Federal Reserve's Rate Hikes Grind to a Halt

Some Reservations at The Federal Reserve

Almost all major financial analysts are predicting that the Federal Reserve, under Ben Bernanke's direction, will leave the Fed rate of 5.25% untouched at their meeting today. Now, with the recent reports indicating a downturn in sales of durable goods, plus the continuing drop in new housing starts and home values, some think the freeze on rate hikes will last through the end of the year.

There are some signs that the cooling economy is still stable. The sale of homes actually crept up slightly from July to August, by about 14%, and consumer attitude is still very positive. Still, the backlog of homes for sale on the market, decreases in fuel prices, and a drop in consumer spending all indicate the the Fed's policy of raising rates at every meeting for three years has succeeded in driving down inflation. But have they gone too far? Unfortunately no one, including Ben Bernanke and the directors of the Federal Reserve Bank, knows for sure. As I've mentioned before, there are problems with balancing the economy by controlling interest rates, not the least of which is that the full effects of rate changes aren't apparent until 12-24 months after the change takes effect. Because of this lag in cause and effect, the Fed may already have increased rates above what was necessary to slow inflation to a standstill, and a recessionary trend may be developing. What this means to homeowners and prospective home buyers is that currently rates for home mortgages are fairly stable, and have actually moved slightly lower in the last few months. And interest rates on fixed rate mortgages are still very low.

Let's look at what these conditions mean for homeowners thinking about re-financing, new home buyers, and sellers.

Homeowners

Many homeowners have been misled by all of the news and talk about the Federal Reserve's rate increases. They assume that because the Fed Rate has increased by 4.25% in the last 3 years, that mortgage rates have gone up by that amount, as well. This simply isn't true, and many homeowners with current fixed rate mortgages at 7% or above, or who are hanging on to older adjustable rate mortgages (ARM's) with wide spreads, could do much better by re-financing. The fact is that back in June of 2003, when the Fed Rate was at 1%, the best available rates on mortgages were averaging 4.75-5.125%, a spread of about 4%, with fixed rate mortgages significantly higher than ARM's. Right now, with the Fed Rate at 5.25%, the best average rate on a mortgage is running about 6.125-6.5%, a spread of only about 1%! No matter what your credit rating or debt situation, the average rate you could get today, versus what you would have gotten when rates were at their lowest, is only about 1% higher. Plus, due to other economic factors such as changes in the bond market, fixed rate mortgages are actually averaging rates that are almost the same as ARM's, making them an excellent deal for consumers. So if all of the talk about high rates has scared you off re-financing your current mortgage, take a hard look at what your current rate really is, and contact a Licensed Mortgage Broker to find out if you can do better.

Home Buyers

As I stated in a previous article, it's a buyers market, and that still applies. There are real bargains to be found in housing, as more sellers tire of waiting for a sale, while watching their home's value slowly decrease. Plus, rates on mortgages for new purchases are usually lower than those offered for a re-finance. Waiting for the Federal Reserve to perhaps lower rates slightly sometime next year, may mean that you miss out on buying a home at a bargain price, and the small amount you "might" save in interest, won't even be close to the amount you could save by buying at a lower price. For example, if you can buy now at a 5% below market value price on a $250,000 home, financed at 100%, you would save $12,500 off the price, and finance $237,500 at 6.5%, for a payment of $1501.16 on a 30 year fixed rate mortgage. If the Federal Reserve drops rates by .25% early next year, but the housing market gradually improves, and you have to pay full appraised value for the same home, you'd be financing $250,000 at about 6.25%, for a payment of $1539.40! Plus you will have paid $12,500 more for the same house, and have less equity in that home for the entire time you own it.

Home prices have fallen slightly in the last few months, but there are signs that trend is coming to an end, and no one predicts it to continue in the long term. You only have to decide if you want to already own a home when the recovery is in full swing, or wait until then and pay more for the same house.

