of the week: What does it mean that the Fed
stopped buying mortgages?
Answer: Maybe not much.
In 2008 in response to
the sudden drop in the stock markets and start of the recession the Federal
Reserve initiated a policy known as “Quantitative Easing,” or QE. This policy
was for the Fed to purchase fixed rate securities, i.e. bonds, to pump money
into the economy to stabilize the markets and reduce panic in the markets and
to lower interest rates to spur on the economy. The bonds purchased were
Mortgage Backed Securities (MBS) issued by Fannie Mae, Freddie Mac and Ginnie
Mae and some Treasury bonds. From November 20008 until the end of QE1,as it
became known, in early 2010 the Fed purchased $1.25 trillion in mortgages and $300
billion in Treasury debt plus another $175 billion in debt from other federal
agencies for a total of $1.725 trillion in new money put into the economy.
Before QE1 started the base 30 year fixed rate loan I quote every week was at
6.25% on Halloween 2008, when QE1 ended rates had dropped to 4.875% at the end
of March 2010, a reduction in rates of 1.325%.
The economy was not
faring too well in 2010, even though the recession had ended in June 2009
unemployment remained very high and growth was stagnant. In November 2010 the
Fed initiated what is known as QE2 to increase the pace of the economy and keep
interest rates very low to entice borrowing for companies to expand and hire
more workers. Until June 2011 the Fed purchased $600 billion of long term
Treasury bonds. At the start of QE2 the benchmark 30 year fixed rate loan was 3.875%
in the beginning of November 2010, at the end of June 2011 the rate was 4.5%,
an increase of 0.625% during the QE2 time period primarily because when the Fed
started QE2 it announced how much and for how long it would be purchasing the
U.S. Treasury assets.
With the economy and job
growth still lagging the Fed embarked on QE3 in September 2012, which was to
purchase $40 billion in mortgages and $45 billion of U.S. Treasuries until the
economy improved—so for an indefinite period of time. Again the expectation was
to keep mortgage rates and other borrowing rates low for consumers and
As soon as QE3 started
speculation started as to when the Fed would end its purchasing program and the
word “taper” entered the vernacular of financial markets. Tapering was the
expected move of the Fed to end QE3, instead of immediately stopping the
purchase of $85 billion in securities every month the Fed would slowly taper
off its purchases until out of the market. Tapering finally began in December
2013 and will end this month--which is the news this week, the Fed announced
that October 2014 would be its final purchases of mortgages and U.S. Treasury
debt with new money in the economy.
The net impact of QE3 was
approximately $2.2 trillion in mortgage and Treasury securities purchased by
the Fed, for a total of approximately $4.5 trillion in new money put into the
economy from the start of QE1 in November 2008 through this month. As stated by
the Fed in each iteration of Quantitative Easing, a primary purpose was low
interest rates for businesses and consumers to spur the housing markets, the
economy and employment.
What was the impact on
mortgage rates from November 2008 to October 2014? As stated above the
benchmark rate that I have consistently used for the Fannie Mae conforming
mortgage rate every Friday in the Weekly Rate and Market Update was 6.25% on
Friday October 31, 2008, today exactly six years later that rate is 3.75%, a
drop of 2.5%.
So what happens now that
the Fed has left the building so to speak? Not much in my opinion. The Fed’s QE
program saturated the markets and did have an impact of lowering mortgage rates.
However as we have seen this past year even as the Fed has exited the QE3
program tapering its purchasing of mortgages and Treasury debt rates have been
very stable through most of 2014 and are lower than January when the tapering
This is very good news
for the mortgage markets in the short, and possibly longer term, as it shows
that institutional and private investors have filled in the slack in the demand
for Mortgage Backed Securities as the Fed has slowly left the market. It also
means that investors do not have a significantly positive view of economic
growth in the near term.
