Dennis' Mortgage Blog

Question of the week:  What is your view of the housing market?

Answer:  I was asked this question by a young couple entering the market to purchase their first home.  Their underlying question which I had them confirm was, “should we buy now or wait for prices to drop further?”  My quick answer is, if you find a home your really like at a price you can afford then you should buy it.  Even if prices do drop further this home will not be on the market later, some other family will own it.  If prices do drop when will you know the bottom of the market has hit and can you time your purchase perfectly?  What inventory will be on the market at that moment?  Are you willing to wait and do the study and research to know when this will happen?  Finally, I’m not using my money to buy the home, I’m not going to make any of the payments to pay for the home and I’m not going to stay in the home, you are so you need to make the decision to buy when you feel most comfortable with the market, the home you are prepared to buy and the cost upfront and monthly to pay for it.  When those align the market is right for you. 

Now to my thoughts on the housing market in general not for specific families out looking.  As discussed below the housing markets had set backs in May, and the numbers will probably not show any big rebounds in June or July, because of the number of buyers artificially sucked into the market in April with the IRS home buyer tax credit deadline.  Despite the volume declines in home sales for the month median prices rose across the country, and particularly in California, and very much so in home base Long Beach.  Inventories are still high, around eighth months, but are slowly dropping.  Prices have been firming up in pockets around the region for several months and those pockets have been growing.  I’m not sure how long price increases year over year need to continue to declare the housing industry out of recovery and back to a healthy, normal market but we are closer today than we were at the beginning of 2010.

A couple of factors that impact the slow housing recovery are jobs and a lack of mortgages for certain markets.  The continued growth of unemployment in the region and country, 457,000 workers filed initial unemployment claims the past week, the average is almost two million new claims per month.  Temporary employment for the census will not solve the employment crisis we face, those workers quickly return to unemployment when their duties are complete.  As the number of jobless Americans remains high, over 8 million, there will be continued foreclosures that depress home values due to over-supply, as well as fewer families eligible to purchase homes.  When unemployment rates begin a steady and consistent decline the housing markets will see even stronger recovery. 

Housing recovery is lagging in the upper end of the housing markets, significant portions of the Southern California Coastal Regions.  The primary reason is the lack of financing for buyers purchasing homes with mortgages over the maximum loan limits $729,750.  In particular are the qualification restrictions on income that have tremendous impact on self-employed borrowers.  For a couple of decades prior to the 2000’s self-employed borrowers with significant down payments were able to obtain financing based on alternative income documentation.  Fannie and Freddie’s run into no income documentation for mortgage approvals with combined loan to values up to 100% was a major factor for the housing bubble.  As a result of the bubble’s collapse all alternative documentation mortgages have been removed from the market and use of common sense underwriting that was prevalent through the industry through the 1980’s and 1990’s has evaporated.

There are many who ignorantly proclaim that all alternative income documentation loans, or stated income loans as they came to be known, are bad and should be out of the market.  Most of those making the general comments have no knowledge of the industry and the practical application of mortgage products that are suitable for some borrowers. 

As an example two separate buyers: 

Routinely borrowers with 3.5% down payment, seller paying closing costs and little to no reserves after closing are approved for home purchases with debt to income ratios up to 50% of their gross income; some with credit scores as low as 650.  These are borrowers who fit into the FHA underwriting guidelines and are eligible and qualified under the guidelines to purchase their homes.

Consider the self-employed, small business owner who retains profits and earnings in her company to have cash available for future growth, unexpected turns in the market and reserves to meet as yet unknown regulatory requirements.  The borrower’s personal income tax returns are not unrepresentative of many small business owners who run lean on personal income to ensure their business stays profitable and maintains high net worth for vendor credit lines.  In this case the borrower has a credit score over 800, has a history of homeownership for twenty years with never a late payment, wants to purchase a $2 million home with 50% down payment.  Unfortunately because of the current qualification guidelines and the calculation of debt to income ratios she does not qualify based upon her personal tax returns for a payment that she can obviously make based upon her complete financial picture, and her proven financial abilities. 

The lower and middle portions of the market will continue to have qualified buyers due to the guidelines established by FHA and Fannie/Freddie allowing lower down payment borrowers with lower credit scores and high debt to income ratios to continue to buy homes.  The upper end of the markets will continued to be hampered by not only the lack of mortgage products available but also because of the restrictive qualifications for self-employed borrowers who make up a significant portion of this market: this includes doctors, lawyers, CPAs, real estate professionals, consultants and anyone not paid using W2s.

