Question of the week: What’s in it for me…again? Answer: We continue to get this question as more and more proposals come out of Washington D.C. and there are more variables for home owners, and potential homeowners, in the WIFM question. First, regarding the tax credit for new homeowners, one of the best recaps I have seen thus far is from Jon Lansner on his Orange County Register blog, if you may be eligible for the credit read his post—and then consult with a tax specialist! Next up is the limiting of deductions on tax returns for Americans earning over $200,000—I have read $200,00, I have read $250,000 and I have read top marginal tax rate which in 2009 kicks in at $372,950 (which means if $200k or $250k income is the limit where deductions get cut then it is the top two tiers of income earners being hurt, not just the top tier as the President has stated)—my understanding of this proposal is that if you earn above one of these amounts the amount you will be able to deduct from your income for tax purposes will be cut back 25% or more. This includes but is not limited to home mortgage interest, charitable contributions, retirement contributions, medical bills and property taxes. What’s in it for you and me? We will be paying tax preparers to determine the answer, but my guess is there will be more in it for the IRS than there will be for us!
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This has been another week with a lot of news, and the bond and mortgage markets have not reacted too favorably. With the Dow flirting with dipping below 7,000 for the first time since the mid-1990s, the standard assumption would be that mortgage rates would drop as investors pulled their money out of stocks and placed it in bonds. Alas this has not been the case primarily because of the $3+ trillion budget Obama announced early in the week.
Bond investors detest inflation. Inflation erodes return on investment and bond investors are locking in their returns tomorrow with dollars today. Inflation discounts the return on their investment not only by weakening the purchasing power they will have when the investment pays off, but also because their rate of return will be lower than future rates of return because as inflation rises so do market interest rates. Looking back at the past year we have seen the Prime Rate drop all the way to 3% as the Federal Reserve Board of Governors has cut rates to stimulate the economy. Once the economy stabilizes and begins to grow again, and it will grow again with our without Washington doing anything, the Fed will start to look at raising rates to stem inflation.
With the almost $2 trillion already put into or pledged into the economy and another $3 trillion plus in Obama’s budget proposal has created tremendous concern. Investors in stocks and bonds are concerned about the amount of money spent and borrowing created in the past five to six months by Washington. The money flooded into the economy is very inflationary and the amount of borrowing creates tremendous pressure on the credit markets. Both of these create higher interest rates.
Last week we were experiencing resistance at the upper levels of bond trading as prices could not break the ceiling of triple moving averages. This week as investors began doing more math and Obama released his staggering budget requests bond prices dropped and we began bouncing of bottom levels of resistance. Experienced readers of my updates know, low prices mean high rates. This week we saw rates pop.
I want to close on some positive news. It was announced this week, and I put a post my blog and emailed real estate professionals, that Fannie and Freddie will be raising their loan limits for “hi-balance” mortgages back to our levels for most of 2008: $729,750 for single family residences. We are unable to offer the loan amounts yet because lenders, the GSEs and primarily the secondary markets have not yet priced the loan limits. When lenders start putting the new/old limits on their rate sheets I will let you know.
Rates rose across the board from last Friday as investors worry about excessive government borrowing, government involvement in banking and future inflation concerns.
FIXED RATE MORTGAGES AT COST OF 1 POINT*
30 year conventional at 1 point 5.125% Up 0.25%
30 year conforming-jumbo at 1 point 5.625% Up 0.125%
30 year FHA at 1 point 5.375% Up 0.375%
Please note that rates quoted are based on average of several lenders for a purchase transaction with 20% down payment and a minimum FICO score of 740; APR is not quoted as it is dependent upon specific loan amounts, lenders and services selected. Numbers provided are for comparative purposes only.
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Have a great weekend,
Dennis
Remember this update is posted weekly on My Blog at www.DennisCSmith.com ; feel free to forward the link to family and friends who may be interested in past commentaries.
The stimulus bill signed by President Obama last week apparently had one item within it that is good news for the mortgage and real estate markets: conforming loan limits will be raised back to their 2008 levels. That means in Los Angeles and Orange Counties the limit will go back to $729,750 for single family residences, other counties in Southern California will be lower. To check a county click here for the spreadsheet.
You may recall that last February when Congress passed the temporary loan limit changes that raised conforming loan limits from $417,000 to $729,750 it took until almost April before we could fund the higher balance mortgages. This time around the loan limits are not official from Fannie Mae until March 4th, then we need to wait until we see the pricing overlays that may be involved. Because of this lenders are not taking applications or allowing loans over the current $625,500 level to be locked in; once they get the overlay costs from secondary marketing they can provide pricing on the loans and we can begin taking applications and locking loans.