The Fed purchase of
mortgage debt has not ceased entirely, just the use of new money for those
purchases. Moving forward the Fed is recycling proceeds from mortgages that pay
off and interest received to continue purchasing MBS, the sheer volume of
purchases has declined precipitously though. The difference between the Fed
reinvestment and the MBS hitting the market is what is being bought by the
Moving forward without the
false support of the Fed for mortgages our rates will once more become more
tied to economic data and investors’ outlook on future economic conditions. As
things stand currently, the continuing conflicting data (see recap below) continues
to show a murky economy not ready to exhibit strong growth and not ready to dip
back into recession. After more than five years of the post-recession business
cycle history shows that one or the other should be occurring in the not too
One other note on the Fed’s
QE program. With a purpose of stimulating investment by companies for economic
and payroll expansion the most expansion that has seemed to occurred are the
cash balance sheet of U.S. companies is estimated to be up to $5 trillion, that
is $5 trillion not spent on new equipment, on new buildings, on payrolls. This
non-invested cash is very near the amount of all the Fed’s QE programs
One other expansion
exhibited by the Fed QE programs has been the value of U.S. stocks as the Dow
Jones has expanded from 9,325 on Halloween 2008 following its low point of 8,450
two weeks prior (having reached a record high of just over 13,000 in May 2008)
to almost 17,400 as I type this on Halloween 2014. This increase has benefited
those with retirement accounts, such as 401(k), IRAs, pension funds, invested
in equities and of course institutional and private investors.
I hope this rather
lengthy explanation and opinion has not put anyone to sleep and provided
insight into the Fed and its impact on the economy and your mortgage rates.
Have a question? Ask me!
Remember, with Dennis it’s not just a mortgage,
it’s your complete financial picture.
busy week for data that impacts mortgage rates. Pending home sales
nationwide was reported on Monday by the National Association of Realtors and
showed a slight 0.3% increase in September and up year over year for the first
time in 2014 by 1.0% from September 2013. The Western region showed decline of
0.8% for the month. Higher pending sales usually translates to higher closed
sales and continuous gains in home sales will usually precede higher interest
rates as it reflects a strengthening economy. Of course if rates climb too fast
too soon home sales will dampen.
indicator for the economy are orders for durable goods, these are orders
manufacturers place for what are known as factory hard goods. September showed
a surprising drop in durable goods orders for the second month in a row
dropping 1.3% for the month and the year over year performance is an increase
of 3.3% from last September. Though a volatile index that is used to predict
future economic performance drops two months in a row create some unease about
economic growth. Lower durable goods orders tend to be good for lower interest
rates as they can portend lower economic growth.
was the release of the initial third quarter Gross Domestic Product (GDP)
data. For the quarter the initial estimate was an economy growing at 3.5%, which
is moderately healthy. The growth in the quarter was lower than the second
quarter’s 4.6% growth much of which was a rebound from the poor first quarter
due to the harsh weather in January and February in much of the country. This
data could push rates higher as the Fed debates when to raise its discount rate
it charges banks borrowing funds to cover reserves, if the Fed pushes its
discount rate higher then rates across the economy will rise as well.
is stabilizing as seen by initial unemployment claims filed each week continuing
to remain at recovery lows. This week 287,000 new filings were made, up a bit
from the prior week. The stabilizing number indicates companies are not laying
off more workers across the economy and usually this is followed by an increase
in hiring. As we have seen however despite the slow-down in layoffs there has
not been a corresponding rise in private sector hiring to increase the labor
participation rate in the economy.
conflicting data this week on consumers. Consumer confidence and sentiment data
was released that showed strong gains as consumers look forward to a more
positive personal economic situation. This in spite of decreases in personal
spending in September of 0.2% following gains of 0.5% in August. Personal
incomes in September gained 0.2% for the month, lower than gains seen in
August. With personal incomes up slightly and personal spending down slightly
combined with lower durable goods orders and expenditures one would anticipate
consumer confidence to be lower rather than higher. Overall the mixed data has
a cancelling out impact on mortgage rates as the lower spending would trend
rates lower and higher confidence trend rates higher.
Friday October 31, 2014: With all of the news what is the net impact on
mortgage rates? Overall Mortgage Backed Securities prices slipped a bit lower
each day with some volatile interday swings. The net result has been a slight
increase in our rates from last Friday.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.75% Up 0.047%
30 year high-balance conforming 4.00% Up
30 year FHA 3.25%*** Flat
30 year FHA high-balance 3.625%*** Flat
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. ***FHA rates have no
points and credit towards closing costs.
Boo! What can be better than being a kid with
Halloween on a Friday or Saturday night? No homework, no having to get up early
the next morning for school and more leeway from parents to sample treats from
the night’s haul.
