What do you think about interest rates, real estate prices, and the economy?

Question of the week: What do you think about interest rates, real estate prices, and the economy?

Answer: This week I am saving you some time, at least those who routinely slog through the answers to the questions of the week.

I would like to know what you think about what is happening in the economy, inflation, interest rates, real estate.

Please click this link to a quick survey I put together (14 questions all multiple choice but one): https://s.surveyplanet.com/0xbb1zby

Every week the WR&MU goes out to over 500 readers, almost half open up the email and read some, or all, of the update every week. My hope is that everyone who opens this week’s updates click on the link and take a few minutes to click through the survey.

Depending on the amount of data, I intend to have for you next Friday the results of this not very scientific poll.

Thank you for taking the time to complete the survey!

Have a question? Ask me!

A lot of public figures talk about “transparency,” Federal Reserve Chair Jerome Powell appears to be one who means it. Pulling no punches, Powell without actually saying it, said that the Fed is okay if the economy falls into a recession as a result of the Fed’s moves to pull down inflation.

As well, the Fed is expecting unemployment to increase, forecasting the unemployment rate to be 4.4% in 2023, an increase from the current 3.7% rate.

Powell’s comments came at a press conference following the Fed had hiked its benchmark rate by 0.75%, the third straight increase of that amount, as expected, increasing the rate from 2.25-2.50% to 3.00-3.25%. Looking ahead, the Fed raised its “terminal rate,” (where it expects to end up after more rate increases) to 4.6% in 2023. Easy math shows us that two more large rate increases hits that mark. While it will get close to 5%, no Fed officials who vote on the rate changes predict it will exceed that level. Forecasts from the eighteen officials were evenly split with six each predicting the benchmark rate will level off at 4.25-4.5%, 4.5-4.75%, or 4.75-5.00%. The climb to the “terminal rate” will not be gradual, as the Fed has embraced a shock-and-awe approach, as seen by the 2.25% increase in rates over its last three meetings. Looking forward, based on the past few months, it is not unreasonable to expect the terminal rate to be reached by February. How firm the terminal rate expectation is remains to be seen given Powell’s very hawkish view of inflation and his stated intention to use all tools to pull it down from near 9% to near 2%.

In regards to housing, Powell said the deceleration (not the same as decrease) in housing prices is “a good thing,” as housing prices will be more in line with residential rental rates and other prices. Having supply and demand become more aligned is needed to increase home affordability.

Somewhat good news for mortgage rates came when Powell answered, “No,” when asked if the Fed is getting close to selling the $2.7 trillion of Mortgage Backed Securities it holds. As mentioned in last week’s WR&MU, the Fed selling its holdings of mortgages and Treasuries puts upward pressure on rates, but withholding sales of MBS in the short-term, the Fed will alleviate any additional pressure.

Rates for Friday September 23, 2022:  No news or comments this week moved investors to want to enter the fixed-rate markets. When they feel a recession is closer than more inflation and rate hikes we will see rates flatten and decline. In the meantime the conforming rate is up from last week, but less than I would have expected given the activity earlier in the week.

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

30-year conforming                              6.125%        Up 0.125%

30-year high-balance conforming        6.625%        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 with 740 FICO score for purchase mortgages.

Thank you to all who reached out after last week’s WR&MU. I was worried about getting too technical, and was more long-winded than normal, so the positive feedback was very well received.

Regular readers know that I am a big baseball fan. While never a fan of the Yankees, Aaron Judge’s season where he has already tied the immortal Babe Ruth for home runs in a season, and could possibly win the Triple Crown (first in the American League in homers, RBI, and batting average), has me rooting for him.

That said, I am rooting even harder for St. Louis Cardinal Albert Pujols to reach the magic number of 700 career homeruns, he currently is at 698 career dingers with eleven games left in the regular season and how ever far they go in the playoffs. Pujols is one of the all-time good guys to play the game and is well known for his work in the communities where he has played.

Making it easier for me to root for both of these great players is that neither is scheduled to play my beloved Phillies, unless they meet in the playoffs.

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

How do Fed moves impact mortgages and housing?

Question of the week: How do Fed moves impact mortgages and housing?

Answer: Today’s WR&MU may get a bit into the weeds and a little technical for some readers. I will do my best to write in simple English and broad-stroke explanations. I hope you stick with our answer section as it may clarify for you the relationship between the Federal Reserve, our economy, interest rates, and therefore our housing markets.

The Federal Reserve’s stated purpose is, “Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit off full employment and stable prices.”

Very simply, monetary policy is controlling how much money is in the economy. Increasing the amount of money increases economic activity, decreasing the amount of money suppresses economic activity. The Fed has several tools available to increase or decrease the amount of money in the economy.

“Full employment” and “stable prices” are not mutually compatible in a natural state. If everyone is employed there is more money circulating in the economy as workers purchase goods and services. Full employment results in greater demand for goods and services, which puts upward pressure on prices, i.e. inflation. Less than full employment decreases overall purchasing power and ability. Lower demand leads to stable, or declining prices.

While the Fed’s purpose is full employment and stable prices, its objectives for a constant economic growth and stability are targets of around 2% of inflation and the amount of employment to sustain that target. When met the economy should grow at 2-3% per year, enough to absorb the influx of new workers into the economy.

Contrary to what many believe, the Federal Reserve only controls one interest rate, the federal funds rate (referred to often as the “benchmark rate”). This is the rate that banks lend money to each other, typically on an overnight basis.

Banks lend and borrow money overnight to ensure they have the cash reserves as a percentage of deposits to meet the requirements set by the Fed; currently banks and other depository institutions are required to have reserves equal to 10% of their demand and checking deposits.

If the Fed increases or lowers the amount of the rate banks must pay to borrow money from other banks to achieve their reserve requirements, banks in turn increase or lower the rates they charge their borrowers, or pay their depositors.

Mortgages are considered a fixed rate assets. You borrow money to purchase your home with a mortgage and agree to pay a certain interest rate. An investor will purchase that mortgage because they want to receive that rate of interest on a regular basis as part of their investment portfolio.

Mortgage rates are determined by investors who purchase mortgages as an investment. The mortgage market is generically known as MBS, or mortgage-backed-securities. Investors want to make a profit, their decisions to purchase or not purchase any investment is based upon their opinion as to what they think will happen in the future and if their investment will be worth more or less money. In the case of MBS, this includes what they feel interest rates will be, or should be, in the future.

Part of their decision-making criteria is what they feel the Fed will do in regards to monetary policy, or what the Fed has announced it will do.

