Year in Review: 2021

Question of the week: A quick review of 2021?

In January rates were at their lowest for 2021, the conforming 30-year rate was 2.5% for the first five weeks of the year, and the high-balance conforming rate was 2.625%. Mortgage rates were very stable between April and October, during a 25-week stretch the conforming rate was between 2.625-2.75%. In October, and again last week, the conforming rate hit its high for the year at 3.00%; the high-balance rate hit its high for 2021 last week at 3.25%.

With a strong growth in Gross Domestic Product through the year, equity markets experienced significant gains, as evidenced by the 19.93% increase in the Dow Jones Industrial Average. For those with retirement accounts and investments in equities, 2021 created a large growth in wealth.

Housing prices continued their pandemic surge. In California the median home price for a single-family residence grew 11.9% from November 2020 through November 2021. In Los Angeles County, for the same period, the price increase was 14.3%, while across the border median homes rose 23.7%.

With a more competitive jobs market, salaries and wages are on pace to increase almost 5% for the year, however inflation growth at almost 7% has eroded the wage gains.

Looking ahead to 2022, the Federal Reserve has indicated it will use the tools it has available to push rates higher in an effort to stem inflation. How quickly and how fast this occurs will be critical to these moves dampen inflation while not putting a hard brake on economic growth.

 Have a question? Ask me!

Rates for Friday December 31, 2021: Rates dip back down this week, reversing the bump in rates last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Down 0.125%

30 year high-balance conforming                   3.125%  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 with 740 FICO score for purchase mortgages.

For myself, and Stratis Financial, I thank everyone for their continued support with your trust in confidence to work with you and your families for your mortgage needs. Also very much appreciated is the further confidence you show when referring us to family, friends and neighbors.

As we move into 2022 at midnight, we do so under the cloudy skies of the latest Covid-19 variant. The “latest,” but not the last as there will be many variants in the future, as they are with most viruses. It appears vaccinations and boosters are working to mitigate the effects of the latest strain, which is very good news in enabling us to live a more “normal” and productive life with the virus present.

Looking to the end of the coming year, it is my hope, and I am sure for most of those reading, that we close out the pandemic regulations and we are able to fully participate in gatherings, small and large, with little to no concern from the Covid-19 coronavirus.

Wishing you and your family a happy, peaceful, and especially healthy 2020.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Question of the week: What does the Federal Reserve announcement mean for mortgage rates?

Question of the week: What does the Federal Reserve announcement mean for mortgage rates?

Answer:  Higher mortgage rates.

Follow up questions are when will rates be higher and how much higher will they go?

These questions are harder to answer as there are so many variables that can enter the equation in the future.

For those who do not read the business pages of the newspaper, or have business and financial sites on their social media feeds, let’s review the premise of our question of the week.

In March 2020 the Federal Reserve dropped its short-term interest rates to near zero in response to the impact the pandemic had on the economy.

Aside: Also known as the “benchmark” rate, the Fed sets a target rate for what is known as the Federal Funds Rate. The Fed funds rate is what banks that are members of the Federal Reserve charge each other to borrow money to cover their reserve requirements. When the rate is at “near zero,” that means the target rate is 0.00-0.25%.

In June 2020 through October 2021, the Fed initiated what is known as “quantitative easing,” or QE, following a financial policy that the Fed engaged in starting in 2009 as a response to the Great Recession, and continued the practice until October 2014.

Quantitative easing is the term used for the Federal Reserve purchasing interest rate related financial instruments, more specifically U.S. Treasury debt, in the form of bonds and notes issued by the Treasury, and Mortgage Backed Securities (MBS) which are generically put into “bonds” for ease of explanations. It should be noted, the MBS the Fed buys are almost solely those issued by Fannie Mae and Freddie Mac. By purchasing these instruments, the Fed is supporting low interest rates with the intent of stimulating the economy.

The support occurs because as a buyer, the Fed is creating demand. For fixed rate financial instruments, aka bonds, the lower the price the higher the rate, the higher the price the lower the rate. If the Treasury issues bonds and there are no buyers, the price of the bonds will have to drop until investors see value in their investment, this causes rates to increase. The Fed becomes a big buyer, therefore pushing the price on the bonds higher, and the rates lower.

When the Fed announced its QE program in March 2020, it stated it would purchase $80 billion of Treasury debt and $40 billion of mortgages, every month. This activity by the Fed has helped keep interest rates extremely low as the economy recovered from the pandemic, and as the economy and inflation grew.

In September the Fed announced that it would “taper” its purchases on a monthly basis with the objective of ending the QE program in June 2022. It also stated that it expected to raise the target rate for Fed Funds rate once in 2022, probably in September. Investors and markets reacted to a shallow ramp down of the asset purchases that would take eight to nine months before the Fed was out of the bond and mortgage markets, and its benchmark rate remaining near zero for almost a year.

Many felt the Fed should have started its tapering process earlier in the year as inflation started to increase at a more rapid rate. Early in the current inflation cycle, and until this week, the Fed called the spike in prices “transitory” and that there would be a cooling down of inflation as the economy fully recovered from the pandemic, employment normalized with wage growth leveling off with prices. For this reason, the point of view that inflation was “transitory,” the Fed held on to its stated schedule of tapering QE purchases and retaining its target rate near zero.

On Wednesday the Fed announced it was speeding up the tapering process of its bond buying, with the objective of ending the process in March 2022 instead of June. As well, and perhaps of greater impact on rates to businesses and consumers, it announced it was stepping up its planned rate increases.

The new rate schedule for the Fed is to increase the Fed Funds rate target to 0.9% with three rate increases by the end of 2022. In 2023, three more rate increases will push the rate to 1.6% and one more increase in 2024 will set the rate at 2.1%.

Keep in mind the announced rates and schedules are not contracts, are not written in stone and can be changed by the Federal Reserve governors at any time depending on the economy and world events. The announced tapering schedule and rate increases are the Fed’s plan based on current economic data, particularly inflation that is well over 6%, and economic recovery.

In its announcement, the Fed has changed its prediction of inflation for 2022 to be 2.6%, up from 2.1% estimate, and for GDP to slow to 4%.

Some long-term background that is foundational to the Fed’s actions. First, the Fed’s target rate for inflation is around 2-2.25%. Second, it feels a “neutral” rate for its benchmark rate is around 2.5%, just above the rate of inflation. If these two targets are met it is expected that the economy will have steady, sustained growth in the 3-4% range.

So, what does this mean for Americans in the market for a mortgage? It means increasing rates, certainly into the 1st quarter of 2022, and likely longer. I have said for some time that rates need to be higher than that are, perhaps up to 1% higher, but at least 0.50-0.75% higher. From my viewpoint, this is likely to happen in 2022, perhaps by the Easter, more assuredly by Independence Day.

