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President’s Corner Downgrades, debt concerns and the impace on mortgage rates

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Kerry Suess

Posted: Friday, August 26, 2011 4:12 pm | Updated: 4:13 pm, Fri Aug 26, 2011.

Sara Sutachan, senior research analyst with the California Association of Realtors, says that with all of the headlines, the problems with U.S. Treasuries, the debt crisis here and abroad are adding another layer of uncertainty to an already uncertain marketplace right now.

The main question for housing in particular is where mortgage rates are headed. Standard & Poor’s downgraded the U.S. Treasury and Fannie and Freddie (GSEs) which caused financial market gyrations across the board. However, it is interesting to note that the other two rating agencies, Moody's and Fitch, have not made any changes to their credit rating of the U.S. Treasury or the GSEs.  While some have reported the downgrade is likely to lead to a bump in interest rates, the fact of the matter is the yield on the 10-year Treasury, to which most mortgage rates are tied, has hit recent lows because of what is going on in the global financial marketplace.

Interest rates generally react to future expectations of economic conditions, as well as other risk factors such as repayment risk and default risk. The downgrade was not a completely “unexpected” event, the fact the current market issues including the U.S. debt crisis and deteriorating economic conditions were already built into investor sentiment. Interest rates, including long-term mortgage rates, react to what investors expect to happen in the future. If investors feel uncertain about the stock market or other more risky assets, they would turn to a relatively safer investment.

At this point, U.S. Treasuries are a safe haven (regardless of their rating) compared to Europe and elsewhere where debt troubles are more widespread and mounting. Any instrument backed by the full faith credit of the United States government is a relatively safe investment, and markets are proving that to be true as investors flock to that safety. Increased demand for these safe haven instruments has caused yields, thus, mortgage rates to fall.

Because the downgrading of U.S. debt instruments is an unprecedented event, it is still unknown what or how large of an impact this will have on the long-term direction of interest rates. However, moving forward the biggest threat to the housing market is the lack of confidence in the economy in the days, weeks, and months ahead. If we can get over this hump, the markets can recover from the current financial crisis and move back into a recovery mode. For questions about Real Estate 411, please contact the Research & Economics Department at research@car.org.

Pending home sales in California fell 1.7 percent in July, according to C.A.R.’s Pending Home Sales Index (PHSI)*.  The index was 117.0 in July, down from June’s index of 119.0, based on contracts signed in July.  The index was up 4.9 percent from July 2010.  Pending home sales are forward-looking indicators of future home sales activity, providing information on the future direction of the market.

“While pending home sales dipped in July, all indications show we should continue at the current level for the next couple of months,” said C.A.R. President Beth L. Peerce.  “Pending sales have been ahead of last year’s level for the past three consecutive months and should be on track to finish the year even with last year’s pace.”

“Although July sales improved over last year, they were somewhat weaker than expected, given current prices and mortgage rates,” said C.A.R. Vice President and Chief Economist Leslie Appleton-Young.  “Economic uncertainty and recent developments in financial markets have caused hesitation among buyers, the effects of which we may see in the coming months.  We must see sustained job and income gains along with an increase in consumer confidence before we can expect to see consistent improvement in the housing market,” Appleton-Young added.

The statewide median price of an existing, single-family detached home sold in California dipped 0.3 percent in July to $294,230 from a revised $295,210 in June.  July’s median price was down 7.6 percent from the $318,550 recorded in July 2010. “Despite the uncertain outlook, interest rates are at near-record lows, and home prices are favorable,” said C.A.R. President Beth L. Peerce. “Well-qualified, motivated buyers who expect to own their home for more than a few years should carefully study their options now.” Remember that you should always consult a Realtor for your real estate needs. 

Questions or comments can be made to Kerry Suess at larpres2011@yahoo.com.

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