While this is an announcement of hurry up and wait I wanted to let you know that in the very near future we will once again have affordable 30 year fixed rate financing for higher end properties. I hope, and I am sure you do as well, this will loosen up the higher end properties in the region a little bit and see some activity in the $1 million range of homes.
If you have any questions please do not hesitate to contact me.
Question of the week: What’s in it for me? Answer: This, or a variation of this, has been a question I have received several times the past year, more frequently the past month, and most frequently the past couple of days. “It” referring to any mortgage restructuring policy that has been floated or enacted in the past year, and “IT” referring specifically to President Obama’s announcement on Wednesday when he announced his “Homeowner Affordability and Stability Plan” (HASP). The very general theme of Obama’s HASP is to create mortgage products for homeowners who are having difficulties making their mortgage payments, or are unable to refinance to current lower rates due to having little, no, or negative equity in their properties. What is in it for you is not yet known because the White House will not announce details of the plan until March 4th. Further what is not known is whether Obama can execute his HASP through Executive Order, or if it will have to pass through Congress. As we just saw with the “American Recovery and Reinvestment Act” (ARRA), what the White House proposes and what Congress passes are not always the same things. While the HASP announcement has filled many a newspaper column and talk radio segment, the bottom line is no one knows who it will work, how Fannie Mae, Freddie Mac and various lenders will be able to adopt the plan and what effect it will have on the market in general. What we have seen is a creep towards full nationalization of Fannie Mae and Freddie Mac, and this creep has not been pleasing to the stock markets, nor necessarily the mortgage markets, as no one knows what will happen if/when the Federal Government takes full control of the Fannie and Freddie. What’s in it for you? I have no idea, and chances are no one else does at this time either.
With all the news this week from HASP and ARRA we have had a fairly active market all week. I want to touch on four areas for my update this week: stocks, levels of resistance, risk based pricing affected by government action and mortgage insurance. This week’s update is longer than usual, but I hope you find it informative and useful—as always!
Stocks have been down about 18% since January 1st, the Dow Jones Industrial Average dropping from right about 9,000 points on the last day of trading in 2008 to about 7,400 points at closing today. There are a few contributors to this drop: market concerns about formal nationalization of our banking industry (I say formal since the U.S. government now owns stocks in most major banks), market concerns about the ARRA and its $800 billion price tag today and estimated $3 trillion cost over the next decade, and perception of a better return and value in other investments—such as bonds, mortgages and precious metals. Mortgage rates during this same time frame have spiked and fallen back down—and indication of investor flight from all investments for several weeks and holding assets in cash. This past week we have seen a benefit in our market as investors sold off equities, or stocks, and purchased bonds and mortgage backed securities. As we move forward if stocks continue to fall 2% per week we should see mortgage rates drop as well.
Levels of resistance is a market phenomenon I have discussed in the past. Every market has a range within which products are priced; neighborhoods have a high and low for prices, apples have a high and low price in a group of markets, stocks have a high and low price they will trade between for several days or weeks. When an upper or lower level of the range is broken through then the market will try to seek a new range within which to transact exchanges. Example: Dennis Inc. stock has been closing every day for the past couple of weeks between $5 per share and $6 per share; but for the past several days it has spent some of the day at prices up to $6.25 but each days slips below $6.01 to close at or just below $6.00 per share. One day it breaks through the $6 mark and closes at $6.10; the next day it closes at $6.12 after trading most of the day at $6.25. It has broken the resistance level of $6 on the upper end in the next few days will find a new upper limit and lower limit of the range in which it will trade; say $5.50 to $6.30 per share.
So what does this have to do with mortgages? A lot. Regular readers of the Weekly Update know that higher prices on mortgage bonds means lower interest rates. This past week we have seen mortgage backed securities trading right up against a very strong level of resistance—a triple layer of resistance consisting of the 10, 25 and 50 day moving averages of the MBS prices. We have not been able to break through this barrier and as a result several times this week mortgages have hit the resistance and prices have then dropped back down and rates inched back up with them.
The combination of stocks falling and mortgages pressuring the triple resistance layer indicates a possible strong shift in our mortgage rate range should this resistance be broken next week. Keep an eye on the stock market, if prices continue to drop those resistance levels get a lot softer for mortgage rates to drop a bit lower.
Private mortgage insurance companies are over-reacting to the losses they are accumulating from past mortgages and are starting to punish new homeowners. California has seen strong restrictions in place on condominium transactions, high balance conforming transactions and may soon see an evaporation of mortgage insurance available in the state. What does this mean? Either low down payment borrowers will have only FHA financing available or Fannie and Freddie will have to come to market with self-insured mortgage products (which I personally feel they should have always had to model the FHA programs). For those looking to purchase in the future with less than 20% down I strongly suggest your pre-qualifications are under FHA qualifying guidelines.
