As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.
Today could be a difficult day to shop for mortgage rates. Expect volatility.
This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.
There has to be a buyer and a seller at a specific price to make a deal.
With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers. This can cause mortgage prices rise or fall faster than on a "normal" day, directly leading to mortgage rate volatility.
For a light-volume trading day, there is a lot of information for markets to digest, including:
By themselves, each of these points can move markets. Together, however -- and aided by Labor Day -- they can move markets a lot.
Mortgage bond pricing is fluid, changing every minute of every day. Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.
Three years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.
Memories of Katrina are making oil traders nervous. The 2005 storm shut down 30 platforms and 9 refineries. And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm.
Mortgage rates are edging higher on the news.
The link between oil prices and mortgage rates is not a direct one, but it's worth paying attention to.
Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy. And at no time was this relationship more evident than in May and June of this year. As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets -- the Cost of Living inflation gauge reached a 17-year high in July 2008.
Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too.
And this is one reason why mortgage rates are ticking higher this morning -- there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.
Damage reduces oil supplies and that causes oil prices to rise. It's basic supply and demand.
Gustav is expected to make landfall Monday or Tuesday. If the storm continues on its path, we may see mortgage rates continue to trend higher. If the storm dissipates, rates should reverse.
According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.
This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.
Now, it's worth stating that all real estate is local and that there's no such thing as a "national real estate market", but for home buyers looking to to maximize their negotiation power to get the best possible "deal", spotting trends like this before the media does is a good thing.
So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report. By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.
We shouldn't dismiss annual trends because they're helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it's the month-to-month data that matters most.
After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets. And, in some, they've already started to recover from their lows.
Source
U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman
Bloomberg.com, August 26, 2008
When a homeowner buys a new home, he has 3 options of what to do with his current residence:
- Sell the home, paying off the mortgage in full
- Keep the home as a second/vacation home
- Convert the home to an investment property
The most common action plan is the first one -- sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid "selling low".
Unfortunately -- as of August 1, 2008 -- waiting out the market won't be so easy.
Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.
Among the highlights of Fannie Mae's changes:
Selling the primary residence
If the new home being purchased closes prior to the existing home's sale, both payments must be used to qualify the buyer for the new mortgage.
Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.
Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.
If it seems like mortgage rules are getting strict, that's because they are. And they're expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the "fringe" borrower from access to mortgage money.
Mortgage rates may rise through 2009, or they may fall. We don't know. But what we do know is that borrowing money to buy a home will be tougher.
If you plan to buy a home in the next 12 months, consider moving up your timeframe or -- at least -- planning ahead. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.
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Momentum carried mortgage markets through a week of low trading volume and few economic releases. Rates were volatile, but ended the week unchanged overall.
Don't let the word "unchanged" fool you, however.
From day-to-day last week, mortgage rates covered a huge range and it was only coincidence that Friday ended where Monday began.
And it's the second week in a row that that happened.
Lately, mortgage rates have been highly sensitive to both inflation data and to the U.S. dollar. Lucky for rate shoppers, both were given a boost of support last week by high-profile Americans:
- Ben Bernanke said that inflation should moderate in 2009
- Warren Buffett said that he has no bets against the U.S. dollar
Comments from both of these men attracted buyers to the mortgage market, propping up prices and offsetting those that fled because of lingering trouble at Fannie Mac and Freddie Mac and skyrocketing wholesale prices.
But, for Americans in need of a home loan, know this: As long as there is uncertainty about the U.S. economy, mortgage rate volatility will continue.
And, this week, volatility will get an extra boost because of Labor Day.
Starting mid-day Thursday, trading volume will start to thin and will lead to larger-than-normal movements in mortgage bond pricing. This should cause fits for mortgage rate shoppers because rates will jump heading into weekend.
If you're currently comparing lenders, consider getting your rate locked in early in the week instead.
Stories on TV about the national real estate market are misleading to Americans.
This is because there is no such thing as a "national real estate market".
Consider the latest American Housing Survey. It found that there are 124,377,000 homes in America spread across:
- 50 states, with
- More than 30,000 incorporated cities, and with
- An innumerable number of neighborhoods
And yet, the media repeatedly groups all 124 million homes into one giant lump and then gives an analysis. No matter how you slice and dice the data, a home in Oregon can't be compared to a home in Mississippi.
This is why national real estate statistics are somewhat useless.
To get real estate analysis that matters, look local instead. And I don't mean stats from your state -- I mean stats from your neighborhood. It's the only way to know what's driving home prices on your street.
Unfortunately, finding local data like this isn't easy; it's far too narrow to be covered by the press. So, the best place to get local real estate data is from a local real estate agent or from somebody else with access to raw real estate data in and around your neighborhood.
By talking to "in the market" professionals that know your backyard, you'll get a much clearer picture of your local market -- good or bad -- than the national media could ever provide.
Real estate is a local market so your real estate data should be local, too.
Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.
With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.
So far this year, mortgage insurers have paid out $6 billion in claims.