Will higher rates be bad for the economy, homeowners, businesses and consumers? I think not. From 2017 through 2019, GDP was over 4%, and mortgage rates ranged from around 3.75% to 4.5% for most of the period, and inflation was in the 2% range.

The challenge for our economy is slowing the rate of inflation, maintaining high rates of employment and labor participation, and not over cooling the economy such that a slide into a recession is the result. Which would lead to lower interest rates and a new economic cycle.

Keep in mind, the mortgage rate you pay is not dependent on the Federal Reserve. Well, lately it has been since the Fed has been absorbing some of the mortgages funded and sold on the secondary markets. In general, your mortgage rate is dependent on open markets and investors, it is their beliefs as to what will happen next in the economy that determines their actions of either buying bonds and mortgages, pushing prices up and rates down; or selling which pushes prices down and rates up.

The Fed announcement has investors expecting higher interest rates, and their expectations will guide their actions, and their actions will fill their expectations. The result, an increase in rates.

All of this said, or written, it can go the other way pretty quickly based on political, social, economic, or biological events. If an event, or series of events, occur that puts our economy back into a tremendous drop in economic activity, the Fed can reinstitute another QE program, drop its rate and shift into stimulus mode. At the same time, knowing this is what the Fed will likely do, investors will push rates down on their own.

Finally, how much of an impact has the Fed’s quantitative easing policy really had in real numbers? Consider the Federal deficit in 2021 totaled approximately $2.77 trillion dollars. Of this amount the Federal Reserve purchased about 35% of the debt issued. For mortgages, the total U.S. mortgage market is approximately $1.1 trillion and the Fed purchased approximately 44% of the market. Those are significant numbers that will need to be absorbed by other entities, pension funds, mutual funds, private investors, local, state and foreign governments. Depending on how much non-Fed investors wish to purchase of these long-term bonds, rates could move up slowly or quickly.

 Have a question?  Ask me!

How much is too much? Some more data on the Fed. In the 3rd quarter of 2008, before the Fed began its initial QE program in reaction to the Great Recession, the Fed’s total assets were $476 billion. At the end of 2021, after six years of bond purchases following the Great Recession and going on over twenty months of purchases due to the pandemic economy, the Fed’s balance sheet is at $5.91 trillion, a twelve-fold increase. Others debt that has been purchased and retained by the Fed has grown to 25% of GDP.

Considering that most of the holdings are debt issued by the U.S. government, and the percentage debt the Fed has purchased, the Fed has been the primary enabler of higher and higher Federal deficits, financed with low rates created by the quasi-government agency. Currently the outstanding debt is 125% of our economy’s GDP. And growing.

Putting a charge and urgency into the Fed to speed up its plan to push rates higher and stem inflation was data that the Producer Price Index increased to a 9.6% annualized rate in November. If wholesalers and manufacturers are paying 9.6% more for their supplies, how much of that flows through to consumers?

The headline number is good, the real number not so much. Retail sales for November were reported to be 0.3% higher than October’s sales. Pretty decent growth on the face of it. However, with an increase in prices of 0.8% inflating the sales numbers, retail sales in volume appears to have declined 0.5% for the month—not great news for a  month that is traditionally higher for retailers due to the beginning of holiday purchases by consumers.

Rates for Friday December 13, 2021: With all the announcements of the new Covid-19 variant, Omicron, spreading rapidly, and mandates for masks and proof of vaccinations increasing across the country, the concern is another lockdown of the economy. This concern, plus economic data hinting at a slow down in consumer spending (about 65-70% of our economy), investors are looking past the Fed announcement this week. What does this mean, in “normal” times the Fed announcement would spike rates. In today’s times rates are flat for the third straight Friday.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Flat

30 year high-balance conforming                   3.125%  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 with 740 FICO score for purchase mortgages.

I have been asking parents this past week if their kids are more excited for the two weeks off they will have from school starting on Monday, or the presents they expect to get next Saturday. There appears to be a direct correlation to the age of the children and where there excitement lies.

Our two come home from Boston and New York next week for their winter breaks of about four weeks. Leslie said last week, “the closer it is to their being home the more excited I get to see them.” I agree. I want to put a big bow around each of them and sit under Leslie and my stockings next Saturday morning, as their being home is the best gift we can wish for. (Grammarians, I have a hard time writing “for which we can wish.” I’m sure that is not correct either…)

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Why should we use you for our mortgage transactions?

Question of the week: Why should we use you for our mortgage transactions?

Answer:  Many of you will be heading out of town for the Christmas/New Year’s to visit with family and friends, or you will be hosting vistors. You will be having some conversations over eggnog or platters of hors d’oeuvres (picturing Clark Griswold and Cousin Eddie with the moose glasses). During those conversations, the topic of real estate and mortgages may come up, the way the 20+ months have gone it is somewhat likely. Cousin Eddie thinking of buying a new home, adding on to the current home, or worried about his equity line going up. Or perhaps sister Susie and brother in-law Lance finally see what others saw and are formally ending their marriage, she wonders what their options are regarding their home. Maybe the conversation is with you and your siblings over Mom and Dad’s home—your first Christmas without one of them and now the reality of dividing the assets which includes where you grew up, what options do you have? If/when such conversations occur it would be appreciated if you were to say, “I know a guy who can help, call Dennis…”

 For thirty years I have helped families with many scenarios where a mortgage is able to solve problems. A family purchasing their first home, or their third. Siblings purchasing some investment property. Mom and Dad refinancing an equity line they used to put their kids through college. Sister buying out her brothers’ share in the family home from mom and dad’s estate.

 Why me for these scenarios? Primarily because my staff, partners and I combined have more than two centuries experience in the mortgage industry—that is a lot of mortgages used to solve a lot of scenarios. We are adept at taking a problem and creating scenarios for our clients to consider for solutions. We are adept at communicating those solutions in plain English. We are adept at showing only the scenarios that we know will work and be able to close.

 So, do we only do complicated, or non-standard transactions? No, we thrive on “simple” or “normal” mortgage scenarios such as purchasing a new home or refinancing an existing mortgage. But, because of our experience we know that the “normal” transactions can quickly become complicated or possibly a bad situation for our client.

Properties that have unpermitted square footage, or not in condition that would be approved by underwriting. Condo projects with shaky budgets and financials. Job losses, maternity leave, unknown issues on credit reports, cloudy title, tax returns filed by someone else using your social security number, appraisals that come in under the needed value.

 As many of you learned if you are self-employed and went through the mortgage process after the start of the pandemic, new twists and turns in underwriting policies change how mortgages are approved for those not earning a W2 income.