One more factor impacting mortgage rates is what other investments are available at what return to investors. The primary competitors for mortgages are other fixed rate assets, such as corporate bonds, and most notably government bonds and notes.

Because of their long-term nature and relative low risk, the benchmark alternative to MBS is debt issued by the United States Treasury in the form of short- or long-term notes or bonds. The United States has never defaulted on any note or bond, and is therefore considered the safest investment in the world. As a result, it generally pays the lowest interest rate in the market for similar investments due to the almost complete lack of risk.

Back to the Federal Reserve. The two primary tools available to the Fed to achieve its purpose are the fed funds rate, and the purchase or sale of assets on its balance sheet. For decades the Fed held on its balance sheet almost exclusively U.S. Treasury debt (henceforth UST).

When the economic crisis of 2008 hit the Fed announced it would commence “quantitative easing.” This is a process where the Fed enters the market and purchases fixed rate assets. In the past this would be buying short- and long-term UST debt. This has the impact of stabilizing, or lowering, interest rates as the Fed’s entry into the market instantly reduces demand as it edges out other investors, which in turn creates lower rates.

Sidebar: Long term readers of the WR&MU know that in the fixed rate asset markets higher prices mean lower rate and lower prices mean lower rates. I.e., if you purchase a $1000 bond for $990 you will receive a higher return on your investment that if you purchased the $1000 bond for $1010)

When it announced its quantitative easing (QE) program in 2008, the Fed stated it would be purchasing not only billions of dollars of UST every month, but also MBS to shore up the housing markets by pushing mortgage rates down. The Fed proceeded to engage in QE1, 2, 3, and 4 over a period of a few years.

In August 2008, before it began QE1, the Fed’s balance sheet was $910 billion dollars. By the end of 2014, after several years of purchasing UST and MBS, and thereby keeping rates relatively low, the Fed’s balance sheet had ballooned to $4.5 trillion.

At that time the Fed stopped purchasing new issues of UST and MBS and maintained a fairly stable balance sheet by purchasing UST and MBS with funds received when those assets matured or paid off as home sold or mortgages refinanced.

In response to the economic impact of the Covid-19 virus in March of 2020, the Fed slashed its benchmark rate to near zero (borrowing rate 0.00% – 0.25%) and initiated another QE program to purchased UST and MBS. This was to push more money into the economy and drop interest rates to encourage borrowing and economic activity.

In February 2020 the Fed balance sheet of UST and MBS was $4.17 trillion, by the end of March 2022 that amount had more than double to $8.96 trillion. This amounted to about one-third of all UST and MBS debt issued.

By March the Consumer Price Index had reached 8.5%. The Fed’s objective of “stable prices” was far from being met. Action was required by the Fed to stabilize prices. Not mentioned was achieve maximum employment.

Using its primary tool, the Fed funds rate, the Fed began raising its benchmark rate in March, raising it from an average of 0.08% to 0.33%. With inflation running so high, investors were anticipating several hikes in the rate through the year, and this was supported by announcements from the Fed as to its expected schedule of rate hikes. (It should be noted the Fed tries to signal its intentions so as not to shock markets.)

The opposite of quantitative easing is quantitative tightening (QT). The QT process involves the Fed “unwinding” its balance sheet by purchasing new UST or MBS when similar assets payoff at maturity or refinance. This reduces demand in the market, reduced demand leads to higher rates as prices drop.

Quantitative Easing (QE), the Fed lowers demand in the markets and results in lower rates as the Fed purchases fixed rate assets from the U.S. Treasury and Mortgage-Backed Security markets. Quantitative Tightening (QT), the Fed increases supply in the markets results in higher rates as the Fed withdraws from the UST and MBS markets and/or sells off those assets on its balance sheet.

In May 2022 the Fed announced it would begin a QT program to combat inflation in addition to continuing to increase its benchmark rate. One part of the QT would be the Fed letting almost $1 trillion worth of assets mature without reinvesting the funds into more UST and MBS over the next twelve months.

The other part of the QT would be the Fed actively selling UST and MBS on a monthly basis on the open market. Starting slowly in May, the Fed began selling tens of billions of assets on the open markets. In September the schedule increased to $95 billion being sold each month.

The markets must now absorb not only the continuing debt issues from the Treasury, increasing considerably with the several trillions of dollars of spending passed in legislation over the past year or more, and new mortgages being funded, but also absorb the $95 billion per month being sold by the Fed.

This additional supply into a market that was lacking sufficient demand has put constant upward pressure on interest rates.

As simple example. Bob wants to open a bike shop but need to borrow $10,000 to do so. He puts an ad in the paper, “Need to borrow $10,000.” There are no other ads for people wanting to borrow money, so several people looking to make some money with an investment contact Bob with offers to make the loan. Telling each potential investor what the others will charge results in Bob being able to get a low interest rate, 3.00%.

A few years later Bob wants to expand into another city. He puts and ad in the paper, “Need to borrow $10,000.” He receives not response, and looking in the paper sees why, there are twenty similar ads. He makes a new ad, “Need to borrow $10,000, will pay 6% or market rate.” He has a few people call and offer varying rates, saying what rates other potential borrowers are offering. Bob borrows the $10,000 at 6.75%.

 The Fed has impacted the mortgage rate markets in a few ways. First, with their predictions of the economy and their stated intention of rate increases and targets have investors looking forward to how high rates may, should, go for the Fed to impact inflation and cause it to slow and drop.

Second, with its increasing the benchmark rate the Fed is having a trickle effect through the economy as banks charge more to their borrowers through increasing their prime rates, credit card rates, auto loan rates, etc.

Third, and the most under-reported but the most impactful, is the quantitative tightening process that is increasing the supply of Mortgage-Backed Securities on the market, against which new mortgage offerings from lenders will have to compete.

We discussed the increase in the Fed balance sheet since the beginning of the pandemic, and the Fed’s plan to reduce it by putting over $2 trillion over a 12-month period into the markets, what about rates?

As mentioned above, the Fed funds rate was below 1% in the beginning of March, before the Fed began its schedule of rate increases. At that time the prime rate (basis for Home Equity Lines) was 3.50%. Today the funds rate averages 3.33% and the prime rate is at 5.50%. Next week, both rates will increase by 0.75% (funds to 4.08%, prime to 6.25%). The expectation is that there will be two more increases this year, totaling 1-1.5% before December.

The Fed has indicated it expects there to be “pain” in the labor markets, i.e. layoffs and higher unemployment, as its monetary policy pushes rates higher and reduces the amount of money in the economy. Fighting inflation is a higher priority in meeting its stated purpose than maximum employment.