In response to the losses, the mortgage insurance industry is using two tactics to return to profitability -- and both mean bad news for homeowners.
- Raise the minimum standards to get insurance
- Raise the annual mortgage insurance cost
This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.
Because of the higher PMI rates, it's getting more expensive for small-downpayment home buyers to finance their homes. And that's if they can even still get mortgage insurance.
Some mortgage insurers now require a 10 percent minimum downpayment in certain states.
So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult. If you plan to make a small downpayment on your next home -- or plan to remortgage your current low equity home -- consider moving up your timeframe.
It may not be as cheap or as easy to get financing as it is today.
(Image courtesy: The Wall Street Journal)
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The Producer Price Index is a business inflation meter and it's now up 9.8 percent annually.
This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.
Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since Tuesday's data release.
Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise.
Yesterday, however, that's not what happened.
Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. "Of course PPI is high," traders thought. "Did you see how high energy costs were last month?"
Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July's.
In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.
Housing Starts measure the number of new housing "units" on which construction has started and in July, Housing Starts fell to its lowest levels since March 1991.
For homeowners, this is a welcome bit of good news because as fewer homes are built, there is less inventory from which home buyers can choose.
With fewer homes for sale, the supply-and-demand curve shifts in favor of home sellers and this adds a support floor for home prices.
For home buyers, though -- and for the opposite reason -- the low number of Housing Starts may not be as welcome.
With fewer new homes on the market, owners of "used" homes may feel less pressure to lower their asking prices or to make other concessions to interested buyers. This means that home buyers may pay more for a home, or get fewer "throw-ins" on the contract.
For all of the hocus-pocus that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall.
Homebuilders learned this lesson and July's Housing Starts data supports that.
(Image Courtesy: Wall Street Journal Online)
Mortgage rates overcame a terrible Monday last week, climbing back to unchanged by Friday. And like most weeks this year, rates were volatile.
Most interesting about last week, though, was that there was a ton of news that should have dragged mortgage rates down, but it didn't seem to happen.
Instead, a soaring U.S. dollar attracted global funds to Wall Street and a renewed demand for all things denominated in U.S. dollars, helping drive up prices in the mortgage bond market.
When mortgage bond prices move higher, mortgage rates move lower.
Like last week, the path of the dollar will likely determine in which direction mortgage rates move between today and Friday. If the dollar increases in value, mortgage rates should fall. And conversely, if the dollar decreases in value, mortgage rates should rise.
Of all the economic data hitting the wires this week, the only one of major importance is the Producer Price Index -- a "Cost of Living" reading for American businesses.
Normally, we'd pay attention to the inflation-predicting PPI because inflation causes mortgage rates to rise. This month, however, we're ignoring it. Oil prices have fallen 20-plus percent since July highs and the PPI reading from last month doesn't reflect the "current marketplace".
So, in the absence of hard data, mortgage rates should move with momentum this week. To follow along at home, keep your eyes on Bloomberg and stay close to your loan officer.
It's during weeks like this that rates can really move.
(Image courtesy: The Wall Street Journal Online)
Each month, the National Association of Realtors® releases a study called the Existing Home Sales report. It's a detailed look at "used" home sales data from all four regions of the country.
One of the key findings in each Existing Home Sales report is something called the "median sales price", the statistical price point at which half of the homes in the U.S. sold for more, and half sold for less.
Last month, the median sales price in the United States fell to $215,100, off 6.1 percent from a year ago.
But, just because the median sales price is falling doesn't mean that housing is necessarily in the doldrums. Real estate is tied to local markets and the national statistics rarely make sense when applied to any given city.
For example, the $215,100 median sales price for the nation is as outrageously inappropriate as a sales price to New York City as it is to Minot, North Dakota. In fact, it's the very definition of "median" that discounts its ability to reflect the health of the national housing market.
If large numbers of homes are sold and the price tags are high, the median sales price will trend higher. Conversely, if large numbers of homes are sold and the price tags are low, the median sales price will trend lower.
The median is just the middle point.
The falling median home sales price in June may indicative of first-time home buyers outnumbering luxury ones, or banks successfully unloading homes in foreclosure. And this idea may be supported by the data which shows that the West and Northeast led the decline.
So if you're trying to gauge the health of your local real estate market, consider asking a local real estate agent for help. A skilled agent's analysis will be infinitely more practical and useful than the national data pumped out by the industry trade group.
(Image courtesy: The Wall Street Journal Online)
The connection between the world's political events and mortgage rates here at home is not always clear, but Russia's invasion of Georgia provides a strong working lesson.
Georgia is a former Soviet republic on the eastern shores of the Black Sea. Oil pipelines within its territory supply about 1 percent of the world's daily oil needs, mostly to ports in Western Europe.
Last week, Russia bombed Georgia's oil and natural gas transport systems. None of the bombs struck the pipelines, but several exploded close to it. Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP's other pipelines this morning.
The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown -- because of war, weather or otherwise -- oil prices respond by moving higher.
Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States. High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year. And as oil prices have settled, rates have calmed a bit, too.
It's easy to ignore politics and news when it's not happening in your own country, let alone your own hometown. But that doesn't make it any less important.
When you're buying a home, or thinking of refinancing one, you'll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.
Especially when the event involves oil.
Source
Russia-Georgia conflict raises worries over oil and gas pipelines
Elizabeth Douglass
Los Angeles Times, August 13, 2008
(Image courtesy: LA Times)
It's not your imagination -- getting approved for a home loan is becoming increasingly more difficult.
Taken from the Federal Reserve's quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.
Most notable is the steep curve for "prime" mortgages, a type of home loan given to applicants exhibiting:
- A well-documented credit history
- High credit scores
- Low debt-to-incomes
Americans have come to expect sub-prime loans to be tougher, but it's the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.
If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles -- the trend is your friend.
Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.
Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what's coming ahead.
According to the Federal Reserve's survey, what's coming ahead more mortgage application scrutiny.
When home sellers accepts a contract on MLS-listed property, the property's official status changes from "Active" to "Pending".
By measuring the number of "Pending" homes nationwide, the National Association of Realtors® publishes its once-monthly Pending Homes Sales Index.
The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will "close" within 60 days, and most others will close within 120 days.
But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use.
This is because of the index's methodology:
- It doesn't measure new construction homes
- It doesn't track For Sale By Owner properties
- Its sample set covers just 20 percent of MLS transactions
In addition, in a tough mortgage climate such as the one we're in now, a greater percentage of pending sales will fail to close at all because of lack of financing.
The Pending Home Sales Index still has its place, however -- it's a terrific look at the buy-side demand for homes.
When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength. After all, pending sales can't happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.
This is why the June's Pending Home Sales report is so intriguing.
In June -- for the second time in three months -- the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.
Now, again, the uptick doesn't mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding "now" to be a good time to buy real estate.
That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn't usually far behind.
In a week packed with mortgage news and economic data, mortgage rates swung hard in both directions last week before settling into the weekend slightly higher across the board.
Adjustable-rate mortgages worsened more than their fixed-rate counterparts and both broke a two-week streak in which mortgage rates had improved.
But, if we look at all of the big stories of last week, there was a dramatic overweight of news that is usually "good for rates".
Those stories included:
In the end, it turned out that the news was so good, investors decided to jump back into the stock market, propelling the Dow Jones 3.6 percent to a 6-week high. This fevered trading action drew investor money away from the bond market -- including bonds of the mortgage-backed variety -- and that pressured mortgage rates higher.
And, of course, it didn't help rates when the two biggest insurers of mortgage-backed debt posted large quarterly losses and warned of more delinquencies ahead.
Turning our attention to this week, make note that it is back-heavy on data. Therefore, expect the positive momentum of Thursday and Friday to carry through Monday and possibly Tuesday.
By Wednesday, however all bets are off -- that's when July's Retail Sales data is released. Furthermore, Retail Sales is backed up Thursday by the Consumer Price Index, a Cost of Living measurement.
Both data points are correlated with inflation so higher-than-expected readings may cause mortgage rates to rise.
Regardless, given that mortgage rates are now moving more in a hour than they used to in a day, be prepared to get your mortgage rate quotes quickly and be ready to act on them.
Just 90 minutes later, the quote could be expired.
(Image courtesy: Press of Atlantic City)
The next time you think you may have outgrown your home, consider what it would be like living in The Little House.
Barely bigger than a school bus, the 312-square-foot home featured by CTV News occupies land once reserved for a city alleyway. When the alley went unfinished, a contractor decided to buy and build on the lot.
The home is so small that an adult with outstretched arms can touch the opposite walls inside of it.
But, of all things little about The Little House, it's sale price is not one of them. Well-decorated and recently renovated, the home at 128 Day Avenue recently sold for the U.S.-equivalent of $159,300, or $511 per square foot.
Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying or refinancing a home.
Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.
In the updated model, even 720 credit scores with a 20 percent downpayment won't protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and loan-to-value.
Fannie Mae will continue the practice of rewarding low-risk borrowers with fee credits.
Fannie Mae's second pricing change involves the Adverse Market Delivery Charge and it is not risk-based -- it applies to all applicants equally.
First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages. The fee was initially a quarter-percent. It's now doubled to 0.500 percent.
Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:
- As a one-time fee, paid at closing, payable to the lender
- As an interest rate increase, payable month-after-month to the lender
The one-time fee is calculated by multiplying to fee amount by the applicant's loan size and dividing by 100. The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.
The fees become "official" October 1, 2008, but lenders are expected to deploy them much sooner.
For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.
In its press release, the Federal Reserve addresses inflation, saying that it "has been high", fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.
Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.
The key comment, repeated from the June statement, was this:
Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.
Translated, it reads:
The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.
In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.
Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.
Source
Parsing the Fed Statement
The Wall Street Journal Online
August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html
The Federal Open Market Committee meets today and is widely expected to hold the Federal Funds Rate at 2.000 percent.
