The Fed Works to Motivate Buyers off the Fence

Fed slashes key rate to 3.5%
Citing weakening economic outlook, Federal Reserve makes biggest cut in nearly 24 years - three quarters of a point.

I have notice that my phone has really been ringing a lot, particularly considering it is the first month of a new year. According to CNNMoney, Morgage applications have also been on the rise.

WASHINGTON (AP) -- Mortgage application volume rose 8.3 percent during the week ending Jan. 18, according to the trade group Mortgage Bankers Association's weekly application survey.

The rise in mortgage applications is largely due to refinancing. The favorable rates which have been enticing current homeowners will likely be spurred even lower by the latest action of the Fed. This is likely to lure more borrowers into the home buying market.

In conversations I have had recently with buyers, the benefits of home-ownership often out-weigh concerns of a recession. From the perspective of well-positioned buyers-- as they consider the importance of all of their monetary decisions-- home ownership still tops their financial goals. For buyers who plan to stay in their new house at least five to seven years; the combination of good mortgage rates and optimism regarding the future value of Bay Area property makes owning a home a reasonable investment. "Either way we need a roof over our head. Lower interest rates make the monthly payments on a home more affordable," states one home buyer. There are also the intangible benefits of owning your own spot on the planet. You can change anything you want and (if you make your loan payments) no one will ask you to leave. If the recession continues, more may chose beans and rice over caviar; yet, many will also make the leap toward home ownership.

Hop, Skip and a Jump in Property Value

Ten years ago, if an East Bay buyer could afford to be particular, first on the list was a Bay view. The primary objective of today's buyer is to be "walking distance."* This is a dynamic cultural shift. New Urbanism and the subtle move away from car culture have worked to protect home values in our pedestrian centers. "Quality of life" now respects the value of what's at your doorstep. Locally, neighborhoods surrounding Piedmont Avenue, Grand/Lakeshore, Rockridge, the Gourmet Ghetto, Westbrae and Solano Avenue have more cachet than ever.

Discover your home's walk-ability score at walkscore.com. Enter an address and the site will tell you what is nearby (gr0ceries, libraries, cafes...) and attribute a Walk Score. See how our office rates as mapped by Walk Score on the sidebar to the right (scroll down.)

*Note: As Realtors we don't advertise properties with the words "walking distance," in keeping with Article 10 of our Code of Ethics, as we don't intend to discriminate against non-walkers. We do advertise, "shops nearby." "Rolling distance" is more inclusive and extends the local amenities to the larger realm of all amenities within bicycle distance.

National Association of Realtors Price Analysis for the San Francisco - Oakland Region

Summary (click here for full report)

Sales activity has been down significantly, but home prices have declined only minimally in the San Francisco area. The local economy is fundamentally sound generating jobs at a respectable pace. The national economy is also fundamentally sound due to rising exports and business spending. Consumer spending will be a bit weaker because of stagnant home prices and the accompanying wealth impact. One interesting observation is that the continuing low mortgage rates have not led to more buyers - implying that there is an issue of confidence or lack thereof - in the home buying decision. Also, the recent subprime fallout is a concern, though the shakeout will be good for the housing market over the long-run as the market eliminates bad mortgage lenders.

Inflation appears to be contained. Both the headline and the core consumer price index decelerated to 2.8% and 2.1%, respectively, over the past 12 months to September. Better yet, most economists anticipate a further deceleration of inflation in 2007. Such an outcome could well lead the Federal Reserve to cut the federal funds and prime rates down the road. A federal funds rate cut is no guarantee of a fall in mortgage rates, but the signal that inflation is contained will force bond buyers to demand lower inflation premiums, and hence, lead to lower mortgage rates as well.

With job additions continuing and mortgages rates hovering at about 6.4% as of early October 2007, the housing market is poised to slowly climb back. If, however, mortgage rates were to rise to 7.5% or higher, then the housing market would continue to limp along with the possibility that home prices and overall housing wealth could stagnate. If rates were to move lower, then the market will recover at even a quicker pace.