A large, and growing, concern for many is that the continued monthly sale of large amounts of UST and MBS, combined with the continued issuance of debt, particularly from Washington, is putting too much stress on our banking system and can, will, lead to a cash crisis as banks and dealers only have so much capacity to purchase, and retain with so few buyers, additional debt.

Some of suggested that the Fed adjust its QT program to retain mortgages, perhaps re-enter the market to purchase excess supply thereby stabilizing mortgage rates, to ease the financial strain on banks.

Looking forward, with the Fed moves thus far having no impact on inflation, or labor markets, rates will continue to increase as the battle against inflation continues. The higher rates are already having an impact on residential real estate markets as markets have transitioned from sellers towards buyers, with prices supported more from lack of inventory than an increase in demand.

Have a question? Ask me!

Inflation data was mixed, but not, for August. The Consumer Price Index for all goods and services showed an increase of only 0.1% for the month, and a decline year over year of inflation from 8.5% to 8.3%. This should be great news and put a little downward pressure on rates. However…the “core” rate blew up the data. The core rate is the CPI data less food and energy; these items are extracted because they are generally more unstable than other goods and services. The core rate was a very high 0.6% for August. Gas prices dropped 10.6% in August, almost solely accounting for the relatively flat change in prices. Of particular concern in the data were the increases in groceries (+13.5% year over year), medical (+5.4%) and housing up 0.7% month over month.

Markets reacted very negatively to the report due to the large influence gas prices had on reducing CPI, and the vulnerability if/when gas prices increase in the future when demand for heating fuel and gas increases in the winter. The average American household spending $460 more per month for same goods and services as last year, even with gas prices on the decline. That number will continue to climb with inflation, and higher costs due to the need to heat homes in the winter.

Consumers didn’t seem to mind what is happening in the economy, and evidently feel pretty secure in their jobs and income. Retail sales increased 0.3% in August after adjustments for inflation. Driving sales were vehicles and dining out, two categories that are reflective of consumers attitudes to the economy and their future. Workers pay adjusted for inflation has increased for the past two months, though down 2.3% from last August.

Rates for Friday September 16, 2022:  Rates spiked this week on a combination of the inflation news and looking ahead to moves by the Fed before the end of the year to increase rates with three large rate bumps. The conforming rate has its largest one-week increase since June, the high-balance increase is the largest since March.

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

30-year conforming                              6.00%          Up 0.375%

30-year high-balance conforming        6.625%        Up 0.625%

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.

Technically, summer comes to an end next week. This morning driving to the gym at 6:45 the dashboard thermometer read 61°, it almost feels like fall is here six days early!

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

Does it make sense to refinance to consolidate other debts?

Question of the week: Does it make sense to refinance to consolidate other debts?

Answer: As with many mortgage questions, the answer depends on the math.

During the pandemic many families ran up debt on credit cards, auto loans, Home Equity Lines of Credit (HELOC), as they improved their homes to adapt to study and work at home, or just to upgrade kitchens, baths and exteriors. Following the rescission of stay-at-home regulations and the opening up of travel across the country and around the globe, many families incurred more credit card debt to release their pent-up travel bugs.

Now looking at very high balances on their credit statements, and the corresponding payments, with perhaps minimal increases in income compared to inflation and the new monthly obligations, the question arises, “should we consolidate our debt?”

Before we look at the math on a hypothetical example, let’s look at some of the factors to be considered as you weigh the decision as to whether it makes sense to refinance to consolidate your debt.

First and foremost, the concern about increasing the interest rate on your mortgage. Most homeowners refinanced during the historically low rates we experienced in the past few years to a very low rate, and greatly reduced monthly mortgage payment. With rates having spiked since the beginning of the year, does it make sense to refinance and pay a much higher mortgage rate?

Another factor is utilizing a HELOC to consolidate the debt, or you already have a HELOC to which you have transferred a lot of consumer debt. Is that a better option?

Against these factors are what are the rates on the debt you are paying off, how long will it take you to pay off the debt and experience those rates, and very importantly what are the monthly payments and how are they impacting your household cash-flow against rising prices and costs for daily life?

The math.

The assumptions we will use are that you have a $500,000 mortgage with 30-year fixed rate loan with an interest rate of 2.75% from refinancing last summer. Your monthly mortgage payment is around $2500 per month.

You obtained a HELOC for home improvements at the start of the pandemic and have a balance of $85,000. The rate on the HELOC is the prime rate plus 0.50%, today your rate is 6.00%. Your minimum payment this month is interest only, $425 per month.

From travel, major appliance purchases, clothes for growing kids, and more nights out for dinner, your credit card balances are $55,000, with a minimum payment of $1100 per month. Because you have excellent credit the average rate on the cards is 15%.

Your minimum payments on mortgage, HELOC, and credit cards total $4025 per month.

Now consider that your HELOC rate will increase by 0.75% (to 6.75%) later this month after the Federal Reserve increases its benchmark interest rate, and likely another 0.75% later this year, and up to 2% more into 2023. The immediate increases your minimum payment another $50.

With the increase in the prime rate, the rates on your credit cards will very likely increase as well.

Ignoring the future for the moment, let’s see the math on a mortgage of $640,000 to consolidate your debt. Assuming your property value has increased to $900,000 so your loan-to-value is 71%.

The refinance transaction is considered “cashout,” which has a higher rate than if the transaction were a purchase or “rate and term” refinance (no cash out, just lowering rate and payment). The rate today for a cashout refinance is 6.25%* with no points, or 3.5% higher than your current rate. If you wish to pay one-point ($6400), the rate would be 5.875%*.

The payment for $640,000 30-year fixed rate mortgage with a rate of 6.25% is $3940 per month, for 5.875% $3825. Essentially the same payment as your total payments today. So, does this make sense?

Reasons it may make sense for some families.

Primarily, the payments calculated for the debt being paid off are for minimum payments; interest only on the equity line, and 2% of the balances on the credit cards. This means your HELOC balance is staying the same, and your credit card balances, assuming you are not charging more, decline by about $400 per month.

Without an increase in income, or a windfall from a bonus, sale of an asset, inheritance, or other source, how will you pay down/off these balances? Does it bother you that you will have these debts for a prolonged period of time with the balances declining slightly during that time?

The counter-argument to the time frame issue is that you are obtaining a 30-year mortgage should you keep your home for that long. Surely you will be able to pay off the debts within that time frame.

 To pay the debts off within a certain time frame, 2-, 5-, 10-years, how much will you need to pay per month and how does that affect your household cash-flow? With a current blended rate of about 10% for your credit card and HELOC accounts, to pay off the balances in 10-years (assuming no change in rate or adding to balances) the payment is $1850 per month. To pay off in 5-years the payment is almost $3000 per month.