This past year we have seen an increase in risk-based pricing; Fannie and Freddie have had “add-ons” to their rates and prices for loan to value, occupancy, FICO scores, a range of factors. In the past because of the small price spread between each level of rate we have been able to absorb the add-ons with little impact to the borrower. If a product had an add-on of half a point (0.5% of the loan amount) for non-owner occupancy the typical rate differential to make up the added fee was 0.125% in rate—moving a borrower from say 5.25% to 5.375%. Currently the same half point add on in fee can take up to 0.75% in rate to accommodate the change due to lenders very adverse stance towards rebates paid out on mortgages; this is due not only to a dropping rate environment but even more so because of Federal officials, such as Senators and Presidents, giving speeches saying they are going to create low interest rate programs or mandate low interest rates for homeowners. The banks do not want to pay out of pocket to purchase a mortgage only to see the borrower refinance the mortgage in twelve months because of HASP or some similar proposal that becomes national law.
Reaction to stocks, mortgage rates in decline, mortgage insurers pulling out of markets and government announcements, all have an impact on John and Maria who want to purchase a home—some positive and some negative. Underlying all of this is that it is a great time to purchase a home given the prices and the rates, the affordability index in California (percentage of families who can purchase the median priced home) is at the highest it has been in almost a decade.
Rates dipped (conventional) and dropped (conforming-jumbo and FHA) this week:
30 year conventional at 1 point 4.875% Down 0.125%
30 year conforming-jumbo at 1 point 5.50% Down 0.375%
30 year FHA at 1 point 5.00% Down 0.500%
I hope your week was as great as mine was. We added Harrison, a six month old Smooth (short hair) Collie to our family on Monday and he has been making himself at home and on Thursday we celebrated my youngest daughter’s 7th birthday—nothing makes a home more homier than little kids and puppy dogs!
Question of the week: I was asked the following this morning from Marilyn Kalfus, writer and blogger for the Orange County Register (her blog here): Did you see that DQ came out with numbers today showing sales in HB are up 12 % year over year for most of Jan.? I am interested in your opinion of why if an anomaly. Answer: As we have discussed before, the increase in sales numbers are not a surprise, as well any corresponding decline in median prices. There is significant activity at the lower end of the market throughout Southern California. First time buyers are flocking to market to take advantage of the lower prices and rates that have resulted from the credit crisis that began in 2007. Last December and January we had no financing over $417,000 and FHA loan limits were capped about $100,000 below the median price levels for coastal California counties. The subsequent increase of loan limits for conforming and FHA loosened up the markets and allowed the increase in buyers for markets $600,000 and below. When we see value in jumbo mortgage rates we will see the same phenomenon in the upper ranges as well. The local real estate markets are very active and we are seeing multiple offers on a significant number of our transactions. This is not an anomaly --it is a real trend and solidifying of our housing market from the bottom up.
As politics continued to play out in Washington (and Sacramento) on the massive spending bill (i.e. “stimulus”), bonds had a down and up week. Early in the week as the stock market reacted unfavorably to early negotiations on the bill mortgage rates benefited, hitting bottom on Wednesday. Yesterday and today as the bill took more shape and neared possible passage—the House passed it today and if President Obama can keep three Republican Senators as his “bi-partisan” support it should pass the Senate later today or this evening for the President’s signature over the weekend—back to our story, as passage nears the bond markets have reacted unfavorably and we have lost all our gains and finish the week where we started.
The bottom skipped off of on Wednesday equaled our December lows for conforming mortgages (i.e. below $417,000) but we seen little to no corresponding drops in the hi-balance conforming rates nor the FHA rates. Until Fannie and Freddie eliminate the penalty they are charging lenders who have over 10% of their fundings in the hi-balance mortgages (as discussed here last week) we will not see a corresponding drop in the hi-balance mortgage rates.
As mentioned above rates are flat from last Friday after dipping into Wednesday.
30 year conventional at 1 point 5.00% FLAT
30 year conforming-jumbo at 1 point 5.875% FLAT
30 year FHA at 1 point 5.5% FLAT
I hope no one is experiencing triskaidekaphobia (thank goodness for spell check!) today! Happy Valentines Day to every one—Be Mine!