This year is a milestone for the house as the oldest,
being in high school, is too old to trick or treat so will be going to a party
instead. To make up for it we are having of few of the younger one’s friends
stay over after trick or treating and no doubt staying up to near dawn on sugar
highs from their haul.
Have a great Halloween, remember when you pass out
your candy it is not supposed to be one for them and one for you!
Have a great week,
of the week: We are looking at a home that the
prior owner lived there for over thirty years and now her children are selling
it. It is in pretty rough shape, how will this impact our appraisal?
Answer: Once again we have a question that presents many possible answers. With
real estate prices having climbed the past few years there are fewer investors
purchasing “distressed” homes so they can remodel and flip for a profit. As a
result more of these properties are being purchased by traditional buyers who need
mortgages to finance their purchases.
In answering this
question the first question I have is what is your definition of “rough shape?”
For some people a property needing fresh paint and carpet is considered “rough”
or “distressed;” for others holes in the wall, obviously leaks in the roof and
missing fixtures means a property is distressed. If the condition of the
property is the former we will get different impact on appraisal than if the
condition is the latter.
Appraisers are required to
grade a property’s condition on a six point scale that range from “improvements
have been very recently constructed and have not been previously occupied” to
“the improvements have substantial damage or deferred maintenance with
deficiencies or defects that are severe enough to affect safety, soundness or
structural integrity.” Most properties
fall between these top and bottom grades and depending on where in the opinion of
the appraiser will determine the impact on the appraisal report.
If the condition of the
property is such that it needs cosmetic renewal, i.e paint, carpet, and has an
out of date kitchen then the appraiser will down grade the value in relation to
comparable sales in the area that are in clean condition and have had recent
upgrades to kitchen equipment, bathrooms, etc.
If the condition of the
property is such that it has several functional, safety or integrity
issues-such as missing fixtures, holes in structure, missing floor coverings,
etc. then the appraiser will severely downgrade the value of the property with
list of conditions that have impacted the value. In this instance underwriters
will reject the loan unless the conditions have been addressed and corrected,
at which point appraiser must re-inspect the property to verify the conditions
have been corrected and often will then re-adjust the value of the property.
Poor landscaping, dirty
wallpaper from 1981, carpets that have been in place since the wallpaper was
put up and had several pets potty train on them over the years and an original
1956 kitchen will not kill a mortgage approval as long as the structure is
sound but will receive a lower value than the property that sold across the
street that had been refreshed the year before it sold.
If this same property has
noticeable water stains on the ceilings from a leaky roof, a water heater that
is installed out of code and some broken windows then the underwriter will most
likely require a certification from licensed roofer that the roof is free of
leaks, the water heater properly installed and vented and broken windows
replaced before the loan can fund.
One of the challenges we have with property
conditions on appraisals is not necessarily the subject property since the
appraiser has inspected the home, but rather the condition of the properties
that are used as comparables by the appraiser that he did not inspect. For
gauging the condition of comparable sales the appraiser can only use the
comments made by the agent that listed the comparable and put in the multiple
“Recently remodeled inside and out!” “Turn key
with new cupboards, counters and flooring” “Cleanest property on the market”
and other phrases tell the appraiser that the condition of the property is very
good. We have had instances when showing the comparables and adjustments to
real estate agents on an appraisal that is low where the agents have seen the
properties valued much higher do to superior condition and commented that the
conditions were the same but the listing agent on the comparable engaged in
“puffery” on the MLS. While this may entice some agents to show a property it
also negatively impacts other sales in the area if the property is not in the
condition stated. I had one instance where the listing agent of our property
with the lower appraisal was the agent that puffed up the condition of the
comparable property, that was an interesting conversation. The lesson being
that the more honest MLS descriptions are for the condition of listed and sold
properties the better values other homes will receive when appraised.
Condition of a property definitely impacts an
appraisal, how much is determined by what is needed to improve the property to
good condition and also what condition other properties were in that have sold
recently in the area.