In determining if consolidating your debt into a new mortgage is right for you, do the math on your own particular situation. Consider the overall cash-flow of your home today with your current debts. Is there an ability to pay off the debts in a relatively short time frame vis-à-vis a new 30-year mortgage?

Looking forward, will rates come down in the future? If so, can you benefit from refinancing again to lower your rate and payment? How long are you planning on owning the home? If a short time you can use equity from the sale to pay off the debt, how sure are you of this time frame.

I see and hear marketing messages from some lenders quoting adjustable-rate-mortgages for consolidating debt for a lower rate and payment. But for how long? The thing about ARMS is the rates aren’t fixed—isn’t that part of the uncertainty with your current credit obligations?

Current and future income, ability to make large payments to pay off current outstanding debt, current rates and payments on mortgage and debt you are paying off, and most importantly your comfort level with your current debt situation versus consolidation and fixing the monthly payments removing uncertainty. These are the factors we will discuss if you call to go through your current situation and options to obtain debt relief.

*Rates are based on credit score of 740, balance of new mortgage being $647,200 or lower, and a loan-to-value between 75-79.99% for a detached single family residence. Rates and terms vary daily and based on other factors, as well as those above.

Have a question? Ask me!

Rates for Friday September 9, 2022:  No economic data this week that impacted rates. Federal Reserve Governors, and Chair Powell, were giving speeches and interviews, all of which said, without actual saying, that the Fed would raise its benchmark rate by 0.75% during its September 20-21 meeting. A bump in the conforming rate to match the most recent high from June.

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

30-year conforming                              5.625%        Up 0.125%

30-year high-balance conforming        6.00%          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.

We had a great trip to New York City. An interesting aspect was the U.S. Open tennis championship going on while we were there. Arriving Wednesday evening, the bars and restaurants that evening and again on Friday all had Serena Williams’ matches on. Everyone, it seemed, was talking about Serena. As well they should.

Perhaps one of the top five athletes of my lifetime, Serena’s accomplishments in an era where more and more women entered professional tennis with better training, coaching, and conditions that greatly increased the competition and reduced the margin of ability between the top and middle players, are truly historic. I am glad her final matches were at the U.S. Open and that even non-tennis fans were made aware of how incredibly unique she is with a career that may not ever be matched.

Heat breaks this weekend? Coming home to a house with no air conditioning did not bring a lot of joy, but every degree lower we can get will make the Smith’s, and Sammy our dog, very happy!

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

Where are you?

Question of the week: Where are you?

Answer: We are in New York City for long Labor Day weekend. Those ardent readers of the personal section of the WR&MU know we recently signed a lease for an apartment for our daughter and three friends for their college housing. Now we need to obtain the necessary items to convert a vacant unit to a home for the young women.

“We’re helping my son/daughter move into dorm/apartment…” translates to, “We’re buying stuff for our son/daughter…”

Have a nice long weekend everyone!

Have a question? Ask me!

More workers, more pay, more pressure. Those are the take-aways from today’s labor report for August. Over 300,000 new jobs were added to the economy in August. The unemployment rate increased from 3.5% to 3.7%, mainly because the participation rate increased (percentage of eligible workers that are working or looking for work). While more are looking for work, job openings outnumber available workers by almost double. This puts more upward pressure on wages, which in turn puts more pressure on employers to raise the costs of their goods and services; in other words, wage driven inflation. Wages increased again last month and are up 5.2%, still lagging behind inflation.

The data seems to ensure a rate hike by the Federal Reserve to its benchmark interest rate of 0.75% when it meets on September 21st. Investors are pricing this rate increase into the markets.

Rates for Friday September 2, 2022:  Rates are up for the third consecutive Friday, at or near post-pandemic highs, as a result of the economic data and outlook.

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

30-year conforming                              5.55%          Up 0.125%

30-year high-balance conforming        6.00%          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.

Schools have started, Labor Day weekend is here, summer is coming to an end. This weekend also brings Leslie and my anniversary. Twenty-eight years of marital bliss for me and tolerance for her…

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 is mortgage insurance a good thing?

Question of the week: Why is mortgage insurance a good thing?

Answer: Long time readers of the WR&MU will recognize this question as one I re-circulate every few years, the last time being March 2019. When last answered it was a follow up to the Question of the Week from the prior Friday, Should we wait until we have 20% down payment to purchase our new home? The 20% down payment question came about as a result of a survey from the California Association of Realtors, and my own experiences speaking with potential buyers and setting them up for homeownership.

The number one reason, prior to spike in rates in 2022, home purchases are delayed is potential buyers feeling they need to save more for a down payment. Drilling deeper, most feel they need 20% down payment to purchase a home because they do not want mortgage insurance.

To which I answer, putting 20% down to avoid mortgage insurance is a waste of money and a terrible return on investment.

Mortgage insurance is a good thing, let me amend that, mortgage insurance is a great thing because it saves you money.

But Dennis, mortgage insurance costs money.

Moving forward to save my carpal tunnel syndrome we will use MI, or PMI, instead of typing mortgage insurance.

For those who just want numbers, skip below for real examples of saving money with mortgage insurance.

Before we begin the conversation of why mortgage insurance is good (great), let’s examine what MI is. For those new to the conversation, MI is not insurance that pays off the loan if you pass away or become disabled—there are life insurance and/or disability insurance policies you can get to cover the mortgage to protect your home and family should something happen.

The purpose of MI is not to insure you, but to insure your lender should you default and go into foreclosure. Between the missed payments, legal fees, professional fees, loss of value due to foreclosure sale and other costs, a lender will average about 35% of the value of the property. Because of this if you have less than 20% down the lender will require MI that covers the difference between your initial down payment and 35% of the purchase price.

For example, if you are purchasing a home with 5% down the lender will require 30% coverage from a MI company, if you put 10% down coverage of 25% will be required, and if you put 15% down coverage will be 20%.

Even with this protection, should a home go into foreclosure there will likely be losses to the lender. Consider the process and losses. It typically takes about eight to nine months for a home in California to be foreclosed on after the first missed payment. Once you miss a payment by more than 30 days, i.e., you do not make your September 1st payment by October 1st, you are in default of the note. To cure the default, you need to make all payments due plus late payments. So, if you miss the September payment you have until October 30th to make the September payment plus the late fee and the October payment plus the late fee, if applicable.