These are just a few of the countless surprises that can, and do, pop up during transactions. Numerous times per year we are called by agents as an issue has come up on their transaction where their client, or the buyer of their client’s home, is using a different lender and they do not know how to solve an issue; they call us because they know we can provide different possible scenarios so they can move forward.

 I have always told my clients, you might be able to find another lender that will quote a lower rate; note “quote” because we only quote what we can close—this, we have discovered through the years, is not always the case with some of our competitors in the mortgage industry. Our rates are excellent, and our value is among the best in the industry. I use “value” because of what we provide in the way of service and experience to make our clients’ transactions as smooth as possible, with them knowing every step of the way what is happening, why it is happening and what will happen next. All at or below the same rate and price of almost all other lenders in our markets.

 Our business is referral only. How have we been in business for so long counting on word of mouth for our business? Tremendous service, products and rates. Plus, the ability to work out solutions for practically every scenario where a mortgage is needed.

 “I didn’t know getting a mortgage could be so easy.” This is perhaps the most common comment we get from our clients, regardless of the difficulty of the transaction, it is easier than they think it will be due to our clear communication and honest answers from first contact through closing.

 I thought long and hard before using this space to toot the horns of Stratis Financial and Dennis Smith; it is hard to speak well of oneself without feeling like a braggart or boastful. Every now and then however we do need to boast a bit about what we do and how we do it. I hope you read this as intended, to remind people about what we do and how we do it with the desire that our name is passed along to others who are in the market for some assistance with their mortgage needs.

In closing I want to thank the thousands of individuals and families that have told clients, families, friends, co-workers and neighbors, “hey, I know a guy who can help you, call Dennis…”

 Have a question? Ask me!

Johnny Paycheck was the vocals for millions of Americans again in October. His 1977 song is on their lips and minds as the Great Resignation continues with 4.2 million quitting their jobs in October, which amounted to 2.8% of workers. Most of those leaving their jobs are doing so for another job for better pay, conditions, benefits, location or a combination of these and other factors. The transitory nature of the workforce is evidence by the 11 million job openings in October and an increase in labor costs of 9.6% in the 3rd quarter, a number that is sure to be higher in the 4th quarter. The higher labor costs are detrimental to mortgage rates as they add to other factors to push inflation higher.

Segueing into inflation, the Bureau of Labor Statistics released data for the Consumer Price Index today, and the numbers are not good for consumers. Prices rose 0.8% in October, pushing the annualized rate of inflation for consumers to 6.8%, the highest it has been since July 1982. I had just finished my sophomore year in college and was half way to my degree in economics. We studied money supply as a means to control inflation, as Federal Reserve Chair Paul Volcker was in the midst of restricting the amount of money in the economy, which pushed interest rates to post-World War II highs (the prime rate went to 21.5%), to lower inflation. The CPI data is not mortgage rate friendly as it provides even more support for the Fed to raise interest rates. Ideally not as high as Volcker did in the ‘80s.

Rates for Friday December 10, 2021: Rates end the week flat from last Friday, which is a bit surprising given the data and growing expectations for higher rates sooner rather than later.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Flat

30 year high-balance conforming                   3.125%  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 with 740 FICO score for purchase mortgages.

Faithful WR&MU readers with very good memories likely recall a very similar question and answer as this week’s from some time in the past. While I do write the WR&MU myself every week (you can tell by the typoez and mistakey grammar), there are times when I will revisit a subject from the past. I do this for a few reasons.

First, there are new readers added to the send list every month who may benefit from the commentary. Second, some information bears repeating from time to time as a refresher, or to update information. Third, some weeks I have not received any questions, or have a hard time coming up with something new to write about. Fourth, some weeks I am pressed for time and take the easy approach of finding a post from a few years in the past and presenting it once again. Today’s post is a combination of all four!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Will increase in loan limits impact housing markets?

Question of the week: Will increase in loan limits impact housing markets?

Answer:  Yes. Next question, how?

As expected, on Tuesday the Federal Housing Finance Agency announced the maximum loan amounts for conforming, and high-balance conforming, that can be funded in 2022; these are the mortgages that are funded through lenders and then purchased by Fannie Mae or Freddie Mac (aka, GSE’s or Government Sponsored Entities).

In October the WR&MU question of the week was, “Why do loan limits matter?”; at that time the expected new loan limits had been announced, this week we received the official limits for 2022, and they are slightly higher than expections.

For all counties the maximum conforming mortgage limit will be $647,200. For the approximately 100 counties that are considered “high-cost” the high-balance loan limit will be $970,800. As seen in the weekly rate update each week, the high-balance interest rate is always higher than the conforming loan limit.

Not to repeat the WR&MU from October, but a few quick notes. Prior to the announcement this week*, mortgage applicants can have loan amounts almost $100,000 higher and obtain the conforming loan limit. As well, for those in the high-cost areas, they can borrow more money for a home with the same value.

*The 2021 loan limits are $548,250 for conforming loans and $822,375 for high-balance loans. Almost every lender are now accepting and funding loans to the new loan limits, for loans funded in December they will sell them to the GSEs in January when the new limits are effective.

The impact on housing markets is to increase affordability, either due to lower available rates, or lower down payment requirements. For high end home buyers and home owners, the higher loan limits enable these borrowers to have loans underwritten and approved with guidelines from Fannie or Freddie, and avoid what are typically much more difficult guidelines for “jumbo” mortgages.

For instance, in many instances, the GSE guidelines will require only one-year tax returns for self-employed borrowers (not all instances, but many, depending on length of time in business and other factors), where as jumbo guidelines require two years of tax returns and income averaging.

As well, most jumbo programs have maximum loan amounts to 80% of the property value (LTV). Prior to the loan limit increases, home buyers, or borrowers, who wanted a mortgage of $825,000 or higher needed a home value of $1,031,250, which is over $200,000 in equity, to meet the jumbo requirements. With the new loan limits, borrowers can borrow to purchase a home or refinance a current home up to 95% of a home valued at $1,021,895—or $970,800, or only $51,095 in down payment or equity.

The new loan limits will have the effect of enabling more homebuyers into middle and higher end markets with easier qualifying. The more eligible buyers there are in the market, the more potential demand in the market. Prices are a factor of supply and demand, if the is more potential demand prices are supported at their current values, or increase if the demand exceeds supply.

Does this mean that housing prices will remain the same, or continue to increase across the region, state and county? No. While the  higher loan limits will expand eligibility due to lower interest rates for buyers in the conforming and high-balance mortgage markets, the loan limits will have no impact on the rates themselves, which are the primary element in loan qualifying.

While a buyer purchasing a $720,000 home with 10% down, or a $1,000,000 with 5% down may have a lower rate, and/or down payment, in 2022 than s/he would have had in 2021, if the interest rate on that loan is significantly higher in 2022 the borrower’s ability to qualify is more challenging due to the higher payment.

