In the case of real estate, 2005 was an extraordinary year by almost any measure.
Let’s start with long-term mortgage interest rates, which fell as short term rates rose.
The Federal Reserve Bank raised the Federal Funds rate steadily through the year to 4 percent, which is where it sat as of December 1st . Not only that, but as the Fed said goodbye to its long-time chairman, Alan Greenspan, it gave indications that it would continue to raise short-term interest rates to ward off inflation.
To which the long-term mortgage market said, “So what?” In 2005, as Europe and Asian investors bought copious amounts of long-term bonds, the price rose, and interest rates came down. So, long-term mortgage rates, which typically look to the 10-year bond as a starting point, fell as well.
The upshot was significant: For the first time in years, getting a long-term mortgage, either a 15-year or 30-year loan, was a better deal risk-wise, than going with a two-step mortgage like a 5/1 adjustable rate mortgage (ARM).
Why? The difference in the interest rate between a 5/1, or 3/1 or even 1-year ARM wasn’t enough to compensate for the risk that long-term interest rates would rise significantly when the loan adjusted.
At press time, a 30-year fixed rate loan was priced at 5.80 percent at BankRate.com. A 30-year 5/1 ARM was priced at 5.38. That’s less than a half point difference. In fact, a 15-year mortgage was priced at 5.30, or less than a 5/1 ARM. For the risk being taken, a 5/1 ARM should be priced at least 1 percentage point or more less than a 30-year loan.
What else happened this year? While the sales of existing homes and new construction units hit an all-time high in 2005, it has become clear that the air has started coming out of the real estate balloon we’ve all been watching.
While most industry observers refer to the current real estate market as a “bubble,” it has become clear that this metaphor is a bit off. Bubbles are beautiful while they last, but they’re prone to popping unexpectedly. (Think of the soap bubbles your kids blew when they were young.)
But this real estate balloon isn’t showing signs of popping. Instead, after seeing homes appreciate an average of 13 percent in 2004, and perhaps nearly that in 2005, there were signs in the late autumn that price appreciation in some areas is slowing.
It appears that a more balanced market, one where the number of sellers equals the number of buyers, is developing. Developers are beginning to offer better deals to get buyers to sign contracts, including perks like free extras and upgrades as well as cars and pre-paid closing fees. Real estate agents report some houses are sitting longer on the market than before. Sellers are getting frustrated that their homes aren’t selling on the first day they’re listed.
It’s good news for buyers and bad news for sellers, but the real estate balloon seems to be losing some air, as if someone untied it at the bottom and was slowly releasing the gas.
Finally, another barrier was broken when the three major credit reporting bureaus, Experian, Equifax, and Transunion each began offering every American a free copy of his or her credit history through a jointly-run website. www.AnnualCreditReport.com.
The reports are easy to obtain and there is plenty of information available on the web to help you understand what the reports say about your credit.
But getting your credit score, the three-digit number that runs from 300 to 850, will still cost $6.95 if you buy it at www.annualcreditreport.com when you pull your free copy of your credit history. It’s the cheapest way to get your score at the moment — which is a bit unfair, given that everyone from your insurance agent, mortgage lender and prospective employer pulls a copy of your credit score these days.
Still, it’s a number worth having at a price that’s somewhat reasonable. One can only hope that in 2006, Congress returns from the holiday recess and realizes that getting your credit score for free is just as important as getting fast, free access to your credit history.