If you are unable to cure the default at some point the lender must make a foreclosure avoidance assessment to discuss with you the circumstances that led to your default and if there is any way to avoid foreclosure. If there is no agreement between you and the lender to continue with the mortgage, or a modification, the lender can then record a Notice of Default (NOD) with the county recorder in which the property is located no sooner than 30 days after the initial contact for the assessment. After 90 days or more have passed since the filing of the NOD the lender can then record a Notice of Sale informing you that the lender intends to sell the property at auction in 21 days or more. At auction, the lender will sell to the highest bidder who must have cash or a cashier’s check, it is very likely that the first bid will be placed by the lender for the outstanding balance due plus foreclosure costs. At the fastest a foreclosure can occur within about 200 days of the first missed payment, however they generally take about 60 to 90 days longer—or depending on circumstances can take much, much longer.

If you purchased a home for 5% down and a $400,000 mortgage with MI and are foreclosed on the lender will be reimbursed for losses up to 30% of the loan amount, $120,000, by the MI company. With the cost of foreclosure being 25-30% of the mortgage balance, you can see the lender’s recovery through a mortgage insurance policy likely will still leave a loss to the lender.

There are different methods of paying for MI. You can pay monthly, a full premium upfront, or fund a “no PMI” mortgage that is a loan that is self-insured by the lender due to a higher interest rate on the mortgage. Of the different types of payments, the most popular is the monthly payment, primarily for two reasons. First and foremost, it is able to be removed from the mortgage for most transactions after you have made 24 consecutive on-time payments and can show evidence that you have at least 22% equity in the property you can request the PMI and its payments be removed from you loan (caution, do not just engage an appraiser, contact your lender with your request and get a list of approved appraisal management companies to contact for an appraisal).

To reiterate, due to the ability to cancel the premium as soon as 24-months after closing, the monthly MI premium is usually the best option for borrowers.

That is the purpose of the mortgage insurance, what is your benefit?

First and foremost, the rate for a 30-year fixed rate mortgage is higher with 20% down than with less than 20% down. Yes, higher. Why? Because if a loan defaults at 80% loan-to-value without MI the lender’s losses are considerably higher than if the loan is insured. More risk, higher rate.

A second benefit, is that you can purchase a home with as little as 3% down, or 5%, 10%… In California, and most real estate markets, being able to purchase a home without having to save 20% of the payment is tremendous benefit. Doing the math, for a $665,000 home you can purchase a home with only 3% down payment, a $680,000 with only 5%, or higher prices with as little as 10% down. (Note, for separate discussion, with FHA a home can be purchased in high cost areas for $1,000,000 with 3.5% down—however the mortgage insurance is for the life of the loan).

What is the advantage to purchasing a home with less than 20% down? Not having to wait to save the 20% down payment and missing the opportunity of home ownership for perhaps several years—or ever. Consider how long it will take you to save a 20% down payment on your current income, even if you are able to eliminate all your debts—which delays your ability to save. Two years? Three? Five? Ten? During this period will housing prices be stagnant, or increasing faster than your income increases? As you try to save the amount you need to save will continue to increase creating a longer delay in your ability to purchase.

If you know you are going to receive a large financial windfall in the very near term, which I define as less than six months, from a lawsuit settlement, sale of a major asset such as a company, boat or other property, or an inheritance, you may be able to shorten your ability to gather the 20% down. But for most families this is not the case and they should be open and favorable to purchasing a home using a lower down payment and mortgage insurance. If this is the case, I would still advise putting less down and obtaining PMI; after 24-months if your home value has not appreciated enough to remove the MI do the math to determine whether to use the windfall funds to pay down the mortgage to remove the MI—assuming the funds are still available and not spent elsewhere.

The monthly cost of mortgage insurance is a lot less than most potential homebuyers think it will be, and MI is cheaper today than for non-government loans than in the past (MI for government loans is higher today than it was several years ago).

For a $680,00 purchase, here are the monthly costs for a borrower with 740 credit score in California purchasing a home with a 30-year fixed rate mortgage for different down payment amounts (rates subject to change depending on details of transaction and borrower):

  • 5% down has a monthly PMI payment of $210 (premium 0.39%)
  • 10% down has a monthly PMI payment of $112 (0.22%)
  • 15% down has a monthly PMI payment of $63 (0.13%)

Loan amounts and mortgage payments for the above calculations with today’s rate of 5.125% including the PMI payment:

  • 5% down ($34,000), loan amount $646,000, $3725 payment
  • 10% down ($68,000), loan amount $612,000, $3420 payment
  • 15% down ($102,000), loan amount 578,000, $3210 payment

Today the rate for a $680,000 purchase price with 20% down ($136,000) is 5.375%, he monthly payment is $3045 per month.  As mentioned above, the rate is higher for 20% down than with less than 20% down.

This chart shows the difference in cash for down payment, total monthly payment, adjusted interest rate (MI rate added to mortgage rate), and “recovery period.” The recovery period is the amount of time it will take you to save the difference in down payment if you chose the 20% option*.

*Recovery period for taking 10% down option instead of 20% down option: Saving of $68,000 divided by $165 per month savings if you put 20% down. In this example, if you purchase your home with 20% down and I purchase the home next door at the same price, closing at the same time, you will be paying $375 less per month than I will. Every month we get together for a “great to be neighbors” cocktail, at the meeting you put $375 into a Home Depot bucket. After 181 months (just over 15 years) you will have saved the $68,000 I saved when we purchased our homes by putting 10% down.

This math shows why I think MI is better than good, it is great.

  • It reduces the amount of time you may need to save for a down payment
  • If you have enough money for a 20% down payment, it provides you with significant cash savings in your accounts to use for other purposes
  • It provides a lower interest rate
  • It is removable as soon as 24 months, greatly reducing the monthly payment savings you would receive if you put 20% down, further extending the recovery period

These calculations do not take into account the possibility of refinancing in the future, which can produce further savings and financial advantages for borrowers who put less than 20% down for the purchase of their new home.

Not waiting to save 20% down and using PMI to purchase a home may reduce the amount of home and mortgage you may qualify for, but it can greatly reduce the amount of time it will take for you to purchase your new home.

The best time to contact me about your ability to qualify for purchasing a new home is as soon as you decide you would like to purchase a new home. The sooner we discuss your financial situation the sooner we can work on a plan to homeownership that encompasses your available funds, if any, your income, debts, credit rating and what will need to happen, if anything, so you are able to purchase your new home. Perhaps it is a savings plan, or a debt reduction plan, or a credit rehabilitation plan, whatever may be holding you back from purchasing a new home the sooner we discuss your options the sooner you will be able to purchase your new home. Call me and let’s set up an appointment, or click here to schedule on my calendar!

Have a question? Ask me!

It is economic data dump week. Inflation, spending, wages, economic growth, plus an insight to the Fed all impacted markets this week. Overall the economic data was somewhat positive.