That said, the higher loan limits do somewhat dampen the impact of higher rates that are expected in 2022 since there is a relatively lower rate and possibly down payment requirement. A buyer of that $720,000 home with a conforming loan may be getting a rate of 3.5%, or 3.75% in mid- to late-2022, but without the loan limit increase they could be looking at a rate as high as 4% depending on the high-balance rates at that time.

The buyer of a $1,000,000 home in 2021 needed a $177,625 down payment (about 18%) and would obtain a rate between 2.625% (the low in 2021) and 3.125% (the high, so far in 2021). In 2022 the million-dollar home buyer needs only $50,000 down, benefiting high income buyers who want to highly leverage their purchase, or have high income but low savings.

For some perspective on how much of an effect this has on housing markets, consider than 60% of all mortgages in 2021 were purchased by Fannie or Freddie, up from 42% in 2019. With the higher loan limits the percentage of the mortgage market purchased by the GSEs should increase.

The advantages created by the loan limits will add support to the housing markets in 2022 that can mitigate a slow down should rates increase, as expected.

Have a question? Ask me!

Not all the high-end buyers will benefit from the higher loan limits. According to the California Association of Realtors, approximately 25% of the home sold in 2021 between $1.25 to $2 million were to first time buyers, in San Francisco it was almost 40%.

It’s that time of the month, jobs data for the prior month was released by the Labor Department today, as it is on the first Friday of every month. Expectations for new hires were around 570,000 in November, only 210,000 new jobs added, the lowest hiring in one month so far this year. A positive number in the data was that 594,000 people rejoined the labor force in November, pushing the labor participation rate to its highest level since before the pandemic, 61.8%. Also positive was the 4.8% increase in wages from a year ago; however, this is less positive with inflation at 6.2%, in effect real average wages are down 1.4% from last year. The data is a bit of a mixed bag, but the long-term takeaway is not positive. Based on the current pace of jobs being filled, it will take two years, or more, to have our labor force back to pre-pandemic levels; which will be a drag on economic growth.

Rates for Friday December 3, 2021: From an interest rate perspective the jobs data was somewhat friendly as it has some investors wondering if the sluggish labor market may result in the Fed pushing back its intention to increase its benchmark rate to later in 2022, or beyond. While the mortgage markets reacted favorably to the news today, rates remain flat this Friday after the increase last week.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Flat

30 year high-balance conforming                   3.125%  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 with 740 FICO score for purchase mortgages.

You have likely seen reports that the new coronavirus variant, omicron, in is the United States, in California in fact with the first case reported in San Francisco and recently a case in Los Angeles County. From what I have read, those in the U.S. that have been detected with the virus were vaccinated and had some symptoms consistent with Covid, but not severe nor requiring extensive medical treatment, i.e., hospitalization. This may change of course as more people contact the variant; however, it is positive news that thus far the vaccinations are successful in mitigating the impact of the new strain. Let’s hope this is the case for all those who contact the virus so our medical system is not severely impacted with new cases.

It is my hope that the reporting and commentary on Covid-19 moves from crisis communication to educational communication. By this, that the message is not what “might,” “could,” “maybe” occur that is horrible and creates fear. Rather the message is that the coronavirus and its variations are here to stay, thankfully we have very smart people who have developed, and will continue to develop, vaccines that lessen the impact of the virus on the overwhelming majority of people who are infected. Like getting flu shots and boosters for other diseases, we will need them on a regular basis if we wish to diminish the viruses impact.

Vaccines are not 100% effective, but they can in most instances prevent severe illness. This is our future with Covid-19, I wish the media, bureaucrats and politicians would switch from the-sky-is-falling messaging that creates fear, to acceptance of the long-term presence of this, and other, viruses. Of course, friendly messaging and communication does not get clicks, likes or tribalization that separates society so…

Of my soap box, have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Why shouldn’t I get 20% off?

Question of the week: Why shouldn’t I get 20% off?

Answer:  We continue the series we have had on credit with today’s Black Friday edition of the WR&MU, which is dedicated to those who are always bargain hunting, and sometimes ignoring long-term consequences of their hunt.

Everyone loves a bargain, or the perception of getting a bargain. Retailers know this, which is why most the merchandise in stores are “on sale.” Department stores and large retail chains have created a method of making every item in their stores a “bargain,” offering a discount on everything you purchase that day if you obtain a credit card from them.

Over the years retailers have discovered their bottom line improved if they were able to partner with major banks to issue credit cards to their customers, as a result the “department store” card is becoming a dying financial instrument.

Back to your question, why shouldn’t you get 20% of your purchases? This a typical discount retailers provide shoppers if they obtain a credit card, their credit card, that day.

The purpose of the credit card offer is not to get you to buy more items in the store at a discount, but to get you to finance those purchases, that day and in the future, with interest rates that can be as high as 23%, or more.

Whether a department store card, which can only be used at that retailer’s stores, or a credit card issued by a major bank that can be used anywhere credit cards are accepted, both typically will give discounts if the card is used at the retailer.

This is the hook. Offering discounts and bargains if you use the credit card with the retailer’s logo on it.

These discounts are great, provided you do not carry balances on the cards, especially for a prolonged period of time.

Rare is the credit report I see that does not have credit cards with balances. Two weeks ago, we covered how your credit card balance in relation to the credit limit (credit usage) impacts your credit score. In reviewing reports, I often see the revolving credit accounts with the highest usage percentage are cards tied to retailers, airlines, or hotels. These balances are being carried at very high interest rates, but you are getting points.

So, the $500 charge you made at Macy’s, Home Depot, Banana Republic, to get 20% off, leads to other charges for movie tickets, restaurant meals, gas, car repairs and of course clothing, shoes and other apparel. These charges then sit on your credit card, and each month you pay down the balance, but not off, and part of your monthly payments go to interest, at a high rate.

But of course, you are getting points which you can use to get further “discounts” on merchandise or travel.

Credit cards that have benefits of points towards discounts can be very useful, provided the purchases and balances are properly managed—which means paying off the balances as soon as possible to ensure the benefits are greater than the costs of high interest rates.

As in our other WR&Mus in this series on credit, by budgeting your spending and credit use, credit can be a useful financial tool; with poor budgeting, planning and spending, it can be a detrimental financial tool. In our industry, mortgages, the rewards are greater for those who have properly managed their spending and use of credit; which has long term rewards of lower rates on a 30- or 15-year mortgage.

Here are the other WR&Mus in our series on credit:

November 5th: Getting new credit before a home loan

November 12th: New credit during escrow, items impacting credit scores

November 19th: Incorrect balances on your credit report

Have a question? Ask me!

