Imagine if every house in the MLS had a price reduction at the same time.  Would that give you an incentive to buy one?  What if I told you that the price cuts wouldn't last and would soon be back to their original price - would that get you motivated?  Well, with an unexpected drop in mortgage rates, it is as if every house for sale in Austin, Texas just had a price cut.

As recently as a few weeks ago, the general consensus was that interest rates were going to steadily rise this year, getting up to the 6% range.  That was before the financial crisis in Europe turned worse.  The result is a little gift for American homebuyers.  As investors from around the globe bought US bonds for safety, that drove the 10-year Treasury bond yield down.  Since 30-year mortgages generally follow the 10-year T-bill, the rates have fallen.  According to Freddie Mac, the average 30-year mortgage rate last week was 4.84%, the lowest since December 2009.  Rates on the 15-year were at 4.24% (the lowest since they started tracking).  In general, a 0.1% reduction in the 30-year mortgage rate is approximately equal to 1% of the purchase price.  With rates down about 0.4% in just over a month, it is suddenly like the prices of homes have been cut almost 5%.

Combine that with a big drop in the number of buyers in the marketplace, and I believe the next month or two may be the best time this year to buy a house.  Because the federal tax credit ended on April 30, we borrowed a lot of buyers from the next few months.  Here in Austin, the number of contracts written in May is running about half of what we saw in April.  According to the Mortgage Bankers Association, applications for new purchase loans hit a 13-year low just two weeks ago.  Therefore, sellers who need to sell soon will likely feel the pressure to lower prices.  So am I just blowing hot air when I say that the next two months could be the best time to buy this year?  Let's find out.  Suppose you purchased a $300,000 house with 20% down in mid-April when rates were around 5.25%.  That puts your monthly payment at $1,325.28.  Now contrast it to locking that same $300,000 at 4.75% which is a monthly payment of $1,251.95.  Even accounting for the $8,000 tax credit, you are still ahead with the 4.75% mortgage (now, I didn't take into account if you took the $8,000 and invested at x%, etc, etc, but I think this demonstrates the power of a reduced mortgage rate).  If the $300,000 house can be obtained for less in the next two months because of the lack of buyers, then you'll really be ahead.

If this has got you thinking about buying a home in the Austin area, contact me to get the ball rolling.  I can be reached via email, online form, or at 512-735-7200.

If you are not moving but want explore refinancing, contact Lynn Morenz of Capital City Funding at 512-565-0799.  (Disclosure:  I am a minority shareholder (less than 4%) in Capital City Funding)

Some of the data was gathered from an article in yesterday's Wall Street Journal.