Wannabe Homeowners: Now Is the Time to Buy

John Grgurich
Buying a new home
Buying a new home


If you've been putting off buying a house -- playing a game of chicken with long-term interest rates to see just how low they can go -- now might be the time to make your move.

Freddie Mac is reporting that the 30-year fixed mortgage rate averaged 3.59% for the week ending Aug. 9, up from the previous week's average of 3.55%. Two weeks ago, the rate was 3.49%, the lowest rate ever for long-term mortgages. The 15-year fixed rate was up as well, from 2.83% to 2.84%.

These are small moves to be sure, especially in the 15-year rate. But with coinciding news that housing demand is outstripping supply and that home prices are starting to edge up, it's possible that long-term mortgage rates have finally bottomed out and that this homebuyer's dream era of historically low rates is starting to move behind us.

Rising Rates + Rising Home Prices = Time to Buy?

The data comes from Freddie Mac's Primary Mortgage Market Survey, or PMMS. The PMMS is a weekly look at the mortgage market's most popular rates:

  • 30-year fixed

  • 15-year fixed

  • 5/1-year hybrid adjustable

  • 1-year adjustable

Freddie gathers the data by surveying lenders, and it has been conducting the benchmark survey since 1971. And as this mortgage data has come to light, so has corroborating Freddie house price data.

The Freddie Mac House Price Index is showing that from May to June of this year, prices rose 1.39%. Looking at the numbers year over year (June 2011 versus June 2012), home prices are up by 1.02%.

Again, this isn't a massive rise, but it is a rise -- something the housing market hasn't seen for ages.

It's All in Your Head -- Which Makes It Real

What economic forces are at work here? According to Freddie's Chief Economist Frank Nothaft: "... Rates inched up again this week following stronger-than-expected employment reports ... In addition, the number of announced corporate layoffs fell 45% in July compared to last July."

In other words, while the country is still not adding jobs the way it needs to be, the numbers are better than expected.

So people may be feeling a bit better about things overall. They feel more secure about their jobs, perhaps and, as such, feel more secure financially. When this happens, even though it's primarily psychological, they're more likely to spend, even on large purchases like houses.

%Gallery-160528%Anything else to consider? We've also by now had several rounds of quantitative easing, or QE. QE is when the Federal Reserve steps into the bond market and buys U.S. Treasuries. In order to do this, it essentially prints money, which is what central banks have the power to do. QE, therefore, puts more money into circulation, and Economics 101 tells us that when you put more money into circulation, the cost of goods will go up -- goods like houses. This is the downside of QE: the risk of inflation. But in the case of the U.S. housing market, it's so overdue, having been depressed for so many years, that some inflation is likely a welcome sign.

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So, is it time to run out and buy a house, before rates and home prices rise even further? Even if 30-year and 15-year fixed rates aren't about to start zooming up, they're at historic lows and are unlikely to go any lower. The situation is similar with house prices: They may not be about to rocket up (let's hope not -- a housing bubble is what caused the financial crash), but they are unlikely to get much lower.

As a prospective homeowner, this might be a perfect storm of low rates, cheap houses, and a recovering economy -- even if it's an ever-so-slightly recovering one. But as always before a major purchase, make sure it makes sense for your personal financial situation.

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John Grgurich is regular contributor to The Motley Fool.