Minutes from the latest meeting of the Federal Reserve meeting showed a higher concern for inflation that any prior meeting. Their concern with the sharp increase in prices has most members considering accelerate their tapering off of purchasing U.S. Treasury debt and mortgages, as well increasing their benchmark interest rate sooner than later. Prior discussions had the Fed ending their debt purchases by early to mid-summer, the latest minutes show this end date may be early spring 2022. The news is interest rate unfriendly.

Data on income, spending and costs in October were released on Wednesday, and it was consistent with prior data showing increases in all three categories. Personal income was up 0.5% from the prior month, however the increase in earnings was deeply discounted by the 0.6% increase in prices, which were up 5.00% from October 2020. The year-over-year inflation rate was the highest since 1990. Personal spending was up 1.3% from September, however taking out inflation the increase was 0.7%. Overall, the news is not positive for rates as the data adds more support to the Fed maneuvering to push borrowing rates higher.

Rates for Friday November 26, 2021: With the Fed accelerating the time frame for higher rates, and data supporting higher rates, it is not a surprise that we see rates higher from last Friday, as you can see by the chart we have choppy lines—which indicate transition and upward pressure after lower, and stable rates for a prolonged period. Markets are open today and while not reflective on rate sheets, Mortgage Backed Security (MBS) prices are up today (lower rates) due to investors dumping stocks and purchasing fixed rate assets (like mortgages) on news of a new variant in the Covid-19 virus that could lead to a surge in cases, and possible return to shutting down commerce and economies.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Up 0.125%

30 year high-balance conforming                   3.125%  Up 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 with 740 FICO score for purchase mortgages.

I hope you had a wonderful Thanksgiving; we did and I write this still in somewhat of a tryptophan coma—likely adding to my grammatical, punctuation and other usual errors.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

The balances are not correct on our credit report

Question of the week: The balances are not correct on our credit report.

Answer:  Okay, okay, it’s not a question, but the format is the format. This is a follow up on our prior two WR&MU in which we covered whether you should get new credit before applying for a mortgage to purchase or refinance your home, and a follow up regarding getting new credit while you are in escrow for your new home purchase or refinance.

This statement under “question of the week” is fairly frequent from clients after we send them a copy of their credit report.

You receive a copy of your credit report and see a $1200 balance on your Chase Visa, a $350 balance on your Home Depot MasterCard, and a $25,000 balance on an equity line that was paid off when you sold an vacation property two months ago.

You contact me and let me know that you have paid off the credit cards, and of course they equity line is paid and closed.

Why does this happen?

Credit companies report to the credit bureaus on the date of your monthly statement. You went to Vegas for your anniversary weekend and charged $1200 on your Chase card, then the next weekend you went to Home Depot and charged $350 to complete the honey-I-will-do list you gave your spouse as an anniversary gift (they get more exciting the longer you have been married…).

Your credit statement is issued on the 10th of the month, you paid off both cards on the 15th of the month, we ran your credit report on the 25th of the month. On the 10th Chase and Home Depot reported the balances to all three credit bureaus (Experian, TransUnion, Equifax), and they will on the 10th of next month. If you have not used your credit cards between the statement dates, because you paid them off, if we pulled credit on the 11th of the next month both accounts would show zero balance.

Does it matter that your credit report shows balances on credit card accounts you have paid off? Probably not, but maybe.

It may matter if, as mentioned in the WR&MU regarding obtaining credit before you apply for a loan, depending on the credit balance on the report and what percentage it is of your available credit, your credit score may be impacted. As well, depending on your debt-to-income ratios, the minimum payment required on these balances may put you in jeopardy of qualifying. Since minimum payments on most credit cards are 2% of the outstanding balance, the minimum payments on the Chase and Home Depot cards would be $24 and $7 respectively. In most cases this would not endanger your ability to qualify.

What about the equity line that was paid off?

This could present a bigger problem as it raises a potential red flag that you own other property that is not disclosed on the mortgage application, as well depending on the minimum payment your qualifying ratios may be in jeopardy.

This is an easy problem to solve. By providing a copy of the closing statement from the vacation property sale escrow to our credit company, we can have them update your report to show the credit line is paid in full, with no balance and no payment.

If there are errors on a credit report, with proper documentation, i.e., a statement or transaction record from the creditor, we can work with the company we use for our credit reports to correct anything in error.

Regarding “our credit company.” We contract with a third-party company that is recognized and accepted by the mortgage industry, including Fannie Mae, Freddie Mac, FHA, lenders, etc, to provide “tri-merge” credit reports and scores. “Tri-merge” is the fancy lingo for a credit report that merges the reports from the three major credit bureaus into one report.

Besides history, balance and payment details for each open, and closed within the past seven years, from creditors, the reports also list recent inquiries, any public records such as tax liens or judgments, employment history as reported by creditors, and address history, again as reported by creditors.

Have a question? Ask me!

Retails sales continue to increase. According to reports this week consumers continue to ring cash registers as retail sales in October were up 1.7% from September. Very good news for the economy, but…as reported a few weeks ago in the WR&MU, inflation spiked in October, which accounts for about half of the increase in retail sales; this is because the sales are based on unadjusted dollars of sales.

Rates for Friday November 19, 2021: Rates continue to have small fluctuations week to week as investors sort through economic data and prospects for higher rates, impact of inflation, Fed moves and budgets in Washington. The conforming rate slips down after last week’s bump.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   3.00%  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 with 740 FICO score for purchase mortgages.

This will be a record setting Thanksgiving in the Smith household, the fewest we have had.

Every year for the past few decades we have hosted Thanksgiving dinner. It is my favorite holiday and enjoy spending the day prepping, cooking, baking, cleaning (I think cleaning pots, pans and dishes as you go is about 50% of the time spent in the Thanksgiving kitchen) for our dinner with family and friends. Our table varies from about seven or eight to twelve or fourteen.

This year with our daughters and nieces away from home, Leslie’s dad having passed away in January, we find ourselves with an intimate table of four as Leslie’s sister and brother in-law join us.

I’m glad we have a 20-pound turkey so there is just a small chance we won’t have enough…The biggest challenge is how to cut down on the recipes for the side dishes!

Happy Thanksgiving everyone,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Follow up with more credit information

Question of the week: Following up on last week’s question of the week.

Answer:  Thank you to everyone who followed up with more questions and comments regarding credit and credit scores.

Second generation, and long term now retired, mortgage professional Steve wrote to remind of a very important issue that sometimes derails a mortgage approval.

During the approval process most lenders run a “soft-pull” credit inquiry to see if any other inquiries have occurred since the credit report we have in file. This is to discover if the applicant has applied for and opened additional credit since the report in the file was run.