One final portion of the market that has held back a stronger recovery is the complete evaporation of the sub-prime mortgage market.  Another segment of the industry that was abused in the 2003-2007 era, prior to that period there were some very responsible sub-prime lenders who funded lower loan to value mortgages for those with poor credit histories accumulated for whatever reasons.  Knowingly paying higher interest rates as a consequence for prior credit mismanagement, mortgages were available up to 70% loan to value.  The excess began to occur when the use of sub-prime mortgages grew beyond the traditional borrowers of sub-prime loans, loan to values increasing to the magic 100% mark and income documentation going out the window.  Prior to the housing bubble the sub-prime market filled about 5% of the mortgage volume in the industry, at its height it filled approximately 10% of the market.  Today it is zero percent of the market.

My long term view of the housing market is that it will slowly continue to firm up and see price increases in many areas as demand returns to market, especially the demand pulled out of the current market and into the buying earlier in the year due to the tax credit.  Hampering recovery is the upper end of the market which has demand but an inability to satisfy the demand with mortgage products.  A return of sensible underwriting for non-conventional mortgage applicants would help housing recovery, and as was shown in the years prior to the bubble these types of products have a longer history of being used responsibly than not.  Unfortunately common sentiment based on misinformation and lack of knowledge prevents their return in any fashion.

Those buying homes now are solid buyers with well documented income, assets and credit histories.  Their future homeownership is at risk not from future rate increases because almost all the loans are 30 year fixed rate transactions creating future stability as well.  Future foreclosure risk will be based on the job market and if those with either straight ARMs or hybrid-ARMs currently enjoying extremely low interest rates are able to either make significant principal pay down during this low rate period, or are able to refinance into fixed rate mortgages during this period of low rates and firming or rising prices in their local market.

Have a question for me?  Ask me!

Splashed Across the Headlines this morning “Mortgage Rates At 50 Year Low” reflects the move into bonds as nervous investors keep an eye on Europe, the talks in Toronto, Fed statements and Congress.  Uncertainty leads to investing in safe returns of bonds and the hoarding of cash, both of which are on the rise.   As Congress finishes reconciliation of the financial industry overhaul investors are trying to determine what it will mean to them and their markets.  International conversations about how to address the global economy are showing a deep rift between the Obama Administration who feel European countries need to keep up government spending to encourage economic growth and European leaders who are determined to cut spending and their national deficits and debt before they go into total default. 

Against this backdrop of unease combined with shrinking sales in the housing markets and economic data from May showing a stall in economic growth, the Federal Reserve came out of its two day policy meeting on Wednesday and gave a statement that muted its prognosis for the economy.  Having previously said in April the economy “continued to strengthen,” this week the Fed statement referred to the economy as “proceeding.”  A lot weaker in its language on the economy, the Fed reiterated its position to maintain short term interest rates near zero for “an extended period of time.”  The continual debate for a year now has been “what is ‘an extended period of time?’”  Growing consensus is that it extends could extend through 2011 and into 2012.

Housing news for May was not good, though not unexpected; at least by me.  Tracking weekly purchase mortgage applications it was apparent there was a large buying bubble in activity in the final week or two in April due to the tax credit deadline.  “Experts” quoted in the Wall Street Journal and other media said they were surprised when both existing and new home sales for May were significantly lower than April’s sales.  While still up from a year ago, at least existing home sales were as new home sales had their worst month since tracking began in 1983, month to month the number of sales declined.  What will be interesting as we move into summer is how much buying activity this past year and a half was due to the tax credit and if we see buyers without government incentives return to market.

Tax credit deadline is days away.  Legislation that has been stalled in the Senate that combines several spending items, including unemployment insurance, COBRA benefits, physician reimbursement under MediCare, federal flood insurance, was defeated yesterday.  Also included in the bill was an extension of the deadline to close transactions eligible for the homebuyer tax credits from June 30^th to September 30^th.  With the bill dead the June 30^th deadline remains in effect.  Eligible buyers who entered their contracts to purchase prior to the April 30^th deadline have until next Wednesday to close or they will not be eligible for any tax credits.

Rates for Friday June 25, 2010: Mortgage rates were on a steady six day run going a little lower each day until yesterday when investors cashed in on some profits and drove prices down (rates up), today the market is working to recapture yesterday’s losses.  Overall Friday to Friday a good week as hi-balance rates dropped and pricing on conventional and FHA saw slight improvements that carry through to cost sheets.  Mortgage rates appear to be very comfortable in the current ranges. 

FIXED RATE MORTGAGES AT COST OF 1 POINT*

30 year conventional 4.375%                            FLAT

30 year conforming-jumbo 4.50%                     Down 0.125%

30 year FHA    4.25%                                      FLAT

30 year FHA jumbo 4.50%                              Down 0.125%

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 with an impound account for taxes and insurance 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.

Enjoy the weekend, a great weekend to buy a new home.  I am around most of the weekend doing some work in the home office if you need me for qualifications, pre-approvals or to run through numbers. 

Have a great week,

Dennis