If you can find the home that needs cosmetic
improvements and updating and is selling towards the bottom end of the market
in a neighborhood then that can be a great home to buy. Weekends at Home Depot
or Lowes to get paint and materials to slowly rehabilitate your new home can
add a lot of value with not a lot of cost and some hard work.
for housing markets as existing home sales for September rose 2.4% from
August, though down 1.7% from September 2013. Median home prices for the month
were down 4% nationwide, spurring the growth in sales, and are up 5.6% from September
2013. One result of the uptick in sales was a decline in inventory with supply
on the market shrinking to 5.3 months (if no new homes are put on the market at
the current sales pace it would take this long for all listings to be cleared
off the market). The West was the region with greatest growth in sales at 7.0%
for the month. Strong home sales is generally an indicator for higher mortgage
rates as it reflects a stronger economy, consumer confidence and demand for
the drop in gasoline prices that we have all enjoyed the Consumer Price
Index for September was slightly positive at 0.1% growth for the month after dropping
0.2% in August. Stripping out food and energy costs CPI was still up 0.1% indicating
an increase in food prices for the month to balance out the decline in energy
costs. Year over year consumer prices are up 1.7%, the same as August. The CPI
data supports interest rates remaining low and in the same range where we have
been, absence of inflation decreases chances of the Federal Reserve raising
short term interest rates in the near future.
2000 have initial unemployment claims been as low as they have been over
the last four weeks, averaging 281,000 claims per week. This shows some
strength in employment and should result in higher monthly employment figures,
however as our monthly employment data have shown rather than an increase of
hiring that is usually reflective of very low unemployment filings the economy
has seen restrained expansion of employment and a slow decline in the
percentage of those eligible for employment actively working. Ordinarily low unemployment
filings would lead to higher interest rates as it signifies strength in the
economy and in job markets.
Friday October 24, 2014: Following last week’s large swings up and down in
both stock and bond markets there was some anticipation for another choppy week
as international and domestic news continued to put uncertainty in markets.
Mortgage markets returned to some stability with narrow price changes all week
and prices moving sideways day-to-day and equities regaining upward momentum.
As a result mortgage rates after their big dip last Wednesday and subsequent
slow move upwards at the end of the week saw very slight movement up in the
conforming rates from last Friday and no movement in other products.
30 year conforming 3.703% Up 0.015%
30 year high-balance conforming 3.875% Flat
This is coming to you live from the Bay Area this
morning. We are gathered for an 8 Bells Ceremony for my Dad and will spread his
ashes in San Francisco Bay this afternoon. It is a beautiful day and we look
forward to this age old ceremony as the ringing of the bell 8 times signifies the
end of a watch and all is well, time for those sailors on duty to rest. Today
we honor the end of Dad’s watch knowing all is well.
Question of the week: How can I be sure I’ll be able to pay for my new home?
Answer: This is a question that many (most?) new homeowners ask themselves and occasionally ask me. Such was the case this week with a new client who could get herself around her payment intellectually—but emotionally she had doubts. Can I afford this much every month for my house?
It is easy for me to simply say, “of course you can…” and try to move on, but that does not help a nervous new homebuyer put aside their fear and move forward feeling positive about their new home. So rather than brush off the client it is important to go through the process of showing how she can afford the payment.
I have a number of sayings, they have become clichés for those in the office or at home who have heard me speak with numerous clients over the years, that put a client at ease and more open to seeing how they can really afford the price, loan amount and monthly payment for which they qualify.
First is, “I’m glad you’re nervous.” Why? Because I believe if you are a bit nervous about making an important decision you will make a better decision that if you just impulsively decide. When you are nervous you will be more likely to study the problem and the possible solutions. When you are nervous you will be less likely to accept other people’s advice and suggestions offhandedly. There is however a difference between being nervous and being panicked about your new home purchase and mortgage payment.
Second, piggy-backing on the advice aspect there are three things you need to always remember through the process: 1) I am not using any of my money to purchase your home, 2) I am not going to make or help make any of your monthly payments and 3) I am not going to be staying in your new home. Not only am I not doing these three things but neither is your agent or anyone else. That said and understood that is how you need to take and accept advice, in the end what we are providing is just that, advice. Whether you take it or not is up to you because when all the dust settles you are spending your money and making a payment every month for the home you will be living in. Yes it is obvious and rather simplistic. We have plenty of clients over the years however who seem like they have come out of an abusive relationship with a prior lender and/or agent; reminding them that they are in charge and they can say “no” for some is a new concept. Keeping this in mind you will be more comfortable asking the questions you need to ask to find the comfort level you need to make your new purchase.