Not infrequently we will get a message from underwriter, “Please explain inquiry on XX/XX/2021 and indicate if new credit account has been opened.” Contacting our client about the inquiry, they may respond, “Oh, we purchased a new car. Since you already ran our credit we didn’t think it would matter.”

It matters. Now we have to re-work the file and debt-to-income ratios to determine if you still qualify with the new car payment.

Another action that might impact your credit is if you pay off all, or a lot of, your credit accounts before we run a credit report. This is natural instinct for many who want to eliminate debt and payments to enhance their ability to qualify for a mortgage. However, sometimes this may backfire and result in lowering your credit score.

Huh? Why would paying off credit lower my credit score, in prior WR&MU you stated that lower balances help my credit score. True, I have written that. However, in some instances having no balance can be harmful to your score as well. When running models to see what adjustments need to be made to improve a credit score, for some clients the report will say, “having a $850 balance on Generic Visa will improve score 10 points.”

When you are beginning the process of thinking about purchasing a new home, before paying down, or off, any credit accounts consult with a mortgage professional to determine your qualifying debt-to-income ratios with current balances, how your qualifying ratios improve is there is strategic paying down, or off, of credit accounts, and possibly running a credit report and then a “what-if” scoring model to determine how adjusting different accounts impact your score.

In the big picture, your credit score matters when it comes to pricing your loan, in the smaller picture a change of a ten to fifteen points may have no impact because of the pricing tiers (call LLPAs or Loan Level Pricing Adjustments) imposed on lenders by Fannie Mae and Freddie Mac for ranges of credit scores.

Starting at the minimum score of 620, the pricing improves with each 20 point tier until a credit score is 740 or higher, from 740 to 779 the pricing is the same, and pricing is the same from 780 to the maximum score of 850 (which I have never seen).

Depending on the type of loan, property, transaction, credit score and loan to value, the pricing difference from tier to tier can be as low as 0.125% and as high as 1.50%.  For example, if your score is 674 and we discover you can increase your score to 680 and you are purchasing a home with 20% down, this could improve your rate by 0.25% (one-quarter of one-percent); on a $500,000 mortgage this could save you $67 per month, about $800 per year.

Depending on your score and where it falls in the pricing tiers, a small change up or down in your credit score will not impact your interest rate.

The conclusion is the same as last week’s WR&MU answer, before making any major adjustments to your credit accounts, consult with a mortgage professional who is knowledgeable about credit scoring, its impact on qualifying and interest rate, and has the access to tools to determine how certain actions may impact your score. Click the “Ask me” link below to contact such a qualified mortgage professional.

Have a question? Ask me!

It has been more than 30-years since inflation has been as high as it was in October. The Consumer Price Index rose 0.9% in October from September, and 6.2% from October 2020, the highest year to year increase since 1990. Analyzing the data from the last several months, the consensus is that high inflation will persist into 2022, the question is how long into the new year? The news is very mortgage rate unfriendly, not just the number but the persistence of climbing prices and outlook for it continuing longer than many previously thought.

Many Fed officials are looking for higher rates. Word has come out the Fed officials are about 50/50 on whether to raise the Fed’s benchmark interest rate in late 2022 or early 2023, some are hinting they would like a hike earlier in 2022. A few weeks ago the Fed announced it was slowing its purchases of Treasury debt and mortgages (aka Quantitative Easing) beginning this month with a schedule to stop completely in mid-2022; the news of rate hikes possibly coming shortly thereafter has pushed interest rates up this week.

Rates for Friday November 12, 2021: A spike in rates on Wednesday before the Veterans’ Day holiday caused the conforming rate to pop back up this Friday after last week’s dip; high-balance conforming rates have held onto their rate from last Friday. Rates are very volatile as investors react to economic news pointing to higher rates at some point in the future.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Up 0.125%

30 year high-balance conforming                   3.00%  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 with 740 FICO score for purchase mortgages.

Is this it? Are the high temperatures in Southern California the last we will see until, May, June? Several weeks ago, I wrote about Indian Summer on the East Coast, and other parts of the country. When we were growing up we loved the break in the first weeks of cold weather to have some more days with warmer weather. “Warmer weather” usually categorized as low to mid-60’s. In Southern California the comparable is a break from mid-60’s weather and several days of high ‘80’s or higher.

Nothing like putting up Christmas decorations in shorts and t-shirts!

(Note our Christmas decorations and lights do not go up until after Thanksgiving!)

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Is it true we shouldn’t get a new credit card or car loan before we buy a home?

Question of the week: Is it true we shouldn’t get a new credit card or new car loan before we buy a home?

Answer:  Thank to neighbor Alex for the question of the week. Yes, it is probably true that you should refrain from taking out new debt before you purchase your new home, or perhaps even refinance.

However, as with most questions of the week, the answer is circumstantial to your financial situation and objectives.

Over the years we have covered credit reports, credit scores, debt-to-income ratios is our questions of the week. This week’s question encompasses all of these factors that impact the ability to qualify for a mortgage.

One of the impacts of applying for new credit is the potential hit that your credit score may take because of the inquiry. (Why did my credit score drop?) If you have just one credit card inquiry your score may not be impacted, or impacted to severely; however if you have multiple inquiries for credit cards or department store cares your credit score will definitely be impacted.

If you are shopping for a new car and have inquiries from two or three different auto dealers, there may be some slight impact on your credit score, but it should not be significant as the algorithms for the scoring models are set up to accept multiple inquiries for auto loans, and also mortgages.

The other impact on your credit score is percentage of outstanding debt to available credit. If you obtain a new credit card with a $10,000 credit limit and put $10,000 worth of kitchen appliances on the card your credit limit will be negatively impacted as your credit-usage is 100%. If you put $2500 on the card there may be an impact on your credit score depending on other factors within your credit report, but it will not be as significant as maxing out the available credit.

Possible impact on your credit score is one reason you may not to obtain new credit before applying for a mortgage.

The next factor to consider is how much will the monthly payment be for my new credit? Using the above credit card example, if you obtain a new credit card and maximize the limit the probably minimum monthly payment will be $200 (rule of thumb for most credit cards is the minimum payment is 2% of the outstanding balance); or, if you purchase a new car and obtain a $35,000 loan with a payment of $630 per month, this will impact your debt-to-income ratio.

The impact on new credit inquiries and balances can impact the interest rate, or cost, for your new mortgage (lower credit scores can lead to higher cost for same rate, or higher rate for same cost).

Debt-to-income ratios determine if you can qualify for a mortgage or not.