Sellers

Although the short term prospects for people trying to sell their home appears bleak, there are some things you can do, depending on your situation, to improve your odds of making a deal you can live with. You basically have two options, and the first one is pretty simple. If you have no pressing need to sell your home quickly, either pull it off the market until conditions improve, or just sit back and wait out the current situation in the housing market. If you do decide to leave it up for sale, consider using some of the suggestions under option two. Or, if your need to sell isn't based on location, but instead on the size of your current home or it's amenities, consider re-modeling or an addition to solve those problems. You need to be careful not to improve your home to the point where you "out price" it's value for the neighborhood its in, but in general home improvements give you a very good return on your investment. This is especially true in the current market, when contractors need work, you can often negotiate better deals, and it is an even better deal if you can do some of the work yourself.

On the other hand, if you really do need to sell your home as soon as possible, there are several things you can do to improve your chances of selling it quickly. First, make sure your home is "ready to sell". Inexpensive repairs or upgrades can make a big difference in how buyers view your home. Walk through and around your home with "buyers eyes", or have a neighbor do it with you, and look for things that are negatives, that can be easily and cheaply turned into positives.

Some suggestions, if needed:

• Re-paint the exterior and interior with neutral colors. Many realtors and others suggest yellow for the exterior and very light cream for the interior, but buyers get tired of seeing so many yellow houses with stark white interiors. Still, keep it muted, nothing too bright or out of the ordinary. Consider using a three color scheme for the exterior. For example, a very light gray or tan body color, with a medium gray or brown trim color on soffits and shutters, and a dark gray or brown accent color on window ledges and the front door. You can also do the same scheme with other colors like green or blue (but make sure they are muted, think sage green and gray-blue shades), and also consider substituing white for your trim color in any of these. For the interior, stay very light to make your home appear larger, but consider using a darker cream color in certain rooms to make it appear warmer or cozier. The main thing is to follow a consistent color theme from room to room. Bathrooms and the kitchen are two areas you can consider going a little wild with paint color, just don't over do it.
  
  Speaking of kitchens and bathrooms, depending on your budget, and how much of the work you can do yourself, consider adding new faucets, sinks, or complete vanities. (Don't forget to clean throughly around all additions! A new faucet with a hard water ring around it doesn't impress anyone.) Launder or replace shower curtains, bath mats and area rugs. Make sure bathroom accessories are minimal, look new and clean, and match. Buy a few new, good quality towels, and put them out on towel racks for "show".


• Edit, edit, edit! If necessary, rent a storage locker for a few months. You want your home to appear lived in, not cluttered. Clear tables, cabinets, bookcases of all knickknacks and personal pictures, etc., then replace just a few, grouped together by similarity. A good guide for most people is to leave half or less of what was there, and group the items in odd numbers, three or five for example. Take away every canister, appliance, or anything on your kitchen counter that you can, and clean out all of your pantry, kitchen cabinets and drawers. Sell, store or give away anything you haven't used in the last 6 months. Remove furniture that is seldom used to create a more spacious look. For example, if your dining room set has 8 chairs and a leaf in the table, and 2 chairs sit on either side of your china cabinet, put the extra chairs and the leaf in storage. If the room still seems crowded or cramped, consider putting the buffet in storage, and replace it with a narrow hall table from the cramped foyer. Store personal items such as toothbrushes and razors out of sight in drawers or cabinets. Speaking of drawers and cabinets, clean them and your closets out now. It will make moving easier, and make storage appear more spacious. Clothes and shoes that you don't wear regularly, Christmas decorations, photo albums and scrapbooks, even about half or two-thirds of the books on your bookshelves can all be placed in storage. Don't forget the basement and garage. Remove and store anything that keeps you from easily parking your car in the garage. Paint and household chemicals, bicycles or exercise equipment (unless it is in a dedicated "workout room"), all need to go. Consider having a yard sale to get rid of anything you don't want to move with you, and donate the rest to charity immediately after the sale. Then go through and see if you still have any cramped feeling areas or rooms, and edit some more. Then have your friend or neighbor come back through and point out any problems, and edit some more.
  