Do the math. Break down the monthly payment, your income, your net income, your bills and expenses. Our math shows you can afford the payment I am presenting to you. You are worried that you are may not be able to make that payment. Show yourself that you are either justified in your concern or not. One client a few years ago emailed me the day after our meeting with a budget he had put together and he realized he spent a very sizeable amount of his income on eating out every month—or perhaps I should say every meal. He quickly saw that cutting way back on his restaurant bills put him in a confident state of mind to move forward with the home purchase with the price and mortgage we recommended. He is now a happy homeowner and has expanded his cooking repertoire beyond Top Ramen and Stouffers.
Finally take a look at what you would be able to purchase at your comfort level. If I am showing you can afford a home for $525,000 and your comfort level puts you in a home for $450,000 ask yourself how comfortable will you be in that home in one, two, three years when you realize you could have afforded a larger payment and a bigger home or one in a different neighborhood. By the time you realize that you will be a bit stuck as future home prices and rates go up making the home that cost $525,000 more expensive and then calculate the closing costs of selling the home you think maybe you should not have purchased.
Our job is not to talk you into purchasing anything you do not want to purchase, nor to put you into a mortgage you do not feel comfortable paying. Our job is to ensure you can close on the mortgage you need to purchase the home you want. Part of that job is to present you with a range of options so you can see what homes at different prices will cost you out of pocket at closing and every month thereafter. Then you have the ability to compare your housing comfort with your housing payment comfort.
In the end the decision is yours, if you are able to purchase a home for $525,000 and you want to purchase a home for $450,000 I think that is great and will work hard to ensure you own that home. What is important to me is that you have looked at your options and feel good about your decision, today and in the future.
One tool that helps make this decision is comparing the different home prices and mortgage amounts side by side. This link compares prices for our buyer from $450,000 to $525,000 showing difference in cash to close, monthly payments and tax benefits for a mythical buyer named Dennis C Smith.
Be nervous, remember who is in charge and do the math and in the end you will purchase the home you want at the payment you can afford.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Wow. That was an interesting day on Wednesday. Anyone near any sort of media, even social media, was aware that the stock markets took a big dive on Wednesday. Not reported on the headlines, or even on many business pages, was the corresponding spike in bond prices. Long time Weekly Rate & Update readers know that when bond prices go up then interest rates go down. I subscribe to a service that provides me quotes on the prices for Fannie Mae Mortgage Backed Securities (MBS) with hourly messages and alerts when the price moves up or down a fairly significant amount. My Samsung Galaxy SIII was buzzing and chirping most of Wednesday with alerts of big moves—up and down—throughout the day as the stock markets moved. Historically, and fundamentally, there is a reciprocal relationship between stock prices and bond prices. When stocks look shaky or risky investors engage in what is known as a “flight to quality.” Bond investments, including mortgages, are “quality” as they have a defined payment, interest, over a defined period of time. In poor economic times, periods of domestic or international turmoil or uncertainty investors sell stocks and buy bonds.
When the dust settled after the market closing MBS, which had started the day well above the closing on Tuesday had peaked at prices not seen since May 2013 and then dropped to close just above the closing price from Tuesday. Thursday morning we again saw the MBS market open well above the close from the day before, and again saw prices bounce around through the day but mostly dropping until the market closed just below where it was the day before. So while stock markets dropped hard on Wednesday and stayed pretty even on Thursday, mortgages and bonds spiked and then recovered to earlier prices.
What caused the huge sell/buy in stocks/bonds? A convergence of events pushed investors to hit their sell buttons on stocks. Concern over Ebola and infected individuals travelling on commercial airlines caused those stocks to drop having a domino effect on other industries. Weakness in European economies caused concern for the impact on the U.S. economy created a “sell” mentality. Greek is once again on the radar screen as there are concerns if another bailout is needed to prevent default. Retail sales in for September were considerably weaker than expected causing concern about the health of our economy and ability for growth to be sustained. Wholesale prices in September dropped from August, another indicator for a weakening economy. And finally once the momentum of the selling took hold no one wanted to be left holding an investment that would be worth a lot less later in the day. Add all the factors up and the major indexes dropped sharply early and then scratched back to cut losses in half.
Following the ride on Wednesday and the calmer stock market on Thursday, today stocks have rebounded back from the big drop and bond markets have lost some more ground. So lots of news, lots of excitement and some patience sees everything reset back to Tuesday.
