AP: Curveball coming for home buyers

[question everything]

Saturday, December 31, 2005

Curveball coming for home buyers

Turn in bond market means higher costs for borrowers who are planning on using an ARM.
By Aleksandrs Rozens
The Associated Press

NEW YORK -- The bond market turned upside down this week in a move that might end up costing many people more to buy a home.

The phenomenon is called an inverted yield curve -- when short-term interest rates rise above long-term rates -- and it hasn't happened for five years. What it could mean is increased monthly costs for borrowers using ARMs, whose popularity, especially among first-time home buyers, has helped fuel the real estate boom. "It forces first-time buyers into taking down the expectations for the price of the home they can afford," said Dave Jenks, Realtor with Keller Williams Realty International in Austin, Texas.

(snip)

The yield curve's inversion might have occurred because there were few investors in the bond market this holiday week. It also might be signaling that some investors are worried the economy could slip into recession later next year. Normally, long-term interest rates are higher than short-term rates because lenders and investors want higher returns for risking their money over a longer time. Either way, if long-term interest rates remain below short-term rates, demand for ARMs may diminish. That's because the difference in borrowing costs for an ARM and a 30-year fixed-rate loan would shrink.

Someone with a $200,000 home loan and a fixed-rate 6.25 percent mortgage, for example, can expect to pay $1,231.43 each month. An adjustable rate loan linked to five-year interest rates has a rate of 5.75 percent and monthly loan payments for that $200,000 mortgage are $1,167.15. In early January, the five-year ARM rate was at 5.03 percent and a 30-year fixed rate was 5.77 percent. That ARM rate could keep climbing if short-term interest rates continue to rise above long-term rates.

(snip)


Find this article at:
http://www.dailybreeze.com/business/articles/2138832.html

[Lex]

1. That's going to hurt those folks with an ARM,

ARMs always worried me anyway. Glad I went with a 15 year fixed a couple of years ago when the fixed rates were so low.

[bbinacan]

2. An inverted yield curve means

there is a belief that the approx. 4% GDP grow we've had will slow. I've heard about 3%. Because of the doubt, money is being placed on the short end of the curve. If growth is robust, the Fed will raise rates and the long end is less attractive right now. If it is certain that growth will slow, the long end of the curve is more attractive because the Fed will lower rates, causing investors to lock in long rates.

[Cocoa]

3. wrong Curveball

I thought this was about Judy Miller's drinking buddy.