Some 33 percent of households in the state were able to afford their first home in the last three months of the year, according to the CALIFORNIA ASSOCIATION OF REALTORS®. That’s up from 25 percent in the same three months of 2006. The trade group for real estate agents calculates affordability based on the minimum household income required to make a 10 percent down payment and secure an adjustable interest rate loan at 6.21 percent.
MAKING SENSE OF THE STORY FOR CONSUMERS• As the median home price declines, many potential home buyers who had previously believed an entry-level home was out of reach may now find themselves in a position to buy.• The median price of an existing, single-family detached home in California during December 2007 was $475,460, a 16.5 percent decrease from the revised $569,350 median for December 2006.• Prospective buyers for the most part need not worry about the bidding wars that drove up home prices during the housing boom.• First-time home buyers needed to earn an annual income of $82,200 to buy an entry-level home in California in the fourth quarter of 2007, down 15 percent from the $96,600 annual income needed to buy during the last three months of 2006.To read the full story, click here.
Friday, February 29, 2008
Thursday, February 7, 2008
Fed Lowers Interest Rates- What Does This Mean For San Diego Real Estate
In order to answer this question, it is helpful to understand the four major interest rates that are affected by the Fed:
Discount Rate (currently 3.5%) - the interest rate that banks pay when they borrow money directly from the Fed. The rate has been largely symbolic in the past because banks prefer to get short term financing by:
Issuing "commercial paper" – these are short term IOUs of typically one to ninety days
that are sold on the open market to Wall Street investors. Interest rates on these short
term loans are often better than the discount rate offered by the Fed.
Borrowing money from other financial institutions using the Fed Funds Rate as illustrated
below. In most cases, this rate is also better than the discount rate offered by the Fed.
Borrowing money using the Fed's new "Term Auction Facility" that allows Banks to bid
anonymously on what interest rate they want to pay when they want to borrow money
from the Fed.
Fed Funds Rate (currently 3%) - the interest rate that banks pay when they borrow money from each other here in the US. This rate is also determined by the Fed because banks in the US are part of the Federal Reserve System. You see, the Fed's main role is to maintain "monetary stability" by keeping a close eye on the flow of money throughout the economy. One way they do this is by regulating the interest rates that banks charge each other for short term funds.
LIBOR Rate (One Month LIBOR is currently 3.77%) – the London Interbank Offered Rate (LIBOR) is the interest rate that banks pay when they borrow money from other banks anywhere in the world (primarily in the international wholesale money market based in London). There are various types of LIBOR rates including the 1 week LIBOR, 1 month LIBOR, 6 month LIBOR, and 1 year LIBOR; these are the rates banks would pay if they want to borrow funds for 1 week, 1 month, 6 months, etc. Although the LIBOR rates are determined by the financial markets at any given time, they are very closely relatedto the Fed in that LIBOR most often changes when the market anticipates that the Fed will change their
Fed Funds Rate. LIBOR is the base rate that is used on most adjustable rate mortgages (ARMs) in the US and large corporate / commercial loans. The reason LIBOR is used most often for US adjustable rate mortgages is because LIBOR is really the most accurate measure of a bank's cost of borrowing funds since most banks do business internationally these days.
Prime Rate (currently 6%) – the Fed Funds Rate + 3; this is the base rate that is used for most
consumer loans such as credit cards and home equity lines of credit, as well as most small business loans. Like the LIBOR, the Prime Rate is also tied to the Fed Funds Rate.
You see, as the Fed lowers the Fed Funds Rate, the business and consumer-based interest rates of LIBOR and Prime will also godown as illustrated above. The Fed would be reluctant to continue lowering rates if they feel that businesses and consumers would start borrowing and spending so much money that inflation will go up significantly. Remember, the Fed's main goal is to "maintain monetary stability" by keeping a close eye on the flow of funds in the US economy.