Rates for Friday October 17, 2014: The whipsaw markets have taught us the markets can be very volatile on a daily basis and it is important to look at the trends and direction over a period of time rather than a snapshot of one day. Looking at the direction of Mortgage Backed Securities, they have been rising for several weeks and the spike and then drop Wednesday through today either signal the upward momentum is over and we may see higher rates soon, or investors are taking a breath and a little bit of profit before continuing their buying of mortgages. Next week will be important in determining the answer and if we are in for even lower rates or if we have hit the bottom of the current cycle. In such a market it is always advisable to lock your rate when you are able. For the week rates are down from last Friday and the 30 year conforming is at its lowest since the last week of May 2013.
30 year conforming 3.688% Down 0.0620%
30 year high-balance conforming 3.875% 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. ***FHA rates have no points and credit towards closing costs.
I saw an article this week by an author who was saying how he has a hard time relating to kids that are around my kids’ ages. And he is 37. He was saying how it is hard to relate since the big technological difference between him and his parents were cordless phones versus phones plugged into the wall. I had to chuckle as I remembered our first push button phone and microwave. He thinks he has trouble relating, by the time he was our kids’ ages CD, VCR’s and car phones were common place.
Of course it is always fun to play it up by saying things like, “I sent Mom a text and at the end typed Pound Sign DadsInTrouble!”
“It’s a HASH-TAG Dad!”
“Not in my day, it’s a pound sign…” Until I get an automated attendant that says, “for dial by name push the hash-tag symbol on your phone…” I will remain a pound sign.
My apologies, and embarrassment, at the display of this webpage. I have been working with webpage host regarding style issues and they have not been able to resolve. So ignore the style and appreciate the content! DennisQuestion of the week: What should I offer for the house we want to buy?
Answer: This week’s question is a repeat but one that bears repeating given the market where buyers are competing with other buyers’ offers as they try to purchase their new home.
So to answer the question, here are more questions.
How bad do you want it?
Are you buying a house to make money or a home to raise your family in?
Is the asking price in line with recent sales and other properties currently on the market?
What kind of condition is the house in, will you need to spend a lot of money to make it livable, is the cost to do so reflected in the asking price?
Are you the only buyer interested in the property?
How long has it been on the market?
What is your real estate agent advising?
Are you asking the seller for any concessions such as paying for your closing costs, or any contingencies such as waiting for your home to sell or funds to be available to close?
Is the seller the family that has lived there for several years or an investor or bank?
All these are the questions you need to answer when making your offer. Keep in mind whatever you think the property is worth and no matter how much you try to justify your offer if it is below the seller’s asking price, the seller does not have to accept your offer because they have their justifications for the price they are asking.
My advice on this question has always been, and more so now with the current housing markets is don’t be afraid to give the seller what they want to sell you the home if you want the property. As you live in the home for many years and raise your family you can look back and say, “wow, we almost didn’t have this because I was getting stuck on a few thousand dollars.”
If you like it, your family likes it, you can afford it, the price is reasonable to closed and current sales so it will appraise, then buy it—make an offer that makes it difficult for the seller to say no.
If you want the house make the offer it takes for the seller to say, “deal.”
No economic data this week that impacts mortgage rates significantly. the minutes from the last meeting of the Federal Reserve Open Market Committee were released this week, however and any news from the Fed is always a market mover and this week was no exception. The basic summary is that the Fed is not raising rates, has no time table to raise rates and given the current economic conditions the data does not appear to support rate increases. The result of the news, which boils down to the Fed keeping their discount rate near zero for an indeterminable period of time, was that the markets jumped.
Investors have been realizing large gains for the past several years as a result of the trillions of dollars pumped into the economy by the Fed and low interest rates. The money from the Fed is about to stop as it finishes its asset buying spree this month. The news that rates will not be going up anytime soon sent equity markets (stocks) and bond markets climbing on Wednesday. There was pull back on Thursday as profit taking occurred but the Fed news put a positive push on the markets.
Rates for Friday October 10, 2014: Mortgage Backed Securities (MBS), which determine mortgage rates, have been moving up (rates down) since bottoming out in mid-September. Despite a bit of a sell off yesterday and today the trend is positive for mortgage applicants. One aspect of the movement is that it is happening within the private sector as the Fed purchase of mortgages is approaching zero. This supports rates remaining low for a period and perhaps drifting a bit lower as we hit our lowest conforming rate today since last June.
