Fed rate cut--How it will affect mortgage market

Here is an exert from a good article by Kathleen Pender at the Associate press: 9/18/07:

People with home equity lines of credit will benefit first. These variable-rate loans are typically tied to the prime rate, which closely follows the federal funds rate. The prime rate is 8.25 percent today. If the federal funds rate drops by a quarter point, the rate on home equity loans will likely follow suit in the next month or so, says Keith Gumbinger, a vice president with HSH Associates.

Borrowers who have an adjustable-rate mortgage tied to the one-year Treasury yield could also benefit from a rate cut, though not directly. Treasury yields fell this summer, partly in anticipation of a Fed rate cut. An actual rate cut will help keep those rates low and if the Fed indicates a willingness to cut rates more aggressively, they could fall further.

"In early July, a Treasury-based ARM was around 7.75 percent. Now it's around 6.75 percent," says Gumbinger.

If you took out a Treasury-based ARM that was fixed for three or five years and the rate is about to go up, you will still see a big payment jump. It just won't be as big as it could have been.

On the other hand, people with ARMs tied to the London Interbank Offered Rate might not get any relief from a Fed rate cut. While Treasury rates were going down, Libor was going up. Although they normally move in the same direction, corporate credit concerns have put upward pressure on Libor and downward pressure on Treasury yields. A Fed rate cut won't automatically lead to a lower Libor rate.

Likewise, fixed-rate loans won't necessarily get cheaper. Unlike ARMs, which are tied to short-term rates, fixed-rate loans follow long-term interest rates, such as the 10-year Treasury note yield.

Over the past two months, rates on conforming fixed-rate mortgages - which can be sold to Fannie Mae and Freddie Mac - have fallen along with the 10-year Treasury yield. But they won't necessarily fall more if the Fed cuts short-term rates, and they could conceivably go up if investors fear that one or more rate cuts could stoke inflation"

1/2 Point, & Contrarian Investing

I've had conversations with several clients recently who are concerned about the equity markets and how that is affecting home loans and real estate in general. While I understand their concerns with what is occurring in the mortgage market. On the flip side of the argument, there are others who are "on the fence" as well, and may be sitting the rest of 2007 out. That causes a reduction in demand, which the current sellers definitely are feeling. As a result their level of motivation and willingness to negotiate is increasing dramatically. With the Fed's 1/2 point rate cut, that is going to have some positive effects on consumer confidence, though the trickle down affect to adjustable rate mortgages and the like, may take a bit of time. Often times contrarian investing can achieve the best long-term results. Buying, when others are selling and other consumers may be hesitant to step in, as longs you are planning to hold 3+ years, ensures that you purchase at a time when sellers are motivated and you can achieve a great price. Waiting 6-18 months, may just put you in the pool with many of the other out-of-town buyers and you may try to come back in when sellers are much less motivated, and you are competing with the flood of buyers back into the market.

And that is the best case scenario in my mind. If rates go up in the next year or two, and prices soften further (I strongly doubt they will decrease more than 5%--when my gut feeling is that we are going to see more of a level market with no movement each way), you could be in a situation where your monthly payment is significantly more, even if you paid slightly less. When I looked at the actual numbers from some of these prices decrease, but mortgage rates increase scenario, it was a real eye-opener for me, as well as for many of my clients.

My recommendation is that if you want in on the Santa Barbara real estate market, find the right property now, negotiate hard, and purchase it for a medium to long term hold.

Looking for a duplex in a good neighborhood?

If you want a duplex, for under $900k, there are a handful in Santa Barbara at any given time. Now if you want that duplex to also be in a good neighborhood, for that price, that is a tough bill to fit. There is one fantastic deal located in the Samarkand neighborhood at 22 Romaine. It just got reduced to $895k (was originally $995k) and it won't last long at that price. Two, 2/1 bath units stacked on top of each other. Located at the street's dead end. Call me for details: 805-637-7148.

Great time to purchase land in Santa Barbara

If you are looking to build a custom or spec home, it is a fantastic time to purchase land in Santa Barbara. Since construction starts are down, and many contractors have adjusted their business back to remodeling (as the market has leveled off), the demand for vacant land has decreased. As a result, sellers have adjusted prices downward to create some very attractive values on some beautiful parcels of land. City lots start at $600k on the very low side and go up from there, while larger parcels (1+ acre), many with great ocean or mountain views start around the $1 Million mark. While land still isn't cheap by any means, it is a much better move to buy while the market is level and demand is still fluctuating, than waiting another couple of years until the market is stronger. You'll have more competition if you wait, which means less motivated sellers and higher prices.





We have one incredible parcel for sale right now in the 93108 Zip Code. For 3.59 Acres of secluded oak forest, and Panoramic ocean, city, and mountain views, this lot is very competitively priced at $1,395,000.















The building site, located at the top of the parcel is mostly cleared and partially cut, and the sale comes with preliminary approved plans for a 3300 SF (4500 SF gross) Mediterranean style home capturing those magnificent views from almost every room.

Here are some additional pictures and additional information: Santa Barbara / Montecito Panoramic View Lot