Dennis' Mortgage Blog

Before we get to the question of the week two items I wish to bring to the top of the update:

1)      I am looking for any first hand information on homebuyers who have applied for the IRS homebuyers tax credit and whether they have received the credit, how they received the credit and how long it has taken them.  To date I have not heard of one family receiving the credit.  If you or someone you know, family, friend, client, has applied I would appreciate any information.  Thank you.

2)      On my website I have loaded a page that goes through the new Fannie Mae Guidelines for qualifying for a new mortgage after having gone through a short-sale.  Also on the page are guidelines for FHA mortgages for a “short-refi” or purchase immediately following a short-sale.  Click here for Purchase After Short-Sale information.

Question of the week:  Since I missed the tax credit I think I’ll wait to buy a home.

Answer:  Okay it is more of a statement made to me this past week instead of a question; but I answered anyway.  Here are some factors to consider outside the bubble of the government tax credit incentive to purchase a home:

Tax Deduction

Still in place for federal and state income tax calculations is the deduction of mortgage interest and property taxes.  While a deduction is not the same as a credit, it still offers considerable savings from your income tax obligations.  A deduction is a subtraction from your income for tax calculation purposes.  If you have a $400,000 mortgage at 5% (actual rate may vary—and be lower today!) you will pay approximately $20,000 in interest the first year.  Say the $400,000 is from the purchase of a $415,000 home with an FHA mortgage, so you will have about $5000 a year in property taxes.  Taking the interest and the taxes together you have $25,000 you can deduct from your income before calculating how much you owe the IRS or State Franchise Tax Board.  Assuming you are in the 25% tax bracket to qualify for the home and mortgage you savings could total over $6000 in taxes you do not have to pay.  Not $8000 in one fell swoop, but the deduction continues as long as you own the home and are paying interest.  (Wienie disclosure:  I am not a CPA and these calculations are for comparison and discussion purposes only.  Your tax savings will vary depending on many factors including but not limited to income, amount of mortgage, and purpose of mortgages.  Please consult a tax preparation professional to determine your actual savings on income tax obligations as a result of home ownership.)

Prices

There is more than anecdotal evidence that many areas are experiencing an increase in home prices throughout the region, state and nation.  Earlier this week the Wall Street Journal had a report that home prices are stabilizing in many regions as higher priced home begin to move, and that within those regions are areas of value increases.  On the appraisal reports we see are trends of average days on the market, listing prices, closed sale prices and median prices for the past 12, 6 and 3 months.  The data on many is positive in regards to values.  Certainly there are areas of no value increases or continued value decline, the question however are these areas the future or the past?  There is concern about another decline in values and destabilization of markets as many Hybrid Arms (3/1, 5/1, etc) convert from their fixed rate periods to their adjustable rate period.  The current adjustments on these loans are not hurting homeowners, in fact those with adjustable rate mortgages have benefited from the long period of very low short term rates.  When short term rates climb however so will payments and we may see mortgage payment pressures leading to another wave of defaults.  Over greater concern to the housing markets are the job markets and the slow recovery and growth of employment.  When it comes to home prices and whether to buy now or later it will be impossible for anyone to accurately gauge the exact bottom of any market, no one knows when a market bottomed out until long after it has happened.  For now our data points to stabilizing prices in many areas and climbing prices, 1%, 2%, in several in the Southern California region. 

Rates

Would you rather purchase a home for $500,000 at 6% or at $525,000 at 4.75% interest?  How about $525,000 at 6% versus $500,000 at 4.75?  These are possible scenarios if prices go down or go up. One thing that is more certain than prices are that interest rates will go up.  Frankly I am surprised they have not climbed already, as I predicted last year.  The fundamentals are very strong for higher interest rates, but external factors intervene in allowing them to climb.  Currently the economic, political and social chaos in Europe has flooded U.S. bond markets with investors.  Our stock market is fully recovered from last week’s huge drop and during the recovery mortgage rates stayed steady.  Europe is sinking due to overextended government debt and our own debt is a few ticks away from $13 Trillion.  Our national deficit is four times larger this April than last at $82.7 billion, for the month not year.  Yet short term rates and mortgage rates remain preternaturally low.  For those trying to gauge the bottom of the mortgage rate market please let me know when you think it has arrived because I feel it should already be past.

Rent versus Own

A $1500 rent payment roughly translates to a $300,000 home purchase with $10,500 down payment.  A $2500 monthly rent payment roughly translates to a $500,000 home purchase with $17,500 down payment.  The equivalence is through the standard income tax deduction for home owners interest and property tax payments.  Over time Southern California real estate appreciates in value.  With constraints on new development, in most coastal areas the complete lack of ability to build large new tracts of homes to increase supply, limits overall supply of single family homes.  Limited supply with growing or constant demand leads to higher prices in any commodity market, including housing.  While there may be some dips and drops through the years over the long term those who own their own home are better off financially, more stable and secure than those who rent.  Buying today with a 30 year fixed rate mortgage at historically low rates locks in your housing payment for the next 30 years if you choose to keep your home.

So you missed the government give away meant to incentivize you to purchase a home, that doesn’t mean you have missed the opportunity to purchase your own home at a great price and rate.  Call me, let’s go through your financial situation and discuss options you have for home ownership.

Have a question for me?  Ask me!

A relatively slow week in financial news.  Leading the way was the announcement that Fannie Mae asked for $8 billion more from the U.S. Treasury, running its tab to $145 billion.  While the Senate has debated and amended a massive financial reform bill that has included basically eliminating no point mortgages for 70% of the industry for mortgage originations it has purposely ignored dealing with Fannie Mae and Freddie Mac.  The basic debate comes between those who want to pull Fannie and Freddie fully under the government and those who want to break up Fannie and Freddie into several entities and privatize them.  In the meantime they are neither and operating with the financial efficiency of the U. S. Postal Service.  And Amtrak.  Two examples of organizations that are neither government nor private entities.

Retail sales were up in April and data for March was revised further upward.  Most of the upswing for April was in home builder and supply sales, i.e. Home Depot and Lowes, most likely related to the corresponding increases in higher home sales in February and March and also the need for home repairs in much of the nation following the brutal winter weather in February.  Higher retail sales are an indication of the American consumer coming back to market.  At 70% of our economy the consumer spending numbers are very telling as to economic recovery.

Stocks are the leader for mortgage rates and short term rates, not atypically.  Today stocks are once again facing a sharp decline and the benefit are rates.  After opening lower than previous day closings on Monday and Wednesday, Mortgage Backed Securities have rebounded today due to the woes in the equity (stock) markets and we are back at levels from last Thursday.

Rates for Friday May 14, 2010: As can be seen by the chart the jump in rates predicted by me and others after the Fed left the MBS market in March has not happened, thanks mainly to Greece.  Rates for the week have been dropping steadily.  How much more and longer?  It is a coin flip in the industry as to whether we are nearing cyclical bottom or if there is more room to drop.  If you are a risk seeker you wait, if you are risk averse you lock in the historic low rates.

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.625%                            Down 01.25%

30 year conforming-jumbo 4.875%                   FLAT

30 year FHA    4.5%                            FLAT

30 year FHA jumbo 4.75%                              FLAT

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, and period rate is locked. 

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.

May flowers are blooming all over town, I have the hay-fever to confirm this, especially on many well priced homes for sale.  If you or someone you know is looking to have their own garden to tend please have them call me to discuss financing and mortgage options.  We can have people in their homes in plenty of time to proudly fly their flag on Independence Day!

I am available all weekend for any questions and pre-approvals.

Have a great week,

Dennis