30 year conforming 3.75% Down 0.240%
30 year high-balance conforming 4.00% Down 0.125%
30 year FHA 3.375%*** FLAT
30 year FHA high-balance 3.75%*** FLAT
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. ***FHA rates have no points and credit towards closing costs.
There is no greater time of the year for sports fans than October as all four major sports are underway. Baseball has reached the playoffs, football is in full swing, hockey dropped the puck on its regular season this week and basketball is starting its pre-season. Back in the day…..I can recall several weekends holed up with my friends with a collection of televisions, most black and white with a bit of snow or static, in a dorm room or apartment arranging antennas to produce our own simulcast of games from late morning well into the evening—or end of the weekend. Typewriters may be typing term papers, econ books would stay open to the same page for two or three games, and any inquiry by intruders asking for class notes were met with a grunt and a waive at a desk covered in papers, books, pizza boxes and perhaps an empty beverage container or two. We were in sports heaven for young men with little to no responsibilities. Of all my college and soon after college experiences, those memories are among the best.
That could not happen today due to the advent of cable and lack of over the air sports television. Today we flick from game to game on high definition televisions while checking scores and updates on our smart phones texting each other our comments and jibes, but more likely getting the texts and updates as we shuttle from activity to activity through the weekend.
It’s not the same. Ah, back in the day for the young sports fan.
Question of the week: We know where we want to live when we retire, should we buy our retirement home now or wait until after we retire?
Answer: This is a question I have answered before and as with many questions of the week the only set answer is: it depends. There are several factors that must be considered when making the decision to buy now or buy later answering these questions may help you make your decision.
When are you retiring? Next month, next year, in three years? If you are retiring next month then your options are pretty limited. If you are retiring next year or in several years you will want to consider what home prices may be in the future. If you will need a mortgage if you can get a lower rate today than in one, two, three years. Finally what is your plan with the property between now and when you retire, will you rent it to help with the debt service, will you use it as a second home?
Will you need a mortgage? If you will need a mortgage will you be able to qualify for a mortgage after your retire? I have met with many retirees over the years who have sold their home and are buying their retirement home only to discover they are not able to qualify for a new mortgage. Just because you have retirement accounts with a lot of money does not mean that you can qualify for a mortgage. The Dodd-Frank Act that established the Consumer Finance Protection Bureau also required that the CFPB define a “qualified residential mortgage” (QRM) the includes verifying borrowers’ ability to repay the mortgage. The QRM and ability to repay rule requires that borrowers are able to show sufficient income to make the monthly mortgage payments. While it seems to be common sense that if you have one million dollars in your retirement accounts you have the ability to pay off a $300,000 mortgage, underwriting guidelines and policies are such that simply having funds in the bank does not mean those funds will provide the income needed to cover the mortgage payment. In conclusion after all the technical stuff, if you will need a mortgage it is better to obtain it while you are employed than to risk not being able to qualify after you retire.
Can you support the home until you retire? Being able to qualify to purchase the property does not mean it will be easy for you to maintain the cost of the property. Mortgage payments, property taxes, insurance, any potential association fees, landscaping, utilities, property maintenance, etc can add up. Perhaps you are fortunate to be able to afford these costs and can use the property as a second home. If it may make your budget tight, or adversely impact your ability to continue to save for your retirement, then you may consider renting the property until you retire and convert it to your primary residence. If this is the case are you prepared to be a landlord?
If you are able to purchase your retirement home today there are various financing techniques that you should consider to ensure that when you do finally retire and sell your current residence that you are set up for minimizing your mortgage costs post-retirement. Simply putting the proceeds from the sale of your current home into your new home and paying down the mortgage may not lower your mortgage payment. Not all lenders will “re-cast” your monthly payment after receiving a large payment in principal, if this is the case you will have a high mortgage payment on decreased retirement income. Because of this it is important before you purchase and finance your retirement home to go through any options, including “piggy-back” financing (as discussed in the August 1st Weekly Rate & Market Update), that focus as much on your post-retirement income as your current qualifying income.
One final point regarding pre-purchasing your retirement home, the Employee Benefit Research Institute has issued a report that housing expenses, not health care, are the highest expenses for retirees (read about the report in this article). Pre-purchasing your retirement home may significantly reduce those costs for you in the future and lead to a less financially stressful retirement.
