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Mortgage Rates: 30-Year Fixed: 4.81% 15-Year Fixed: 4.26% 1-Year ARM (Adjustable Rate Mortgage): 6.94% (Last updated on 6/15/2010) Source: mbaa.org |
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A primer on Interest Rates vis-a-vis Home Prices
By Sam Mishra, Chief Podcaster
I have written earlier about the creativity that was unleashed under the "ARM" or Adjustable Rate Mortgage scam: even the well-educated (some with Ph.D degrees, who could do the math well; but took the bait, probably with the idea to flip) were lured into the 3:75% ARM rate for the first 2 years, after which it was supposed to go up by 2% every year, until it hit 11.75%. This 3.75% is an actual example: after 2 years, the rate was to go up to 5.75%; after 3 years, 7.75%; after 4 years, 9.75%; and after 5 tears, it was supposed to have stabilized at 11.75%. The Ph.D who took the bait was a conservative one (or at least that is what he told me); he wanted to refinance between year 2 and 3, i.e., when the rate was 5.75%. If he was planning to enjoy the 3.75% rate for 2 years and then flip for a profit; that was the American Dream then (2007), right?
Fast forward to 2010. What is the American Dream today? First, let's talk about a few shattered dreams: lost jobs, divorcing spouses, foreclosed homes (someone in Ohio bull-dozed it so the bank could not repo it ... reminds me of the cars in repo auctions whose door handles were missing --- the owners didn't want their cars repoed). Consequently, the American dream is adjusting: IT IS NOT ABOUT WHAT I OWN, BUT WHAT I AM!
So, let's ignore the trend for the ARM curve above, and think about the more conservative 15 year and 30 year mortgages. These rates are tied to the Fed Funds rate. (Note: every Interest Rate is tied to the Fed Funds Rate. Well mostly, for rates on your credit card debts are certainly not tied to the zero percent Fed Funds rate). The Fed Funds rate is sitting pretty close to zero; and sooner or later, it will have to be moved up, up, and up... It should be pretty obvious to you that when that happens, the above two mortgage rates have no way to go, but up. Once rates go up, your premium goes up, or the mortgage that you can take out goes down. [Example: in terms of buying a car, if you could buy a Camry before, now you can only afford a Corolla.] In terms of buying a home, the bubble has burst: the buying power of Americans is going to keep coming down as these interest rates keep going up. The buying power will be further damaged by the current jobless recovery; if I don't have a job, where is the money going to come from for the mortgage, big, small, or ugly? Consequently, home prices are on their way down, on the average, across America, at the time of this writing (March 2010)...
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