Employers are not engaged in large layoffs as seen by initial unemployment claims, which dropped from last week. While some company’s announcements of large layoffs are in the news, across the employment market hiring and firing appears to be steady.

The economy did not shrink as much as first reported last month. The first revision of 2nd quarter GDP showed the economy contracted 0.6%, lower than the initial report of 0.9% economic contraction. Revisions were due to upward revisions in estimates for consumer spending, business spending on inventories, and higher profits from businesses.

The Federal Reserve’s preferred index for measuring inflation, the Personal Consumer Price Index (PCE, which is weird as it should be PCPI) showed prices dropped 0.1% in July and year over year the increase was 6.3% after showing 6.8% annual growth in June. The PCE differs from the more widely reported CPI as it takes into account consumers changes in spending behavior to adjust for rising prices. The decline in July was almost solely due to lower gas prices. Because this is the inflation index used by the Fed, a reduction is good news for the Fed to stop increasing rates sooner rather than later.

Consumer spending was positive in July, despite the drop in gasoline prices (consumer spending is based on dollars spent not units purchased, hence lower prices at the pump result in lower consumer spending even if more gallons are purchased). After inflation spending rose 0.2%, with most of the increase in spending on housing, hotels, travel and utilities. While spending outpaced inflation, wages did not, as workers continue to see a deterioration in the purchasing power of their paychecks, even after raises.

Jackson Hole’s posh hotels are housing the Federal Reserve’s annual meetings. This week Fed Chair Jerome Powell spoke about the Fed’s intentions and outlook, and it was not positive for those looking for an end to higher rates. Powell stated the Fed would not stop its rate increases until inflation is down at, or near, its 2% target (see above, current rate is 6.3%). Further, he knows the Fed policy will cost jobs and growth, and there will be “pain to households and businesses.” Forecasting a “sustained trend of below trend growth,” Powell essentially not only put another 0.75% hike to the benchmark rate in September on the table, he pretty much announced it will happen.

Rates for Friday August 26, 2022:  After three weeks of dropping rates in July, August ends with rates rising three of the last four weeks. The mixed signals in the economy, positive spending, slowing inflation, strong hiring, lower real wages, normally would have the markets bouncing in a narrow range. Comments from the Chair of the Federal Reserve that its policy is to not worry about the economy but only inflation put markets on the defensive and pushing rates up for mortgages.

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

3730-year conforming                          5.25%          Up 0.25%

30-year high-balance conforming        5.875%        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.

Public service announcement this week for the closing of the WR&MU. Yesterday I under went a procedure everyone over the age of 50 should have on a routine basis, starting at 50, based on your doctor’s recommendation, I had a colonoscopy. Colorectal cancer is very treatable if caught somewhat early, if not caught it can be fatal—as our family learned when my mother passed away from colorectal cancer a little over 40-years ago. At that time colonoscopies were not something everyone was encouraged to get, and being she was under fifty at the time she likely would not have had one anyway.

Given that there is a history in our family of colorectal cancer, my sister, brother and I are very diligent to ensure we undergo colonoscopies on a regular basis, and have done so since we were in our mid-30’s. While the prep is not a pleasant experience, the procedure itself is very easy and painless.

Breast exams for women, prostate exams for men, and colonoscopies for everyone should be part of your medical routines as all three can result in early treatment and positive outcomes should cancers be detected. Call your doctor and see what your schedule for these exams should be. I want you to be around to read the WR&MU for many, many years!

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 the housing market going to tank?

Question of the week: Is the housing market going to tank?

Answer: Lately I have been asked this question with a little softer language, for instance, “are housing prices going to fall?” However, friend Maria was a bit more, let’s say direct, in her choice of words.

My response was, “it depends on what your definition of ‘tank’ is.”

Let’s look at some data.

The California Association of Realtors monthly housing update for July shows that sales of single-family homes statewide were down 14.4% from June and 31.1% from July 2021. The median sales price in July ($833,910) was down 3.5% from June and up 2.8% from July 2021.

More locally, in Los Angeles County sales were down 26.4% from June and 32.4% from last July, the median price ($846,320) dropped 1.6% in June, but up 4.5% from last July. Across the County border to the south, Orange County saw a 16.3% decline in sales month-to-month and a 38.8% decline year-to-year, with the median price ($1,231,000) down 2.7% from June and up 12.9% from a year ago.

With the surge in sales and prices due to the historically low interest rates during the pandemic, seeing a decline in purchase activity is not a surprise, nor is a softening of prices. Taking a look back, in July 2020 the number of sales statewide was up 28.8% from July 2019, July 2021 saw a drop in sales of 1.6%; while sales are down from last year, statewide, by 14.4%, they are still up almost 13% from 2019.

The decline in sales in 2021 was due to a lack of inventory. Rates were still very low, however, homebuyers had little options on the market to try to purchase. In July 2021 the unsold inventory index was 1.9 months (how long inventory would last if no new listings came to market), in July 2022 the index rose to 3.3 months. Historically, a normal market will have an index of 3-4 months; an index in this range will support slowly increasing prices that track somewhat with the economy. The extremely low index during the pandemic resulted in they buying frenzy, all-cash buyers, and homes selling well over their listed prices.

In July the sales price to list price ratio in Southern California was at 100%, meaning buyers were paying what the seller was asking. During the pandemic market the statewide average the ratio was close to 104% ( a home listed at $700,000 would sell for $728,000).

Recapping, sales are down month-to-month and year-to-year, sales prices are down month-to-month and year-to-year, inventory on the market is up month-to-month and year-to-year.

Nationwide the trends are similar, sales are down, prices are dropping but still well ahead of pre-pandemic prices. The graphs tracking sales are inverse to graphs tracking interest rates, which is no surprise—higher rates have cooled real estate markets across all sectors, single family, condos, multi-family, commercial, industrial, office, all are showing similar trends.

Back to our question of the week, do these statistics mean that the real estate market is “tanking?” No, not at this time. What I see in the data is that the market is normalizing. Buyers have more inventory to choose from, so supply is getting into line with demand. Fewer buyers in the market because of higher rates is lowering the number of potential buyers for sellers, demand is getting in line with supply.

What would signify that the market is tanking? Inventory increase to over four to five months, sale price to listing price ratios dropping below 90%, and most importantly an increase in foreclosures that result in a significant supply of homes going to market from lenders and banks. We are a long way from any of these occurring.

What can cause these factors to occur? Labor markets. If our nation undergoes a significant recession that sees lay-offs and shrinking of the workforce, especially in the middle-income sector, we will see a surge in properties on the market as out of work families, who still have equity, put their homes on the market to get funds to pay rent somewhere. Demand will drop as well as fewer families will have the ability to qualify to purchase homes.