Question of the week: Why would anyone looking to purchase a home doing it on a rainy day? Answer: In Southern California a rainy day or weekend is the best time to shop for a home! The rain we are experiencing locally this week is a rarity, as local residents know we are in a drought and can go many months between rain storms. Many a March homebuyer in our region has owned their home until October or later before experiencing their first rain storm—only to discover then they have water issues. Previewing potential new homes during rain storms allows potential buyers to see leaky roofs, porches, windows or door. Walking the exterior of the property they can see where rain water pools; is it against the house where it can cause erosion, are huge puddles of water flooding a ventilation area for the foundation? Are there adequate gutters and downspouts? Last spring our church had a new roof put on, last night I was in a class being held in the church and one of the participants said, “let me know if you feel any drops. We’ve had a leak in the new roof and they were coming down right where you are sitting.” Seven or eight months have passed since the roof was installed, this current storm is the first serious test of the roof—and it leaks. Think about if this was the home you had purchased last year, you too have gone many, many months without the opportunity to see how weatherproof it is. My advice, if you are looking to purchase a new home do not put off looking just because the weather outside is inclement, in fact call your agent and make an appointment to go look at houses because it is raining!
For all the talk in Washington about stimulus the word has not gotten out to Fannie Mae and Freddie Mac. Recently the GSEs (government sponsored enterprises—although at this point we should call them GOEs government Owned enterprises since the purchase of stock by the Fed in 2008) have imposed stiff fees on many lenders for mortgages they fund over the $417,000 benchmark. This fee is equal to two points (two percent of the loan amount) for any lender whose funded mortgage portfolio of Fannie/Freddie loans over $417,000 exceeds 10% of their total mortgage volume; i.e. if Dennis’ Bank funds a total of $900 million in mortgages with Fannie and $91 million of that total are mortgages over $417,000 then Dennis’ Bank will have to pay the premium on future Hi-Balance mortgages until their volume drops below the 10% threshold.
This fee is more like a fine and it is definitely not stimulating home purchases in high price areas, like Southern California. For lenders and banks who do significant lending in our region and other regions with similar price markets this is essentially shutting them out of a significant portion of the market; and creating higher interest rates for consumers who need mortgages over $417,000 to purchase the homes they desire. In 2008 our company’s average loan amount was $380,000 with, I would estimate, 80% of our volume in Los Angeles and Orange Counties. I estimate that over 25-30% of our mortgages last year exceed the $417,000 mark, and that was without the ability to fund those mortgages until April when the new expanded loan limits hit the market.
So while Senators and Congressional Representatives look to spend almost a trillion dollars on “stimulus”, including a couple of hundred million to “stimulate” home sales, the GSEs in which we own stock through our federal government, is acting in direct contradiction to those efforts. We could save several hundred billion by not having any additional tax credits for new homebuyers and have a more significant impact by having Congress tell Fannie and Freddie to get rid of the hi-balance mortgage penalty for lenders, and while they are at it raise the loan limits back to $719,000. That would stimulate, encourage, and support home sales across the nation.
“Will I get $15,000?” was a question asked by a few clients this week, in reference to the reports that one of the possible items in the TRILLION dollar spending bill will be a tax credit to new homebuyers, possibly as high as $15,000. At this point it is a proposal to increase the credit that is available to those who purchased qualifying properties in 2008—nothing is final yet on this proposal. Keep in mind however that if the credit follows the 2008 credit it will be more like a loan—those who take the $7500 credit for purchasing 2008 will have to pay that money back (see here item #16).
Finally I would like a little perspective once again on media hysterics. Those who have been receiving this weekly communication for several years know that I am apt to point out misinformation, or misdirection, from our mainstream media. Every week the number of individuals filing for unemployment claims is growing incrementally. This week when the number came out the media screamed that it was the most people filing since 1974! What is unreported is the current job losses are coming against the highest number of employed individuals in U.S. history. Trying not to sound callus, when a business cycle ends after peaking at the highest employment in history it will naturally shed record numbers of jobs when it turns down, and that is what we are experiencing in the current economy. The national unemployment rate has hit 7.5% and most likely has another 1.5% to go; while these are not positive numbers keep in mind the “natural rate of unemployment”—the number of people who would be unemployed in any normal economy due to desire to change jobs, companies going out of business, people who just don’t want to work—is 5%, so our current number is 2.5% above the natural rate (by the way this rate is standard used for economic models). While not trying to diminish the loss of jobs, I am pointing out that once again our media is looking to make as much negative light as they can by misusing data and statistics. Just as they do with median home prices.
Bonds and mortgages did not have a great week, especially the hi-balance/jumbo conforming mortgages. The 0.875% spread between the conventional and conforming-jumbo is the highest since the hi-balance limits came out in 2008 and the highest between conforming and any jumbo since December 2007 just before Jumbos vanished.
30 year conventional at 1 point 5.00% down 0.25%
30 year conforming-jumbo at 1 point 5.875% up 0.125%
30 year FHA at 1 point 5.25% flat 0.00%
Have a great weekend and enjoy our rainfall!
Dennis C. Smith, California Dept. of Real Estate Broker #00966315 Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
Dennis C. Smith, California Dept. of Real Estate Broker #00966315
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597
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