Wouldn’t it be great to be walking down the street and suddenly stumble upon a gold mine? One that generates wealth for you every day for the rest of your life? Of course, you would have to compete with others to get ownership rights. But if you fail, no worries. There’s another golden opportunity on almost every city block.
Except for the odd, once-in-a-generation housing crisis, a home is a safe-haven investment that will weather almost any economic storm. Like little a gold mine, it can not only improve your finances month to month, but also pay you a substantial appreciation over the years.
But haven’t the best deals already been picked by now? And aren’t interest rates much too high? Heck, mortgage rates are high enough to scare the Federal Reserve, by the sound of its announcement this week.
Well that is precisely why homes are still an opportune investment, for you now have a little more help coming from Chairman Bernanke and friends.
The Fed Facilitates Home Ownership
It wasn’t just this past week that the Federal Reserve has expressed its concern over the housing recovery and taken measures to help home buyers. Boosting the housing recovery has been on the Fed’s agenda since day one of the housing crisis back in 2008.
The reason a housing recovery made it onto the Fed’s “to do” list is because home ownership is the largest single store of wealth for American families. When the value of homes collapses, so does people’s wealth and, by extension, the economy. Stimulating the economy, then, requires stimulating property values.
Thus, early in the 2008-09 crisis, the Federal Reserve lowered interest rates, intended in part to lower home owners’ mortgage costs and keep them in their homes, as well as helping new home buyers get into the housing market.
Things went fairly well for a few years until the summer of 2012, when bonds reached all-time highs and their yields reached all-time lows. Suddenly in July of that year, bonds started to fall and yields began to rise, increasing the cost of mortgages with enough momentum to derail the housing recovery, which was still in its early stages.
So in September of 2012, the Federal Reserve introduced the monthly bond buying program, which was quickly expanded to include a regular infusion of $40 billion a month into mortgage-backed securities. By buying mortgages, the Fed was taking a load off of the banks’ books and giving cash back to the banks, which they could then reuse to finance more mortgages, which the Fed would then buy the following month. This week, the Fed announced it would continue that mortgage buying program.
But the Fed is doing even more to help home buyers. By using the remaining $45 billion of monthly stimulus to purchase long-term Treasuries, the Fed is helping bond prices remain high and interest rates remain low.
As the FOMC explained in Wednesday’s press release:
“Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery.”
Economists might be getting a little perturbed with the Fed at the moment for delaying a start down the long road to rate normalcy, but home buyers everywhere are just loving it. Good ol’ Uncle Fed is doing his best to get you into a home of your own.
Jump on the Opportunity
And there’s no better time to get in on the opportunity, as any month now all that Federal Reserve assistance will begin to be slowly reduced until it is finally chiselled away to nothing by mid to late 2014. So do what you can to take advantage now.
Although 30-year mortgage rates have shot up dramatically since talk of reductions to the Fed’s bond buying program started circulating five months ago – rising from 3.35% on May 2nd to as high as 4.57% last week – rates have since come down to the current 4.5%. It is quite likely rates will continue to slide a little lower over the next several weeks leading up to the Fed’s December meeting, when bond tapering may finally be initiated.
If bond tapering is announced at that last meeting of the year, interest rates will likely rise by a fair amount, perhaps another half to one full percent, very quickly. One percentage point may not sound like a lot. But as a comparison, the monthly payment on a $250,000 mortgage at 4.5% over 30 years is $1,266.71, while the same mortgage at 5.5% would cost $1,419.47 per month. That one percentage point would save you $152.76 per month, or a stunning $54,993.60 over the full 30 years.
Another reason to jump now if you can is that the refinancing boom is waning rapidly. As the last five months of rising interest rates have spurred home owners to lock in rates before they climb higher, the housing market is suddenly finding itself in a bit of a void. With this last-minute mini land-rush nearly over, not only have banks had to lower their interest rates to draw in more borrowers, but home sellers have had to lower their prices to draw in more buyers.
If you can take advantage of these lower home prices, a savings of just $50,000 would reduce your monthly payments on a $200,000 loan at 4.5% by $253.34 to just $1,013.37 per month, for a total savings over 30 years of an astounding $91,202.40.
Even if home prices have not fallen that much in your area, you can still knock a considerable amount off your mortgage by putting down a sizeable down payment. The more cash you put in up front, the more you save in interest payments on the smaller loan.
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It All Adds Up
Now let’s compare that to renting a modest apartment for, say, $750 a month. Over 30 years – assuming there are no rent increases at all to keep the calculation simple – you would have tossed a phenomenal $270,000 out the window. Now why would you do that if you could at all avoid it?
If you could squeeze another $250 to $300 a month out of your other expenses, you would be able to purchase that $200,000 home and be storing away $1,000 each and every month, most of which would go into equity.
How much would go into equity? With monthly payments of $1,013.37, you would be paying a total of $364,813.20 for your home over the 30 years. Of that amount, $164,813.83 is interest paid to the bank. That leaves $199,999.37 of your total payments that goes directly into your equity, which belongs to you, in addition to the appreciation of the property over time.
So what is the cost comparison? 30 years of rent throws $270,000 out the window in the form of rent to your landlord, whereas a 30 year mortgage throws $164,813.83 out the window in the form of interest to your bank. That’s a savings of some $105,186.17. Divide that by 30 years, and it would be like earning an extra $3,506.20 per year in salary, or an extra $292.18 a month. It’s like giving yourself a pay raise.
Of course, you can save even more by buying a smaller home at first, perhaps a small apartment condo. The point is to get into something while it’s still cheap to do so. At 4.5%, rates are almost half the historical long-term average of 8.62%.
Doing so will help you save more of your hard earned money by storing it in home equity. A few years down the line, you can always reuse your accumulated equity and trade up to a larger home.
All those For Sale signs you see along your street suddenly take on a whole new meaning when you see them for what they truly are… little gold mines waiting to be tapped.
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