Last month’s jobs data showed that this scenario is not yet on the horizon.

In the meantime, with the housing market normalizing, even with higher rates, it is a good times for families interest in buying to start the process of discovering their purchasing power and how the transition of from a seller’s market can create options for lowering your interest rate on your purchase. Securing the home now and potentially refinancing later could save you money if you wait to “time the market” and miss.

Have a question? Ask me!

July was a good month for retailers. The Commerce Department released data for July sales this week, which showed sales in July equaled those in June—flat, 0% change. This is good news? Yes, due to a drop in sales of gasoline (1.8%) and auto sales (1.6%) from the prior month total retail sales were pulled down. Taking out gas and autos, retail sales climbed 0.7% in July. Further good news, since the cost of living was flat from June to July, the increase in sales numbers are unaffected by inflation. Though with gas prices dropping 11% nationwide, the decline in gas sales as part of the overall data was definitely an impact.

With retail sales across most sectors increasing, the positive outlook is the data doesn’t support an extended recession, or a deep one. The data is not positive for rates as it increasing purchasing activity also supports higher prices, i.e. inflation, outside of energy costs.

Rates for Friday August 19, 2022:  Rates spike this week as investors were not pleased with comments from various Federal Reserve governors regarding their hawkish stance on inflation and likely raising rates by 0.75% again next month; many were thinking the Fed may go with a lower 0.50% rate increase with inflation slowing last month. As we close the week everything is down, stocks, Treasuries (higher rates) and mortgages.

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

30-year conforming                              5.125%        Up 0.25%

30-year high-balance conforming        5.875%         Up 0.375%

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.

It’s been several years for us, so I can’t remember if we liked the kids going back to school or didn’t like it because we missed them being around. Just kidding! For those parents in the transition from summer to school schedules I wish you well. I am jealous that the state has pushed back the start times for schools to begin their days, especially those with high schoolers starting no earlier than 8:30 a.m. and not having to get teenagers out of bed in the near dawn hours.

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 is my liability as a co-signer?

Question of the week: What is my liability as co-signer?

Answer: This week’s question is a continuation of last week’s question of the week (Can we put our college student on a mortgage?).

The short answer is, if you are a signer on a mortgage your are 100% responsible for 100% of the mortgage.

With rates higher than they were several months ago, many families are finding that they are just missing on being able to qualify for the homes they want to purchase. One solution for many is to add a co-signer to the mortgage.

When we are adding a co-signer, be it a parent, child, sibling, or other individual, I am asked the question, “what is my liability?”

When a lender approves and application package, they do not approve with 100% of the liability for re-payment for the “primary” applicants (those who are occupying the home) and a lower liability for any co-signer. They are approving and funding the mortgage with all individuals on the mortgage having equal responsibility and liability.

Co-liability is not just a factor for a family needing an income boost to qualify for their home, it is also a factor when couples purchase a home together, whether they are legally married or not.

When you purchase a home there are two legal documents that are recorded. The Grant Deed, which transfers ownership for the current owner to you. And, in California and most other states, a Deed of Trust is recorded, which is the document that creates the lien for your mortgage loan—i.e., the instrument by which a lender can foreclose if you default on your payments.

Someone can be on the deed, the ownership document, without being on the mortgage; in other words, they have ownership interest without having loan liability. However, lenders will not let someone be on the mortgage without having ownership.

Here is a scenario where we have a married couple with one spouse not on the mortgage, on the property, and we have a co-signer.

Christina and Adrian want to purchase a $750,000 home with 10% down. Their income and funds to close qualify them for the home, however Adrian’s credit score is very low due to fall-out from a divorce several years ago. Christina’s father, George, is willing to co-sign.

“You can’t co-sign credit,” is a axiom of lending. Interest rates and program qualifying are based on the lowest middle credit score of all borrowers. Because of this we work up the numbers by removing Adrian from the application and adding George.

Working up the income, debts, and funds for closing with both Christina and George we qualify for the mortgage. For debts, we count all obligations that are just Christina’s and just George’s, as well as all joint debt that Christina and Adrian have, as well as George and Patty, Christina’s step-mother. Not included are any obligations that are just Adrian’s and Patty’s.

With Adrian’s poor credit score removed, we are eligible for a lower interest rate, and lower mortgage insurance premium. We obtain loan approval and fund the loan with Christina and George on the mortgage, and both of them plus Adrian on the deed as owners of the property.

At closing the following deeds are recorded in this order:

  • Quick Claim Deed transferring the property from current owner to Christina and Adrian as husband and wife, George as married owning as sole and separate property, all as joint tenants.
  • Quick Claim Deed from Patty in which she declares she quits any claim on the property she would otherwise have as California is a community property state.
  • A Deed of Trust securing the property as collateral for the mortgage with Christina and George as the responsible parties.

Christina and Adrian move into the property. About three years later Christina recognizes that Adrian’s prior divorce and very bad credit were not as little his fault as he always led her to believe. They separate, Adrian moves out and quits contributing to the mortgage payment. Christina lets George know what is happening, and that she is unable to make the payment by herself.

George has a few options. If he chooses not to assist with the mortgage payment then the loan will go into default. This will adversely affect he and Christina, but not Adrian or Patty. Or he can assist with payments, retain good credit standing, with the understanding that any funds he pays to the mortgage will be reimbursed after the home is sold due to the divorce.

Because Christina, George, and Adrian are on the deed as equal owners, for any sale or transfer to go through all parties need to agree, or there must be a court order to force any recalcitrant party to sign any documents to transfer the property.

Depending on Adrian’s cooperation with the divorce filing and settlement, and subsequent transfer of the home and division of equity, either to an outside buyer or to Christina, or Christina and George, this issue can drag out for a prolonged period of time, increasing the funds George must contribute to keep the mortgage current.

In this case, we did a cashout refinance with Christina and George on the loan and title as owners, and extracted some equity to payout Adrian for the divorce settlement. Because of his history of not paying his obligations, we worked with the attorney to create a settlement that was much more in favor of Christina with the division of assets and eliminated spousal support payments she would likely have been due. Thankfully, Christina and Adrian did not have any children together. From separation to final settlement and removing Adrian from the property, a little over one year passed.

Co-signing complications come up more frequently for non-married couples than married couples as they are more likely to separate and go their separate ways. Without some of the legal protections for separation of assets and obligations of married couples, the situations of separation with join ownership of property can be a bit more complicated if one, or both, of the partners choose to make it so.