Depending on your income, other debt, cost of your new home and resulting costs for mortgage, taxes and insurance, the additional monthly payment for new debt may put you beyond the maximum debt-to-income limits for qualifying. This is the primary reason my mantra for years has been, “buy the garage and then the car.” Auto lenders are much more lenient on their debt-to-income qualifying than mortgage lenders, and it is usually easier to obtain an auto loan if you have a mortgage history.

This argument is especially true for self-employed borrowers with the extra scrutiny given to their income and how it is used for qualifying for mortgage programs.

If you are considering purchasing a new home in the somewhat near future, or refinancing your current one, before obtaining new credit it is strongly suggested you have your financial information reviewed by a mortgage professional (me) with your objective of homeownership as the focus to determine if you should wait or not for your new wheels or major purchase.

Have a question? Ask me!

As some expected, the Federal Reserve announced this week it would slow down its purchases of bonds and mortgages. Known as Quantitative Easing, since early in 2020 the Fed has been purchasing $120 billion in bonds and mortgages every month. Starting in November and December the Fed will reduce their purchases by $15 billion per month, with the current plan to cease all purchases by June; this is known as “tapering.” In the announcement the Fed did say that depending on circumstances it may halt the tapering process to support the economy. Also in the announcement, the Fed said at this time it will taper its asset purchases rather than increase its benchmark interest rate.

A somewhat positive jobs report for October was released, but also some interesting employment data. Employers hired 531,000 new workers in October, and their wages are 4.9% higher than they were in October 2020. The wage number is positive as it is the first time since inflation has spiked that wages are at or above the rate of climbing prices. What is causing some concern is the participation rate, the percentage of able adults who are working. Despite over 9 million workers losing their jobs at one point in the pandemic, millions have not returned to the workforce. Add to those who have not returned are the millions who are new to the workforce due to aging into the working force demographic. Of those who are age sixteen or older only 61.6% are working, the lowest participation rate since the early 1970’s. There are many reasons that are being postulated, however no consensus or reason has come to the forefront for this almost dangerously low rate of participation in our labor markets. One danger to consider is the loss of payments into social security.

Rates for Friday November 5, 2021: Investors have continued their purchases of Mortgage Backed Securities and the momentum of lower rates that began late last week continues into this Friday. The economic news and action by the Fed should put upward pressure on rates, or at least eliminate downward pressure.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.75%  Down 0.125%

30 year high-balance conforming                   3.00%  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 with 740 FICO score for purchase mortgages.

Anyone need some bags of candy? Last week I mentioned how we were excited to see Halloween return to “normal” and Leslie stocked up on candy for us to hand out to trick-or-treaters. Well, after only six or seven small groups rang the bell, we have plenty left—too much—despite us grabbing handfuls of little candy bars and dropping in the bags and buckets.

Thankfully one of the young moms in my gym workout group volunteered to take a bag off our hands! Yes, I see the irony of sloughing off candy at the gym…

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What are supplemental taxes?

Question of the week: What are supplemental taxes?

Answer:  This is a question many buyers ask, whether first time buyers or someone purchasing for the first time in a long time. Usually when they receive a supplemental tax bill from the county asking them to pay the tax.

Before we talk about supplemental property taxes, we need to review property taxes. To keep this discussion simple, we are only addressing taxes when a home is purchased.

Your property taxes are established when you purchase your home and are based upon the purchase price. The base tax rate in California is 1% of the purchase price. On top of the 1% are additional assessments as established by the voters or elected officials in the county and/or city where the property is located. For instance, in Long Beach there are additional taxes assessed for water district, the county for parks, school district and community college district among other assessments.

The rule of thumb for property taxes is the amount is 1.25% of the purchase price of the property. If you purchase a property for $500,000, we estimate your taxes to be $6250 per year.

In California, the fiscal year is July 1st to June 30th. Tax bills are mailed in October with the first half taxes due by December 10th and the second half taxes due by April 10th. With our $500,000 price example, you would need to pay $3,125 in December and $3,125 in April.

If you are purchasing a home and close on the last day of February the escrow company will make sure the second half taxes, due by April 10th, are paid as part of the closing. The taxes that will be paid will be those currently due; i.e. the current owner’s tax bill. As well the escrow company will collect from you and reimburse the seller for four months of taxes since you will own the property the final four months of the tax year—March, April, May and June. 

On the property you are purchasing for $500,000 that will have property taxes of $6,250 the current owner’s annual taxes at the time of the sale are $3,850 per year. At closing you will be charged $1283.33 to cover the four months between your purchasing the property and the end of the tax year on June 30th.

In October your property tax bill will state that you owe a total of $3,850, half due by December 10th and half by April 10th.

But…your tax basis is supposed to be $6250, why is your tax bill smaller? Because if you purchase your property between January and May the prior owner’s property taxes will continue through the next fiscal year.

You will also receive a supplemental tax bill in the amount of $2400 with half due by December 10th and half by April 10th. The supplemental taxes cover the difference between the amount you were billed based on the prior owner’s tax obligation and your tax obligation based upon the transfer price.

If you are paying your taxes directly this causes little difficulty, you are paying the total amount that is owed, just off of two different bills, the regular tax bill and the supplemental.

If you have your taxes impounded as part of your monthly mortgage payment then it gets a little tricky. Your lender will be collecting every month based upon what your taxes should be, $520.83 per month, and will be prepared to pay $3,250 in December and $3,250 in April. However, in October the lender will receive a tax bill totaling $3,850 with two installments due.

This is where it can, and does, get tricky and one reason I encourage people to avoid having their taxes and insurance impounded and paid by the lender if it is an option. In this scenario, with an impound account, you will have paid your lender $520.83 per month based on what tax obligation will be, and then your lender will pay the taxes owed on the tax bill. The result will be a balance of the excess between what was collected and what was paid. At some point the lender will refund this money to you, as they must by law.

However, the refund will most likely come after you will need to pay your supplemental tax bill totaling $2400. If you are impounded and have paid the full amount to the lender for the taxes why is the lender not paying the supplemental tax bill? They have the money to pay it.

Because the county assessor does not send the supplemental tax bill to your lender, and you are responsible for the payment. Essentially you will end up paying the supplemental amount twice, once to the lender—which eventually gets refunded—and once to the county.

If you have an impound account there is the possibility that your payments will be adjusted a few times over the following year or more. Because the tax bill sent to the lender was significantly less than the amount collected, the lenders automated billing process may reduce the amount owed every month as part of the tax collection and will send you a notice to this effect.

It is very important if you do get this notice that you contact the lender and inform them that you do not want your impound collection to be lowered due to the one-time tax bill that was paid at the prior owner’s tax rate, because if you do then you will be underpaid when the next tax bill is sent and the lender will end up sending you a notice that the account is short and your payment must be increased to account not only for the real tax amount due but the shortage created by them adjusting their collections.