  


• Clean, clean, clean! I've mentioned these last two things 3 times each, not because they are very important, although they are, but because you should do each of them 3 times! Clean your entire house from top to bottom, inside and out, with special attention to the bathrooms and kitchen. This should include "cleaning up" your landscaping, as well. Trim hedges and overgrown plants, trim trees (or hire someone), remove dead or sickly plants, add plants to create a theme to your landscaping, if you don't already have one. Mow your lawn high (it looks better), trim around it, and add fresh mulch to flower beds, around trees, etc. Sweep or hose off side walks and the driveway, use a special cleaner to get rid of any oil stains. Rent a pressure washer and buy cleaning solution to go with it, if you have a lot of stains to remove, and consider using concrete stain in a color that complements your homes base color, on any really rough looking driveway or walk way, after its been pressure washed. Then go back to the inside, and clean again. Look for areas you may have missed, cobwebs up high on a cathedral ceiling, for instance. Shampoo your carpets, scrub grout lines, reseal or wax tile and linoleum floors, clean windows inside and out, polish mirrors, wax or oil wood furniture, vaccuum and use odor neutralizer on all fabric furniture, launder or dry clean drapes, clean blinds, etc. Really get into every corner, knook and cranny, and make it spotless. Clean trash cans and ashtrays, clean picture frames and polish glass, clean and degrease kitchen and bath cabinets, clean out and wipe out the refrigerator (don't forget behind it!) and use Pledge or lemon oil, or the appropiate sealer or wax, on your counters and cabinets to make them sparkle. Wait a day or two and rest up, then walk through and clean any ares you might have missed. Now comes the hard part, maintain this level of cleanliness until you sell your home. Pick up after yourself daily, vaccuum and dust often, and mop floors and polish counters, furniture and glass weekly.
  
  


• Market your home every way, every where, all of the time.
  
  If you are using a realtor, make sure your contract specifies that any buyer you find on your own is excluded from your broker aggreement. Tell all of your friends, acquaintances, co-workers and anyone you meet that you are selling your home. They may not be interested, but they may have other aquaintances that are. If you are selling it yourself, invest in a professionally printed sign, put an ad in the newspaper, list it on free on-line services. Consider putting an ad in the paper advertising an open house one Saturday or Sunday. Contact a Mortgage Broker to assist your prospective buyers with their financing. Many of the better mortgage brokers will provide you with pre-printed handouts for your open house, signs for your yard, free pre-approvals for your prospects, and some will even give you free listings on-line on their web-sites. Some will do a walk through with you, pointing out areas you may have missed when you were repairing, editing and cleaning. They will also do an Electronic Valuation Appraisal of your home, and give you a "real" estimate of the price you should be asking. All at no cost to you. Once you a Mortgage Broker lined up to assist your prospects, put "Financing and Free Pre-approvals Available" in your advertisements. Research and use every available resource you can find to get your home in front of as many people as possible, and make your home the best looking one they have seen.
  
  If all else fails, and you have substantial equity in your home, consider dropping your price slightly, and advertise it as selling for below appraied value. If a prospect wants to know why you are selling below market value, explain that you have owned the home for quite a while, have substantial equity, and can afford to sell it slightly below appraisal and still make a reasonable profit. If you are selling it yourself, you could also explain that you are discounting the price slightly because you will have broker fees to pay. Do not tell them that you are "desperate to sell" or "need to move for your job" or the "market in this neighborhood is terrible right now", or anything else that will cause them to make an offer that is ridculously low. Besides, these aren't the "real reasons", they're just conditions that have caused you to reconsider the amount of profit you can live with.
  
  

So this is the bottom line. If you are considering buying a house, or re-financing your current home, conditions are probably a lot better than you thought. If you are selling your home, you will face some competiton, and demand is low, but there are still many buyers out there, and almost 110,000 homes were sold nationwide last month alone. You just may have to work a little harder to make sure that yours is one of the ones that sell this month.

FMI