Blanche Evans is a writer/editor and CEO of evansEmedia. Formerly, she was a senior editor with Realty Times, where she was named by REALTOR® Magazine as one of the most influential people in the real estate industry.
Why Borrowers Should Forget About Market Timing
Federal Reserve rates cuts don't automatically translate into lower mortgage rates.
May 1, 2001
The Federal Reserve recently lowered their short-term borrowing rates to banks. Does that mean that mortgage interest rates will go lower? Not necessarily.
The two aren't as related as they seem, but that may bring little comfort to anxious homebuyers who want to beat the mortgage market.
Although some economists may expect a slight drop in mortgage interest rates after the Fed makes such a move, it's more likely that rates will parallel other loan products, namely 10-year Treasury notes.
According to Robert Van Order, chief economist for Freddie Mac, the federal funds rate is for short-term loans, those made overnight by banks to other banks. Mortgages, regardless of their original terms, are kept an average of seven to 11 years by borrowers, putting them more comparable to the risk terms of 10-year Treasury notes. If Treasuries drop by 10 basis points, as they did after the last Fed rate cut of 50 basis points, mortgage interest rates may also drop by about the same amount.
Yet it may be hard to convince some borrowers who are hoping for big point cuts that they are still getting a good loan interest rate at today's rates. And that could cause them to miss the big picture if they are hesitating on buying a home based on loan interest rates.
Why do homebuyers watch mortgage interest rates so closely? Interest rates dictate how much home a borrower can buy in many cases. The difference of a percentage point in a loan product could be enough to knock some borrowers out of the home or their choice or the neighborhood they want to be in.
And that's turning some borrowers into market timers - they think they can pick the best time to jump in, and in turn, they may miss other opportunities--a better home or a more favorable sales price.
If market timing were that easy, everyone would be as wealthy as stock investor Warren Buffet and have 4 percent mortgages on fantastic homes.
But the reality is that even the world's most successful investor doesn't expect to buy stock at the very moment it is at its lowest price. While buying low is certainly a fundamental, Buffet chooses investments based on their ability to generate sustainable earnings and growth.
Mortgage interest rates are a fundamental of the home buying process, but they are only one factor. There are also the choices of homes, neighborhoods, sales price, remodeling costs, terms, loan products, and other variables to consider. To be successful at market timing, borrowers not only have to time the lowest interest rates, but do so while choosing the best loan product available all while grabbing the best house at the lowest price! Although it's possible to do well on one or two points, such as finding the perfect house, the odds of coming out at the very top of all those variables is simply unrealistic.
That's why borrowers should forget about market timing and jump in when some factors are good, because they will never be perfect. There's a lot to be said for finding a good home, at a fair price, in a desirable neighborhood.
Borrowers should keep in mind that the difference of a few basis points in interests matter little in the scheme of things. Homebuyers likely won't be occupying the home for the full term of the loan, and in the meanwhile, opportunities to refinance may arise. If interest rates should go down, the borrower can have all the fun of trying to beat the re-fi market.
(c) Copyright 2001 Realty Times. Reprinted with permission.
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