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Mortgage Rates and Real Estate Affordability: Rates Continue to Decline

Our Monday morning read brings us away from real estate and over to a topic near and dear to California’s heart: the tech sector.

It is with interest that we read a Business Insider article discussing why we could be in a “massive” tech sector bubble that is “heading for a crash.”

Silicon Valley
Silicon Valley

For one, we have enjoyed learning more about local manufacturing and technology businesses courtesy of our journalism intern from Cal Poly, Holly Dickson (see her work here). For another, it was interesting to see a “bubble” headline that didn’t involve real estate. Maybe we can learn something by way of comparison?

Plenty of arguments to take in here, but the basic idea is this. Investors have pumped money into tech startups, even before these businesses have shown the ability to generate income. The BI article compares the current fervor to the late-90s internet bubble.

Social networking sites like Facebook, Twitter, Tumblr, and Pinterest have enormous, expressive user bases, which is incredibly valuable to advertisers. To some extent, Facebook and Twitter have found ways to integrate ads into their platform and generate revenue, but the latter two have yet to find success therein. Despite this fact, Yahoo saw fit to buy Tumblr for $1.1 billion.

BI argues that if the stock market slows and investors retreat, we could be in for a correction where companies without a solid revenue stream would “pop.”

Now, making a jump to real estate, we wrote several weeks ago about “bubble” language that was being used to describe the 2013 real estate market. Earlier in the year, record affordability conditions helped fuel a real estate boom. Was it a bubble?

We argued that the buyers are more qualified than ever, and lenders have maintained stricter lending policies. As we wrote last week, even more specific government policies are being put in place to protect against “risky” lending practices.

As such, market fluctuations following the pace of supply and demand don’t require alarmist “bubble” headlines.

Federal Reserve headquarters in Washington D.C.
Federal Reserve headquarters in Washington D.C.

Much of the drop in affordability came with a sudden spike in mortgage rates. Between June 20 and June 27, the Freddie Mac rate tracker logged an enormous 0.5% jump in the 30-year fixed, from 3.93% to 4.46%. By mid-August, the average 30-year fixed had reached 4.58%, according to the survey.

Since then, rates have dropped back. Last week, the average 30-year fixed reached 4.10%, which was the lowest reading since June.

This jumps and drops in rates have a big effect on what potential buyers can afford. Dan Green of the website “Mortgage Reports”, wrote of the recent improvement in rates:

“As compared to September, today’s buyers have six percent more purchasing power. If your purchase price was capped at $400,000 in September, you can now buy for $424,000.”

We compared current Paso Robles buying conditions with the beginning of 2013 in our recent article for the Paso Robles Daily News. We found that the 15% rise in median price coupled with the 25% jump in rates (from January 2013 through September 2013) would cause a jump of $336.95 per month in mortgage payments for an average borrower* (see borrower profile below).

Right now, we would tell potential borrowers this: it is a good time to buy. Rates have trended down, but we don’t think they will get much lower and approach early-2013 levels. The Federal Reserve will end quantitative easing in 2014 (its stimulus mechanism, which directly helped push rates to record lows), and when this happens, rates will rise again.

This week, watch for U.S. Gross Domestic Product data (Thursday) and employment data (Friday) – two of the broadest indicators of U.S. economic growth – as potential market movers.

Rates are still historically low. For example, the annual average level for the 30-year fixed for 2009 (5.04%), 2008 (6.03%), 2007 (6.34), are all well above the mid- to low- 4.0% rates of 2013, according to Freddie Mac.

Please see here for our latest rate update.

Questions about what you can afford? Give us a call at 805.543.LOAN for a free prequalification session with one of our expert loan officers.


*Borrower profile: 750 credit score, 20% down payment, 30-year fixed loan with a 30-day lock, and full impounds. Occupant borrower required. Includes 1.25% property tax rate and 0.25% property insurance.

Written by Central Coast Lending - Go to Central Coast Lending's Website/Profile