Realty

Mortgage rates change everyday due to several factors. Stakeholders keep constant eye on this to ascertain the direction they are heading so that they can take the appropriate action. Myriad factors are known to affect the movement of mortgage rates, such as employment rate, federal funds rate, bonds & stock movement and inflation point, although any one of these factors alone cannot certainly give you the guarantee to be able to foretell the potential of these rates. However, by observing all of these factors and keeping tabs of significant changes, one will be able to have a grasp at least of the direction that these rates are heading.

Let us take treasury bonds for instance. Fundamentally, secondary mortgage market provides the continuous flow of funds for the mortgage world through mortgage-backed-securities (MBS), which can be easily bought and sold. To be able to attract investors, these MBS needs to have higher interest rates than US treasury bonds, which are identified as the most reliable debt securities there is. Hence, any variations in treasury bonds rates can indicate mortgage rates changes before they can actually take place.

So, what is the impact of the changes in mortgage rates on the real estate market in the US? While homebuyers and sellers both like low mortgage rates, lenders actually abhor the situation. In fact, the recent dip in mortgage rates is said to have an adverse effect on the real estate market instead of boosting it. Why? Loan originators are tightening their lending criterion since they do not want to expose themselves to financial risks for some inconsequential gains. The risks of potential defaults on this mortgage are high especially if the buyer opts for the ARM or Adjustable Rate Mortgage, which vary throughout the term of the loan depending on the Index on which it is based. This type of mortgage can actually initiate at a very low rate but can ebb and flow significantly over time, depending on the factors mentioned above. Hence, it would be better for a homebuyer not to wait for the yield to get too low to acquire a mortgage to avoid from being screened out or disapproved.

This is a guest post by Chris Adams an expert in housing market industry. He specializes in Las Sendas homes for sale and Arcadia real estate.

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