Dennis' Mortgage Blog

Weekly Rate & Market Update 5-18-12
May 18th, 2012 10:55 AM

Question of the week:  I read where “affordability” remains high.  What is “affordable” about the $350,000 homes in my neighborhood?  


Answer: Affordable or affordability in articles about housing refers to the number of people who can afford the median priced home in a region.  Different organizations, such as the California Association of Realtors, calculate the affordability index for a state or region.  There are different ways to measure affordability but they generally fall into one of the following calculations.


Using the median price home in the region and the current thirty year fixed rate income the index determines what percentage of families can afford to purchase the median home based upon family income.  In the first quarter of 2012 using this calculation 73% of California families can qualify to purchase the median priced home with 20% down.


Another way to measure affordability is what price home can the median income for a family purchase and is it above or below the median price.  This formula is more dependent on the current thirty year rate.  Using approximately $60,800 as the median income for Los Angeles County the affordability is approximately $300,000, right on the Los Angeles County median price for April as reported yesterday by DataQuick. 


During the climb in housing prices, even with low rates, into 2007, the housing affordability index for Los Angeles and Orange Counties was below 30% and the median income could purchase a home at approximately 70% of the median home value in the area.


Due to the combined fall in housing prices and interest rates affordability in California is at historic highs.  The seemingly paradoxical relationship between a drop in the percentage of families that own their own home and the increase in affordability showing that more families can own homes demonstrates the difficulties still facing the housing markets in recovery.  Affordability is up mainly due to low prices caused by the large supply of inventory due to foreclosures and defaults, which is also why homeownership is at a two decade low. 


Because of the affordability and the slow-down in foreclosures being put on the market, home prices are stabilizing in many areas, which is a precursor to values beginning to rise.  This will result in a drop in the affordability unless household incomes are able to keep pace with home prices.  With the fragile markets still subject to pressures from employment, defaults and foreclosures being held back by banks the historic affordability index is the primary stabilizing force that has kept prices from falling further in California.


This past week I posted on my Facebook page an article from the Wall Street Journal that asked, “Is Now the Time to Buy Your First House?” in which two analysts answered the question with one arguing “yes” and the other “no.”  I’m with the former given the low prices that are stabilizing locally and cheap money with rates as low as they are. 


Have a question?  Ask me!


Take this drachma and….well just take it and do what you will with it because it may not be worth they papyrus it is printed on soon.  It is official that Greece does not have a government and will hold elections in June to see if a coalition can be formed to govern the country, and most importantly to other nations, investors and banks, whether the new government will abide by the treaties and agreements signed by the prior government to prop up the Greek economy with loans and bailouts.  One of the leading contenders to lead the new government stated on Thursday that if Greece’s European neighbors do not renegotiate the terms of the loans to the country he will repudiate Greek debts.  If this comes to pass the European banking system, the Euro currency and several European nations will come to the edge, or go over the edge, of insolvency.  Uh-oh.  Myself and many others are hoping the politicians in Sacramento have been taking notes on what has created the Greek economic and fiscal crisis, but given their actions and statements it is readily apparent that our hope is misplaced.


More money from the Fed?  That is the question being asked this week as the Consumer Price Index for April came in essentially flat, no growth, no inflation.  The economy needs some inflation to encourage growth and job creation.  Lack of inflation indicates a lack of spending and demand.  Not only did April see no increase in prices but retail sales were also very flat.  With the tepid news following the disappointing data on Gross Domestic Product growth in the first quarter the analysts and pundits are wondering if, and some not if but when, the Fed will announce QE3 and another round of pouring hundreds of billions of dollars into the economy in yet another attempt to wake up the economy.  Minutes released this week from the last meeting of the Fed’s Board of Governors indicate that there are a few voting members of the Fed who are wondering the same thing, when not if.


Hit bottom.  With the issues going on in the European and domestic economies plus whispers of more money into the economy from the Fed mortgage rates have once again hit a new low.  Investors have been pouring money into U.S. bonds, both government and private, lowering yields (i.e. rates) to protect their funds from potential losses in Europe and in American companies subject to international affairs.  The cliché is that all politics are local, the same can be said of all commerce these days.


Rates for Friday May 18 , 2012:  Last week I mentioned that rates should be lower than they are due to the sharp increase in prices for Mortgage Backed Securities over the past month.  This week MBS continued to climb for reasons stated above.  Short of some major announcement to cure all of Europe’s ills over the next few days as the G8 leaders gather at Camp David and NATO leaders in Chicago, there is little to move rates up with the exception of some profit taking. 



30 year conforming                               3.375%             Down 0.125

30 year high-balance conforming           3.625%             Down 0.125

30 year FHA                                         3.25%               Down 0.125

30 year FHA high-balance*                   3.625%             Down 0.125


Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked.  Rates are based on 20% down (3.5% for FHA)  with 740 FICO score for purchase mortgages.

* Current rates include credit towards closing costs, call for quote on rate and credit.



I jinxed myself. 


Last week I wrote about doing an insurance check-up and balancing the risk of using your deductible versus the lower payment for your premium if you choose a higher deductible.  Mother’s Day morning on our way to church we were hit on the side of the nationally travelled Honda Odyssey by a driver who felt the customary reaction to hitting someone is to drive away.  We followed the other driver long enough to give a description and license number to the Long Beach PD before pulling over and surveying the damage.  Not much, but most likely enough to use up our $1000 deductible.  Sigh.


At least no one was hurt, the damage does not impair any functions of the car and the girls will have a Mother’s Day memory forever, “remember the year we got hit on the way to church and….”


We are off to the Inland Empire this morning to celebrate Leslie’s mom’s 80th birthday, the changes she has seen in the world since 1932 when family entertainment centered on the huge console radio and not computer tablets and television shows recorded on microchips.


Have a great week,




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Posted by Dennis C. Smith on May 18th, 2012 10:55 AMPost a Comment

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