|Some ARM borrowers will refi in 2007
Median house prices began falling on a year-over-year basis in the fall, and the National Association of Realtors predicts that falling prices will persist into January and maybe February "before gaining positive traction," as an NAR news release put it.
is that home sales may have
reached a low in August,"
the Realtors' chief economist,
David Lereah, says, adding he
expects the pool of unsold houses
to shrink early in 2007 "to
the point where home prices
will rise, but at a slower pace
than historical norms."
Such a real estate
environment is called a buyer's
market because the buyers call
the shots. The buyer's market
is going to present a big problem
in 2007 for those unfortunate
souls who have nontraditional
mortgages with rising rates.
The combination of falling house
values and rising loan balances
can make it impossible to refinance,
because you can't get a loan
for more than the house is worth,
and hard to sell, because the
lender will demand the full
loan amount, even if the selling
prices minus real estate commissions
and other costs comes out to
less than the loan balance.
On top of all
this, the Federal Reserve's
course in 2007 is more unpredictable
than usual. In 2004, everyone
knew the Fed was going to start
raising rates. In 2005, everyone
knew the Fed was going to keep
raising rates. In 2006, everyone
knew that the Fed was going
to stop raising rates. There
is no consensus as to what the
Fed will do in 2007 -- whether
it will start cutting short-term
rates again or hold rates steady
or raise them a couple more
Most economists predict that long-term mortgage rates will rise gradually through 2007. The same economists predicted a similar yearlong rise in 2006 and were caught by surprise when rates on 30-year mortgages fell more than half a percentage point over the summer.