It would be reckless of them to artificially encourage too much borrowing and spending as this would only artificially drive up asset prices and cause money to lose its purchasing power. This phenomenon is known as "inflation." The good news, however, is thatinflation seems to be under control based on some of the latest economic reports. How does the Fed affect mortgage rates?
Well, if you have a home equity line of credit based on Prime or short term ARMs based on LIBOR, you should see an immediate reduction in your interest rate in the coming weeks. However, if you are considering a fixed rate loan or longer term ARM with a fixed period of 3, 5, 7 or 10 years, rates on those types of loans are not directly related to the Fed. Instead, these rates are closely tied to the Mortgage Backed Securities that trade on the bond market. For more on how this process works, contact us at (619)895-0389
Discount Rate (currently 3.5%) - the interest rate that banks pay when they borrow money directly from the Fed. The rate has been largely symbolic in the past because banks prefer to get short term financing by:
Issuing "commercial paper" – these are short term IOUs of typically one to ninety days
that are sold on the open market to Wall Street investors. Interest rates on these short
term loans are often better than the discount rate offered by the Fed.
Borrowing money from other financial institutions using the Fed Funds Rate as illustrated
below. In most cases, this rate is also better than the discount rate offered by the Fed.
Borrowing money using the Fed's new "Term Auction Facility" that allows Banks to bid
anonymously on what interest rate they want to pay when they want to borrow money
from the Fed.
Fed Funds Rate (currently 3%) - the interest rate that banks pay when they borrow money from each other here in the US. This rate is also determined by the Fed because banks in the US are part of the Federal Reserve System. You see, the Fed's main role is to maintain "monetary stability" by keeping a close eye on the flow of money throughout the economy. One way they do this is by regulating the interest rates that banks charge each other for short term funds.
LIBOR Rate (One Month LIBOR is currently 3.77%) – the London Interbank Offered Rate (LIBOR) is the interest rate that banks pay when they borrow money from other banks anywhere in the world (primarily in the international wholesale money market based in London). There are various types of LIBOR rates including the 1 week LIBOR, 1 month LIBOR, 6 month LIBOR, and 1 year LIBOR; these are the rates banks would pay if they want to borrow funds for 1 week, 1 month, 6 months, etc. Although the LIBOR rates are determined by the financial markets at any given time, they are very closely relatedto the Fed in that LIBOR most often changes when the market anticipates that the Fed will change their
Fed Funds Rate. LIBOR is the base rate that is used on most adjustable rate mortgages (ARMs) in the US and large corporate / commercial loans. The reason LIBOR is used most often for US adjustable rate mortgages is because LIBOR is really the most accurate measure of a bank's cost of borrowing funds since most banks do business internationally these days.
Prime Rate (currently 6%) – the Fed Funds Rate + 3; this is the base rate that is used for most
consumer loans such as credit cards and home equity lines of credit, as well as most small business loans. Like the LIBOR, the Prime Rate is also tied to the Fed Funds Rate.
You see, as the Fed lowers the Fed Funds Rate, the business and consumer-based interest rates of LIBOR and Prime will also godown as illustrated above. The Fed would be reluctant to continue lowering rates if they feel that businesses and consumers would start borrowing and spending so much money that inflation will go up significantly. Remember, the Fed's main goal is to "maintain monetary stability" by keeping a close eye on the flow of funds in the US economy.
It would be reckless of them to artificially encourage too much borrowing and spending as this would only artificially drive up asset prices and cause money to lose its purchasing power. This phenomenon is known as "inflation." The good news, however, is thatinflation seems to be under control based on some of the latest economic reports. How does the Fed affect mortgage rates?
Well, if you have a home equity line of credit based on Prime or short term ARMs based on LIBOR, you should see an immediate reduction in your interest rate in the coming weeks. However, if you are considering a fixed rate loan or longer term ARM with a fixed period of 3, 5, 7 or 10 years, rates on those types of loans are not directly related to the Fed. Instead, these rates are closely tied to the Mortgage Backed Securities that trade on the bond market. For more on how this process works, contact us at (619)895-0389
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