With mortgage rates still near historic lows and home prices in many areas that might be considered for retirement still affordable now may be the right time for you or someone you know to purchase their retirement home. If you, or someone you know, is interested in discussing the options and possibilities please do not hesitate to contact me.
Employment data bookends the week as Monday data on personal income and spending was released and this morning September’s job numbers. Personal income and spending increased in August, with spending outpacing income. Generally this is good news for the economy as personal spending is 65-70% of our economy. Naturally higher income is good news as it usually leads to higher spending, caution comes into play however if spending outpaces income dramatically or over several months as it means Americans are going into deeper debt or dipping into savings to pay for their purchases. This news usually would lead to higher interest rates.
This morning the Labor Department released jobs data for September. Overall the report was positive, the headline number of the unemployment rate dropped to its lowest level since July 2008 at 5.9%. A total of 248,000 jobs were added to the economy, of which 236,000 were in the private sector. Challenges in the report were that part-time employment made up over 35,000 of the growth, the labor participation rate sunk to 62.7%, 97,000 workers dropped out of the workforce and what some term the “real unemployment rate” which consists of unemployed and under-employed (working part-time or took job below qualifications to work while looking for better employment) is just below 12%, and wages are stagnant which can create a drag on spending. As stated overall the job numbers are positive and a good sign for economic strengthening. Employment growth in September was below 2%, if third quarter GDP numbers show higher than 2% growth then a bit of a disconnect occurs where employment is lagging economic growth. This is part of the “slack” that the Federal Reserve governors express concern about when discussing how long to keep interest rates at near zero for their member banks.
Not surprisingly the news impacted mortgage markets this morning, however not as much as I would have anticipated. Mortgage Backed Securities (MBS) have been on a tear since they hit recent lows (low prices, higher rates) on September 18th and this strong upward momentum in MBS prices (higher price, lower rates) tempered the early morning reaction to the jobs numbers. Bond markets have risen so strongly the past two weeks that many of us are waiting for a correction as portfolio managers sell off holdings to capture profits and re-balance their investments. With the Fed almost out of the mortgage markets the run up in MBS prices has been driven by the private sector, which is positive for the sector as it indicates a truer market than one that is being artificially propped up with money created by the Federal Reserve.
Rates for Friday October 3, 2014: One of my many mortgage mantras is that rates go up like a rocket and come down on a parachute. Such is the case this week. As mentioned earlier MBS prices have been climbing since bottoming out on September 18th, which would be reflected in lower rates. As MBS prices climb lenders are slow to push the rate changes onto their rate sheets as lower rates. Today’s little drop off in MBS prices however quickly made it onto morning rate sheets wiping out most of the gains made earlier in the week. We could see more volatility as the day goes on and investors perhaps flee to the safety of bonds ahead of the weekend and unknown international events, for now however rates are flat from last Friday. Distribution of the Weekly Rate & Update is earlier than usual as I am heading out to San Francisco this morning and will not be able to update later.
30 year conforming 3.99% FLAT
30 year high-balance conforming 4.125% FLAT
30 year FHA 3.375% FLAT
30 year FHA high-balance 3.75% FLAT
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.
A big milestone this week as Stratis Financial celebrated its 15th Anniversary on Monday. I have been so fortunate to work with great partners, wonderful staff and truly professional individuals at Stratis. As well we are all grateful for the thousands of individuals and families who have entrusted us with their mortgage transactions.
We have seen quite a few changes in the mortgage industry, from the start of Automated Underwriting Systems through the bubble expansion and burst and through recovery and tightened credit policies and increased regulation. Through it all we have been focused on our clients’ needs and followed our motto, “Serious About Service.” Our transactions are not about the file folders that move through the office but about the families that will be positively impacted with our successfully doing our jobs.
While there have been many changes in the mortgage industry the last 15 years, what has not changed has been the quality of the people I am blessed to go to work with every day and the quality of clients we have been able to assist in purchasing their new homes or refinancing their mortgages.
Thank you everyone for all your support through the years!
Dennis C. Smith, California Bureau of Real Estate Broker #00966315; NMLS #296660
Stratis Financial Corporation, California Dept. of Real Estate Broker #01269597; NMLS #238166