Confusing, isn’t it? This happens not infrequently as the lender tries to catch up to the actual taxes owed. So, if you get a notice after the first tax bills have been paid by the lender, and you have paid your supplemental taxes that significantly lowers your tax collection for your impound account contact your lender immediately and have them adjust the collection back to the necessary amount.

As with any mortgage or real estate related question or problem you can contact me if you are having an issue regarding the supplemental taxes or impound account, I can help walk you through the process and steps to take.

Have a question? Ask me!

Economic data released this week shows a slowing economy, higher prices and wages. It is a mixed bag of numbers that is reflective an economy in flux with external pressures impacting employers, workers and consumers.

In the 3rd quarter GDP grew by 2%, well below the 6.7% growth seen in the 2nd quarter. A large reason for the slower growth was consumer spending increasing by 1.6% in the 3rd quarter, as opposed to 12% the prior three months. Not only did spending slow down, but there was a marked shift in where the spending took place. Spending on services increased 7.9% for the quarter, but purchases of durable goods (autos, refrigerators, lawn mowers) declined 9.2%. A lot, all?, most?, of the decline in durables purchases are due to the supply-chain issues you have been hearing and reading about. Causing delays in order deliveries, manufacturing abilities and higher prices, purchases of durable goods are being delayed by consumers.

The data shows that inflation is rising faster than wages. Reports for September show that inflation (4.4%) is outpacing wage growth (3.2%) by 1.2%. Employers are increasing wages and benefits to attract workers, the employment cost index (wages, benefits and other employment related costs) is up 3.7% from last September. The result is non-government employees saw wages and salaries increase at a historic 1.5% in the 3rd quarter. Even so, with the increase in inflation more than the increase in wages, the result is essentially a pay cut.

With the slow down in spending and increase in prices, it is apparent that demand is not the prime driver of inflation. Back to the supply chain and the huge increase in shipping, warehousing and delivery of goods, plus the higher wages to attract workers, that are putting higher costs on manufacturers, retailers and employers who must pass along the higher costs to buyers. The reduction in demand may, should, relieve some of the supply issues as fewer products need to be delivered, however this will take time to work through the regional, national and global economies.

Rates for Friday October 29, 2021: The mixed bag of economic news has investors changing their direction for fixed income investments, like mortgages. The result is we see the 30 year conforming rate slip back down from last week’s increase, the high-balance rate remains the same.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.875%  Down 0.115%

30 year high-balance conforming                   3.125%  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 with 740 FICO score for purchase mortgages.

We are looking forward to seeing the little superheroes, princesses, cartoon characters and other costumes this Sunday. Last year our street set up sidewalk trick-or-treating (with beverage “treats” for parents) and while fun, it was sad due to the reduced number of children and families out and about. This year’s Halloween is yet another sign of the pandemic being further behind us and “normal” returning to our homes and neighborhoods. 

We are also looking forward to having enough visitors to blow through the goodies that Leslie has on hand to pass out. Otherwise, the holiday weight gain struggle begins on Monday instead of the third Thursday in November!

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

When is the best time to lock in our mortgage rate?

Question of the week:  When is the best time to lock in our mortgage rate?

Answer:  As soon as you can, especially in a turbulent interest-rate market.

To lock in a mortgage rate for a client we need a transaction type, property address and type, loan amount, property value, credit score and time frame (how long until we close).

From these factors we can generate rate and price options for you to select for your purchase or refinance transaction. For most purchases clients are more inclined to pay points to buy down the interest rate; for most refinances clients are more inclined to go with higher rates and low to no-point options.

Some clients are tempted to wait to lock in for a few reasons. One, they feel rates can drop and save them some money. Two, the shorter period the rate is locked in the lower the cost for the same interest rate.

Taking example two, rates are priced in 15-day increments. We can lock in a rate for 15, 30, 45, or 60 days (there are also 90-day rate locks available but that discussion is for another time). With each 15-day increment, the price for the same interest rate is 0.125 points higher.

For example, if you are looking at a 3% mortgage for $500,000, the price we receive from our mortgage partners would be $625 higher for each 15-day period. A 60-day lock is 0.375 points, or $1,875, more costly than a 15-day lock.

When getting rate quotes from lenders it is important to know how long the lender will be locking in the rate for that quote. Over the years I have had many conversations with clients asking about rates who have responded, “I just spoke to Someother Lender who said the cost for the same rate is $1500 cheaper.” When asked how long the rate would be locked, the answer is usually, “they didn’t say.”

Unsurprisingly the quote was for 15-days and I was quoting 45-days to match their purchase transaction closing time frame.

Back to the question and answer, why is it better to lock in your interest rate as soon as you can?

It is the nature of interest rates to go up as if on a rocket and come does like a feather. Too often homebuyers and owners trying to “time” the market miss out because by the time they realize rates are going up, they have gone up. By trying to save an eighth of a percent (0.125%) in interest rate and save $35 per month on their mortgage, they mistime the market and the rate has climbed by 0.25%, costing them $70 per month, and possible higher points as well.

For many months I have been Chicken Little, claiming “rates should be rising, rates should be rising.” The markets and numbers appear to be fulfilling my expectations. Lock your rate when you can.

Have a question? Ask me!

Twenty million people. That was how many fewer people are receiving unemployment benefits last week that one year ago. Data on unemployment claims and benefits presented positive news for the labor markets yesterday, with new claims being under 300,000 for the first time since March 14, 2020—the week the pandemic closed the economy.

The Fed has indicated it will keep rates low based on the health of our labor market. The data today, and over the past few months, indicates a healthier labor force. As a result, the news yesterday pushed mortgage rates higher.

Rates for Friday October 22, 2021: Markets had been putting upward pressure on rates since last Friday, the news yesterday pushed them higher. We see the 30-year conforming rate at its highest mark since June 5th of last year. Some of the upward pressure has been technical, investors reacting to data sets and points, but significant pressure is the result of anticipation of the Fed slowing its purchase of mortgages and U.S. Treasury debt—which should result in rates moving up.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.99%  Up 0.24%

30 year high-balance conforming                   3.125%  Up 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 with 740 FICO score for purchase mortgages.

Greetings from Boston. Leslie and I have been on the daughter tour this week as we flew into New York City on Monday and spent some time with our youngest, then took the train to Boston where we will be spending time with our oldest, returning home Sunday evening.

We perfectly timed our visit to greet what I grew up knowing as Indian Summer, a period of warm, dry weather in autumn to give one last reminder of how nice that can be before winter cold, winds and snow arrive.

As we took the train north, every half hour it appeared as if more and more of the leaves were turning from green to orange, yellow, red…a lovely ride that I encourage you to take if you have the chance as the track runs along the coast much of the way.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog