The U.S. 10 year Treasuries dropped to 1.843% today. The 10 year U.S. Treasury rate is one of the key indicators in establishing mortgage rates. But why is it dropping if the U.S. economy is in such rough shape? The reason is that although the U.S. economy is in rough shape it, for the moment at least, apparently it is more attractive to world wide investors than anywhere else. Someone on the news recently referred to the U.S. economy as the "prettiest horse in the glue factory". An odd analogy to be sure, but the point was very clearly made.
With western Europe struggling with how to deal with their deficits, and their 10 year bonds skyrocketing upward (meaning higher and higher interest rates) along with an almost certain lowering of their credit ratings by the major credit rating agencies, worldwide investors are nervous about putting their capital in those currencies. So for now...the 10 year U.S. Treasury is "safe" based on the world wide investor sentiment.
But back to the question about whether to wait for even lower interest rates if you are in the market to buy a home. 2011 proved to be a much better year for home sales in the Mat-Su Valley real estate market with nearly a 10% increase in the number of units sold. But it also experienced a 1.7% drop in average sale price.
The decision as to whether to buy now or roll the dice and hope for lower interest rates needs to be based on this one simple mathematical equation. The payment based on an increase of 1% in interest over 30 years would need to have a reduction of price of 11% in order to have the same monthly payment. Given the substantial increase in the number of homes that sold in the Mat-Su Valley in 2011, it may be an indicator that we have either hit the "bottom" of the market or are very, very close. As the bottoming of a market occurs, units are always the first to go up with pricing to follow as the supply vs. demand dynamic occurs. It doesn't matter if it is homes, cars (remember cash for clunkers and how that made the prices of used SUV's increase?), or sweatpants at Wal-Mart. Price anything low enough, the inventory will go away and scarcity then drives the price back up. One does not need to have an degree in economics from Harvard to understand the basic principles of a market.
So the question you have to ask yourself is this...What do you anticipate happening first? Interest rates dropping another percentage point, or the average home price dropping 11% or more? If interest rates go up and home prices also go up, the affordability factor drops exponentially.
With Alaska recently placing 3rd in the country for the fastest growing state, http://www.adn.com/2011/12/21/2228072/alaska-is-3rd-fastest-growing.html I know what my guess will be.
But we will have to wait until this time next year to know how it actually all plays out.
Enjoy your Friday with a much needed respite from the snow!
Greg
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