This does not mean that mortgage rates will stay flat, too, however.
The Fed Funds Rate is a different type of interest rate from the ones charged to American homeowners for their mortgages.
The Fed Funds Rate is an interest rate paid for an overnight loan between banks; it's the shortest-of-short-term loans made to borrowers with exceedingly deep reserves.
By contrast, mortgage loans are borrowed over 30 years and are offered to borrowers of all credit types.
If the direction of the Fed Funds Rate and of mortgage rates were truly related, the chart above wouldn't show mortgage rates rising throughout the 12 months ending February 2008 while the Fed Funds Rate fell by 2.250 percent.
So, just because the Fed Funds Rate may remain on pause today doesn't mean that mortgage rates will, too. Mortgage rates are notoriously volatile post-Fed announcements.
Mortgage rate shoppers may be prudent to lock in ahead of Ben Bernanke and Company's 2:15 P.M. ET press release.
(Image courtesy: The Wall Street Journal Online)
In a week in which stock markets moved 1 percent or more on four separate days, mortgage markets displayed a relative calmness that helped pull rates lower.
It was the second consecutive week that mortgage rates improved.
Last week's biggest story came Monday when the housing bill was passed into law. The new law provides lifelines to the housing market's far-reaching corners including to homeowners, to lenders, and to mortgage-bond securitizers like Fannie Mae.
To the mortgage markets, the law adds stability to the system. Because the severity of losses is likely to reduce, mortgage debt is suddenly more attractive to global investors which includes pension funds, hedge funds, and other nations.
With fewer mortgage-related losses expected, demand for mortgage debt increased and that helped pressure mortgage rates lower.
There was other big news last week, too, and it came in the form of employment data.
For the seventh straight month, the economy lost jobs and it has now shed close to a half-million jobs so far this year -- a minuscule one-third-of-one-percent of the entire U.S. workforce.
Despite that smallness, though, unemployment among Americans is a trend worth watching.
When fewer Americans are working, fewer Americans are spending and that can slow down the U.S. economy. For now, this sort of mild slowdown appears to be leading mortgage rates lower but too many lost jobs could reverse the trend.
This week, there are two big events on the calendar -- Monday's Personal Spending and Personal Income figures, and Tuesday's Federal Open Market Committee meeting.
The Fed is widely expected to hold the Federal Funds Rate at 2.000 percent but -- as is always the case -- it's not what the Fed does, it's what the Fed says. If the Fed talks tough against inflation, expect mortgage rates to rise.
(Images courtesy: The Wall Street Journal Online)
Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.
Effective today, the rule book just got a little bit tougher.
According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.
The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.
Second Home Guideline Changes
- Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
- With 30 percent equity, the PITI reserve can be reduced to 2 months.
Previously, there was no minimum reserve requirement.
Investment Property Guideline Changes
- With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.
- Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.
Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months.
Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.
This is because more restrictive guidlines lead to two separate, but concurrent, outcomes:
- The demand for homes reduces because fewer buyers qualify for mortgages
- The supply of homes increases because fewer sellers can refinance into more affordable home loan
Less demand and more supply places downward pressure on home prices.
Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.
Monday, President Bush signed the Housing and Economic Recovery Act of 2008 into law and the press jumped on the obvious storylines:
- First-time home buyers get a $7,500 purchase "credit"
- Conforming loan limits move to $625,000
- Delinquent homeowners get a lifeline from the FHA
- Local governments get federal money for buying and restoring foreclosed homes
However, tucked away on the last few pages of the text, in a section called "Revenue Offsets", there's an important tax implication. The new housing law changes the way in which capital gains exclusions are calculated on the sale of a residence.
Under the old system, a taxpayer was entitled up to $250,000/$500,000 of tax-free gains from the sale of a home if filing separately/jointly provided he lived in the residence for at least 2 of the preceding 5 calendar years.
Savvy homeowners exploited this verbiage, moving from home-to-home every 2 years to avoid paying capital gains.
The new law thwarts this tactic.
Capital gains exclusions are now calculated by taking the capital gains on the sale of the home and multiplying it by a ratio of how long a person has lived in a home, by how long that person owned the home.
In the example above, a person living in a home for 2 of 5 years would be entitled to 40 percent of tax-free gains on a home sale instead of all of it. As always, however, it's best to talk with a qualified accountant about how tax code changes may impact you personally.
The new capital gains rules go into effect starting January 1, 2009.
Falling gas prices is doing more than saving Americans money at the pump -- it's also helping to pressure mortgage rates lower.
Mortgage rates had spiked between mid-June and mid-July, mostly because economists identified inflationary signals in the U.S. economy.
The largest signal, of course, was the ever-rising cost to fill a car with gasoline. As gas prices rose, so did the overall inflationary pressure on the U.S. economy.
Mortgage rates tend to rise when inflation is present because inflation devalues the U.S. dollar. Higher rates are necessary to offset this consequence.
But, the opposite is also true. The absence of inflation tends to be good for rates; it's why we're cheering the gas price chart above. As gas prices drop, the Cost of Living drops, too, relieving at least one of the economy's inflation sources.
Everyday drivers are cheering today's pump prices but active home buyers and mortgage rate shoppers should be, too. It's creating one less upward tug on the cost of financing a home.
Since mid-July, gas is down 19 cents per gallon nationwide and has fallen over 13 consecutive days.
(Image courtesy: GasBuddy.com)
Move to Plymouth, Minnesota, says Money Magazine in its 2008 100 Best Places To Live survey.
According to the report, the Twin Cities satellite has all of the makings of a desirable home town:
- Affordable homes
- Excellent schools
- Low crime
- Lots of jobs
- Abundant "outdoor life"
The top 5 cities as listed by Money Magazine are the aforementioned Plymouth, Fort Collins (CO), Naperville (IL), Irvine (CA), and Franklin Township (NJ).
The 100 Best Places To Live survey is also sortable by metrics, including housing affordability, job growth potential, and cleanest air.
On the wave of a two-day rally, mortgage rates improved last week overall. This despite a Friday reversal that had caused rates to tick higher just before weekend house-hunting began.
And, like so many other weeks this year, last week's mortgage market activity was defined by its quick-moving interest rates.
At least one major mortgage lender issued 11 separate rates sheets between -- an average of more than 2 per day.
Now, as an active mortgage rate shopper, you can't predict mortgage rate volatility but you can be prepared for it.
Start by knowing which mortgage product is the best fit for your long- and short-term financial goals and then be ready to pounce on a "good rate" because the rates expire as soon as that next rate sheet gets issued.
Another effective way to prepare for shopping is to watch for data that can influence the market's opinion of the U.S. economy. This week, there's a lot of it -- starting with Tuesday's Consumer Confidence report. When confidence levels are high, economists expect Americans to spend more, propelling the economy forward towards inflation.
Inflation makes mortgage rates rise.
Then, on Thursday, the Employment Cost Index data is released. This will be a closely-watched figure this month because it should show if American workers are pressuring employers for raises in light of higher gas and food prices. If wages are up, it will be considered inflationary because businesses eventually pass that cost back to consumers.
Again, bad for mortgage rates.
And lastly, on Friday, the jobs report will be released. American businesses have shed jobs in each of the last 6 months, and June is expected to show the same. The jobs report's influence on mortgage rates is enormous so expect big rate swings Friday, either up or down.
Overall this week, considering the weight of the data, it may be prudent to finish-up rate shopping as soon as possible and get locked in with your lender. As the week progresses and the data's import grows, the markets should get less and less stable.
Statistics won't always tell the whole story, but they often provide good perspective.
The graph at right shows Existing Home Sales data going back three years. An "existing home" is one that can't be called new construction; a "used home", so to speak.
Note the steep decline from 2005 through late-2007.
Since November, however, Existing Home Sales have remained within a very tight range and appear to have reached a flattening point.
The Existing Home Sales data supports the word-on-the-street from real estate agents nationwide that buyers are returning to the housing market in search of good values.
But let's not forget -- demand is only half of the story. There is the supply factor, too, and the supply side of the housing market is showing the same leveling signs as the demand part.
Looking at the national inventory at left, the number of existing homes for sale has hovered near 4.5 million for the last several months. No change suggests strength.
Now again, statistics won't tell the whole story but there are plenty of positive signals from the real estate market right now, just like there are negative ones, too.
This is one reason why real estate data causes so much debate -- people want to take an either/or proposition about the state of the real estate and it doesn't work like that. Real estate can be simultaneously strong and weak and when it is, buyers look for value.
Perhaps this is why the national housing data is beginning to level off after a 3-year slide. There's good values to be had, and today's home buyers know it.
(Images courtesy: Wall Street Journal Online)
Sometimes, the hardest part about news is knowing where to find it.
In its filing with the SEC last week, Freddie Mac stated that it will "pursue increases" to its middleman fee. This would likely make mortgages more expensive for every conforming borrower in the country.
The exact verbiage from the filing is extremely opaque and unless a person knew what things like "delivery fees" were, or "bulk and flow transactions", he'd be inclined to skip right over the offending passage, tucked away on Page 72 in a paragraph labeled Business Outlook.
But, if we paraphrase the passage and simplify it for laypersons, it reads something like the following:
We didn't charge enough fees in 2007 to account for the massive number of defaults. We don't plan to make that mistake again in 2008.
Strangely, in the entire 1,394-page filing, this passage is the only mention of "future default costs" leading to more loan charges. In other words, it's easy to see why this story didn't get picked up by the major news outlets.
To the media, the major angle in Freddie Mac's filing was that it registered to sell $10 billion worth of securities. For everyday Americans, though, the major story was a different one -- mortgage fees may never be as low as they are today.
Therefore, if you know that you'll need a new, conforming home loan soon -- for either a home purchase or a refinance -- consider moving up your timeframe. Whether rates rise or fall, it's likely you'll pay a more money to borrow money only because you waited.
The implied fee increase would be the third this fiscal year, following increases in December 2007 and in April 2008.
After falling 7 cents per gallon over the last 7 days, gas prices are being pressured higher today as Hurricane Dolly barrels through the Gulf of Mexico.
The first landfall hurricane of the season is expected to flood the southern Texas coast and cause minor disruptions to the nation's oil supplies.
Versus Hurricane Katrina in 2005, Dolly's impact on oil supplies is expected to be small but that doesn't stop traders from bidding up oil prices "just in case" their expectations are wrong.
For instance, oil prices rose almost 2 percent Monday as Dolly drifted into the Gulf. Oil prices then receded as the storm's path was better defined.
Regardless, when hurricanes form in the Gulf of Mexico, it's going to be bad news for home buyers.
Because the Gulf of Mexico is stocked with oil refineries and shipping ports, when specific areas are hit by heavy rains and power outages, supply and demand takes over, pushing oil prices higher. This causes gasoline prices to rise and that is considered an inflationary pressure on the economy.
Inflation, of course, causes mortgage rates to rise so when hurricanes are brewing, it generally means that housing is about to get less affordable for Americans.
This week, mortgage rates are up by about 0.125 percent overall so far -- roughly $8 monthly per $100,000 borrowed.
(Image courtesy: Marketwatch.com)
The phrase "Consumer Price Index" can be intimidating and unclear to Americans. It's an economic term, after all, and not a part of everyday American language.
It even has its own abbreviation to add to the confusion -- CPI.
So, when a layperson hears that "CPI is rising", it's not always clear what it means. The tendency, therefore, is to ignore the news.
This is one reason CPI is commonly substituted with the more down-home expression of "Cost of Living".
In contrast to the term "CPI", the phrase "Cost of Living" is a lot more clear. When people hear that the Cost of Living is rising, instinctively, they get it. And now they can see how it works in numbers, courtesy of the Bureau of Labor Statistics.
The Inflation Calculator at the government Web site helps a person compare household income to the changing Cost of Living between any two years since 1913. For example, a U.S. household earning $48,201 in 2007 would have to increase that income to $50,868 just to keep up with "life".
CPI touched a 17-year high in June, jumping 5.000 percent year-over-year. Without a 5.000 percent increase an income, a household falls behind.
Mortgage rates soared last week as mortgage markets experienced a 4-day freefall.
By the end of the trading week, conforming mortgage rates had jumped by as much as 0.500 percent.
The spike in rates can't be pinned on any one factor, but 3 contributing factors include:
- The lingering impact of high energy prices on inflation
- The ongoing weakness of the U.S. dollar
- A rally in the financial sector, marking a return to risk-taking
Inflation and a weak dollar both devalue mortgage repayments, a well-chronicled relationship on this Web site. In short, when mortgage bond investors find that their repayments are worth less, they demand a higher return. This causes mortgage rates to rise.
But, it wasn't inflation or the dollar that caused the majority of the damage to mortgage rates last week -- it was the rally in the financial sector.
Rates had edged higher Tuesday on the inflation data but it wasn't until Wednesday's morning stronger-than-expected announcement from banking leader Well Fargo that mortgage rates really started to spike.
In its quarterly report, Wells Fargo said that its balance sheet was strong and that it planned to increase shareholder dividends. The rosy announcement sparked a strong demand for all things financial and -- by day's end -- the sector scored a 12.3 percent gain on Wall Street.
It was the largest one-day gain in financial stocks ever.
Then, following Wednesday's rally, financials picked up additional momentum and ended up closing out the week higher by 21 percent.
Unfortunately for mortgage rate shoppers, a large chunk of the money that fueled the rally came out from the mortgage bond market.
As investors looked for cash to buy financial stocks, many chose to sell mortgage bond holdings, creating excess supply. More supply leads prices lower and, in the mortgage world, when prices fall, rates go up.
Because mortgage bond prices fell a lot last week, mortgage rates rose by a lot.
This week, expect momentum to be The Big Story. There is little data beyond Thursday and Friday's Existing Home Sales and New Home Sales, respectively, and Friday's Consumer Sentiment Index. And only a few members of the Fed will be speaking in public.
The one bright spot last week was falling oil prices.
After an 11 percent decline, Americans are waking up this morning to lower gas prices. This is anti-inflationary and could help tug mortgage rates lower.
For the first time in its history, the FHA changed its funding fees and mortgage insurance structure this week. FHA-insured home loans are now subject to a risk-based pricing adjustment, as shown by the table above.
Because of risk-based pricing, FHA home loans are now more expensive for borrowers with less-than-ideal credit profiles, and less expensive borrowers with perfect ones.
Prior to the changes, most FHA borrowers paid an up-front fee of 1.500 percent, plus on-going annual mortgage insurance payments equal to one-half-percent on the amount borrowed.
FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA program guidelines have remained loose. FHA allows 3 percent downpayments on purchases, for example, and allows "cash out" refinances to 95 percent.
Fannie Mae and Freddie Mac do not.
(Image courtesy: FHA.gov)
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Another day, another piece of inflationary data.
June's Consumer Price Index showed a 5 percent year-over-year increase in what is now the largest annual Cost of Living increase for Americans in 17 years.
This is bad news for both home buyers and homeowners in want of a new mortgage because rising costs are inflationary and inflation causes mortgage rates to move higher.
Predictably, mortgage rates jumped Wednesday morning after the CPI data was released and they edged higher throughout the rest of the day.
This morning, mortgage rates are higher again on unexpected strength in housing starts and building permits across the country.
On most mortgage products, rates are now higher by 0.250 or more since Tuesday. This is equivalent to $192 in extra mortgage payments per year per $100,000 borrowed.
(Image courtesy: The New York Times)
Last week, Forbes Magazine published a Top 10 list that should grab the attention of housing market bottom-feeders.
The Top 10 list of Increasingly Affordable U.S. Housing Markets shows that falling home prices and steady mortgage rates are providing a support floor in some of the country's most beat-up regions.
The report's methodology is simple:
- Take citywide income data as reported by HUD
- Match it against purchase prices from court records
- Run the math using "prevailing interest rates" from Wells Fargo
A city is considered "more affordable" if increasing numbers of "average families" can afford "average homes". It's not surprising, therefore, that the Forbes list is dominated by cities in which home prices have plummeted over the last year, and in which he economy is relatively sound.
This may suggest that a housing rebound is already underway in several of the cities listed as Increasingly Affordable U.S. Housing Markets, including:
- San Diego, CA
- Orlando, FL
- Riverside, CA
- Phoenix, AZ
- Las Vegas, NV
Read the complete study and its results at Forbes.com.
(Image courtesy: Memorable San Diego Vacations)
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Mortgage markets have turned their attention back to the U.S. economy this morning, causing yesterday's rate improvements to unwind a bit.
Rates had fallen Monday after the Federal Reserve and U.S. Treasury's joint announcement in support of Fannie Mae and Freddie Mac. Today, it's the data that is taking center stage.
Most notably, the U.S. Dollar is trading at an all-time low versus the Euro and other currencies.
This is a negative for active home buyers because American homeowners repay their mortgage interest in U.S. dollars. When the dollar loses value, so does the value of those interest payments so mortgage rates end up increasing in order to attract new investors.
Another reason why mortgage rates are higher this morning is that June's Producer Price Index registered much higher than was expected, posting its largest one-month gain since November 2007.
PPI is a lot like the Cost of Living index, except that it measures operating costs for businesses instead. When business costs are increasing, they are often passed onto consumers and this is why rising PPI is thought to be inflationary and inflation -- like a weakening dollar -- pressures mortgage rates to rise.
So, while Monday's rate improvements haven't completely erased, today's action reminds us that mortgage markets wait for no one and yesterday's mortgage rates rarely carry forward.
Especially when inflation is in the mix.
(Image courtesy: The Wall Street Journal)
Mortgage rates fell slightly in a week that included a bank failure, more oil price spikes, and questions about the health of the nations' mortgage market.
Rates would have fallen more if not for a late-Friday sell-off that added 0.125 percent to most products.
As financial markets fell under stress, most people missed the strong points that emerged about the U.S. economy last week:
And, also worth noting: homes under contract slipped but remained above the lowest levels of the year, suggesting a potential housing floor.
But, the biggest story of last week was the stock-price collapse and subsequent pressure on Fannie Mae and Freddie Mac. It should be the biggest story of this week, too.
So far, Fannie and Freddie's issues appear to be more psychological in nature than fundamental, but to an already roiled market, negative perception can quickly become reality. This is one of the biggest reasons why both the Federal Reserve and the U.S. Treasury made public statements Sunday in support of Fannie and Freddie, and in advance of the Asian markets' opening.
Other events that may move markets this week include Retail Sales data on Tuesday, consumer inflation data on Wednesday and Ben Bernanke's two-day testimony to Congress which takes place over both Tuesday and Wednesday.
It's unclear in which direction mortgage rates will go, but because the markets are on-edge, expect rate movements to be sharp and quick. In other words, if you're in the market for a mortgage this week and you see a rate and payment you like, don't mess around with it -- just get it locked.
(Image courtesy: Wall Street Journal Online)
"Economic uncertainty" is turning into a 2008 buzzword and there's good reasons why.
On the one hand, there are precursors to inflation in the economy:
- Rising oil costs
- Rising food prices
- Higher Cost of Living
On the other hand, there are precursors to recession in the economy, too:
- Mounting job losses
- Less access to credit and/or loans
- Falling consumer confidence data
The pie chart at right illustrates just how uncertain the "experts" are about the state of the U.S. economy. They're evenly split, right down the middle.
This isn't good news or bad news for Americans, per se, but it does legitimize the idea that the economy's future direction is in doubt. This is one of the biggest reasons why there's been no clear direction for mortgage rates or stock markets since the start of the year.
Until the picture gets more clear, we can expect the volatility to continue.
(Image courtesy: Wall Street Journal)
According to RealtyTrac, the rate of foreclosures across the U.S. is slowing. Versus May, June foreclosures fell at a 3 percent clip.
25 states showed improvement month-over-month, led by many of the same areas that had fueled foreclosure activity in 2007.
A sampling of RealtyTrac's data includes:
- California : Foreclosures down 4.54 percent
- Georgia : Foreclosures down 14.91 percent
- Arizona : Foreclosures down 0.07 percent
- Michigan : Foreclosures down 6.00 percent
- Illinois : Foreclosures down 15.65 percent
However, the improving nature of the data is not what is making news this morning. Instead, the press is reporting that foreclosures are up by half since last year and that bank seizures have tripled.
And while the annual data may be accurate, that doesn't mean that it's necessarily relevant to home buyers and home sellers across the country.
This is because people buying and selling homes don't usually boast an "annual" mentality; when someone's an active participant in the real estate market, the mentality is "right now".
In other words, annual data fits an economist, but month-to-month data fits you.
June's foreclosure data may be the start of a trend, or it may be a blip. It's really too soon to tell. But the RealtyTrac data reinforces what real estate professionals already know -- that markets all over the country are showing signs of life.
A noon-hour, mortgage-bond rally rendered homes more affordable for Americans Tuesday. It was the second straight day on which this happened.
On both days, the action was swift.
The speed at which Monday's and Tuesday's respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.
One reason why the market swings so quickly is that, lately, traders are tending to follow the herd.
As a mortgage rate shopper, it's outstanding when the herd is moving in your favor. However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.
Volatility has been the common theme for mortgage rates in 2008 and it's likely to remain a factor until the nation's economic picture gets a little bit more clear.
Some experts are saying that may happen in 2009. Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.
The payment you see in the morning is likely to be gone by the afternoon.
It's a terrific time to buy a home, but not because homes happen to be affordable.
It's a terrific time to buy because the variety of mortgage products available to home buyers looks poised to shrink.
Monday, Alt-A mortgage lender IndyMac Bank stopped accepting mortgage applications and it's likely that other Alt-A lenders will likely follow suit.
Alt-A loans are ones in which borrowers can't (or won't) verify one of two major underwriting criteria:
- Evidence of income
- Evidence of assets
Since the Credit Crunch began last July, Alt-A mortgages have been a steady source of funds for "in-between" borrowers -- those that are not quite prime, and not quite sub-prime. IndyMac was among the largest lenders of its type and had outlasted many of its peers.
Its position as a market leader and subsequent exit from lending means that the remaining Alt-A lenders will likely make one of two choices in the coming weeks:
- Raise rates and fees because of greater Alt-A mortgage risk, or
- Follow IndyMac's lead and exit mortgage lending altogether
Both outcomes would be harsh for home buyers of all types because when any large bank takes mortgage-related losses like IndyMac just did, it tends to create major risk aversion in the market.
Risk aversion impacts everyone -- even the "good" borrowers.
Banks have been nervous about lending for several months and so they'd rather pass on an "average" mortgage application rather than risk getting stuck with a potentially "bad" one. IndyMac's exit may cause fewer mortgages to get approved.
In other words, buyers eligible for financing today may be ineligible tomorrow.
Therefore, if you're a home buyer and you know your credit profile is less-than-ideal, consider writing a purchase contract sooner rather than later. Your mortgage options may be thinning, and the ones you have may be getting more expensive.
Last week was fairly uneventful in the mortgage markets, with rates slightly edging lower across the board and without much data to influence trading.
Even Thursday morning's hotly-anticipated jobs report was met with lukewarm interest; many traders had already left for the weekend.
Mortgage rates just drifted -- a little up and little down, but mostly unchanged.
Mortgage insiders may have found last week to be boring, but for active home buyers, the semi-lull was a welcome break from the up-and-downs that have gripped the markets since January.
It's been three consecutive weeks without a substantial increase to mortgage rates.
This week, rates aren't expected to be as calm because Fed Chairman Ben Bernanke is taking two heavy topics and making public speeches about them.
The first speech is to the FDIC on Tuesday. The speech will focus on mortgage lending. The second is to House Financial Services Committee on Thursday and it will cover financial market regulation. In both speeches, expect Bernanke is expected to address inflation and the health of the U.S. banking system.
These two subjects are closely linked to mortgage rates so watch for rate movement during, and after, the speeches.
- If Bernanke says inflation is moderating, mortgage rates should fall
- If Bernanke says the financial system is stabilizing, mortgage rates should rise
From a data perspective, there's not much doing other than Friday's Consumer Confidence survey. Confidence surveys don't have a direct impact on the economy, but markets are watching them more closely. A strong reading could benefit the stock market which should, in turn, cause mortgage rates to rise.
(Image courtesy: Wall Street Journal Online)