 Co-signing for a home, car payment, college loans, or any credit obligation, is no different than being the only signer on the obligation—you are 100% responsible for all payments whether you receive any benefits from the debt or not. Before co-signing for a debt for which you will be receiving no direct benefits, make sure you are fully aware of the risk and possible exit strategies available.

Finally, if you do co-sign, that obligation is reported on your credit report as if you are the “primary” borrower. The amount of the outstanding debt, the monthly obligation, and very importantly the payment history, impact your credit scores and ability to qualify for other loans and credit.

To close, if you have co-signed for someone to purchase a home, or car, standard mortgage underwriting guidelines are that if you can show that the other party(s) on the obligation have made the last twelve payments in a timely fashion, the obligation’s payment will not count against you for qualifying.

If you, or someone you know, is trying to purchase a home please contact me to go through options and scenarios.

Have a question? Ask me!

Surprise!! Last week we have surprise with the jobs report for July showing a lot more jobs created than expected, more than twice as many. This week the economic surprise was that the Consumer Price Index was flat in July—no increase in prices from June. This resulted in the annual rate of inflation decreasing from 9.1% in June to 8.5% in July.

As you have likely noticed, gasoline prices dropped in July, down 7.7%, which was the primary reason for overall prices remaining flat for the month. Keeping the overall rate to be negative was the 1.1% increase in foods prices in July from June, and are up 10.9% from July 2021.

Rates for Friday August 12, 2022:  Investors liked the CPI data as it possibly portends inflation peaking and perhaps starting to drop. If this is the case there is less pressure on the Fed to continue to increase interest rates. Last week’s news supported higher rates faster, this week’s news supports rates stabilizing or dipping. When in conflict, rates usually go up, or remain very sticky going down. This week we have the latter.

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

30-year conforming                              4.875%        Flat

30-year high-balance conforming        5.50%           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.

Following up on last week’s WR&MU, and this week’s question of the week, this morning a lot of stress and anxiety was relieved when we were notified that we have been approved, along with another family, for an apartment in Manhattan for a twelve-month lease. It is a four-bedroom apartment, with four young ladies moving in. The other family going through qualifying is that of one of our daughter’s good friends from high school who is attending a different college in the city. Her mother and myself are the co-guarantors for the lease. Which as you learned above, each of us is individually guaranteeing that if one, or all, of the tenants do not pay, we must.  #Parenthood

Further following up on last week’s WR&MU question of the week, even with our share of the rent through the full twelve months as opposed to paying for a dorm room for eight months, we are saving over $4000 in housing costs.

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

Can we put our college student child on a mortgage?

Question of the week: Can we put our college student child on a mortgage?

Answer: Yes.

This question has been covered in different ways in the past. It comes up this week as Leslie and I have been involved in housing for our own college student daughter, and I remember some clients from over the years.

Colleges and universities have some of the highest cost per square foot housing in the cities and regions where they are located. For instance, last semester our daughter in New York City was sharing about a 350-400 square foot room for a cost around $2000 per month.

There are several advantages, primarily safety, secondarily comradery living 24-7 with hundreds, in some cases thousands, of other young students transitioning into adulthood. Proximity to classrooms is another benefit for a cohort who typically like to sleep late and find it desirable to go from bed to chair in the lecture hall in under 15-20 minutes.

Over the years we have had many clients contact us regarding the costs and benefits of purchasing a house or condo unit near their child’s college or university. Depending on where the school is located, the financial benefit of purchasing outweighs the cost of a dorm room semester after semester.

This is where having your college student signing on the mortgage comes into play. If your student is attending Boise State and there is a 3-bedroom home near campus for $420,000 it may make financial sense to purchase the home and rent two rooms to other students. However, this only makes sense if you are able to get an owner-occupied mortgage.

If you purchase the property as an investment property the rate with 25% down payment ($105,000) is 6.125%. If you student is 18-years of age or older, they can sign loan documents, be on title and you now have an owner-occupied mortgage with a rate of 4.875% with only 10% down payment ($42,000).

Doing the math for a monthly payment for a $420,000 purchase price with 10% the estimated total monthly payment, including mortgage insurance, is about $2600 per month. Rents for similar size 3-bedroom homes is around $2200 per month, divided by three that comes to a little over $700 per month.

Looking at dorm costs for Boise State, for housing you must also purchase a food plan (experienced college parents know how much of this cost goes unused) for a total monthly payment during nine months for the school year is $1265 per month.

Disadvantages of the purchase the student housing are the costs do not stop when school is out of session, additional costs of utilities and maintenance, and of course being market risk for the future when you sell.

Advantages are your housing costs are fairly fixed, colleges typically raise costs every year, responsibility your student gains for being a homeowner and landlord, possibly appreciating asset, possibly retaining property after your student graduates to either continue to occupy if staying in the area, or as off-campus rental option for future students.

Your student also gains by having a mortgage on credit report, which creates stronger current and more importantly future credit ratings, and as mentioned “growing up” and being responsible.

We have had many clients over the years purchase student housing for their students after paying dorm costs for several semesters. I have yet to have negative feedback from these parents for post-graduation issues or regrets for having purchased a home with their student on the loan instead of renting from the college or university.

If this is an option you wish to discuss please do not hesitate to contact me.

Have a question? Ask me!

Surprise! This morning those who make estimates on Wall Street for economic data were very surprised, even shocked, at the Labor Department’s report on job creation in July. While the consensus on Wall Street was 258,000 new jobs were created in the month, the report showed 528,000 new jobs. If your estimate is off my more than double you tend to be a bit surprised or a lot shocked.

Industries across the spectrum gained jobs, led by Education and Health (+122,000), Leisure and Hospitality (+96,000) and Professional and Business (+89,000). The total number of workers employed equals the number earning paychecks in February 2020, the month before the pandemic. Companies are still having trouble finding workers, and the demand supply imbalance pushed wages up 0.5% in July and up 5.2% from last July.

The dark cloud around the silver lining is that more people have dropped out of the labor market. While there are as many employed as there was pre-pandemic, millions more are eligible for work due to coming of working age. As a result, the labor participation rate dropped to 62.1%, the lowest since late 2021. The increase in new jobs is interesting juxtaposed initial jobless claims filed, 260,000 last week continuing a weekly increase since March.

Investors are very skittish with conflicting data showing a shrinking economy on one hand and increased employment on the other. In between sits inflation which continues to grow at a greater rate than wages, creating uncertainty about consumer spending and expectations.

Rates for Friday August 5, 2022:  The Federal Reserve has been consistent in their stance that they are focused on labor markets when deciding their strategy regarding their benchmark interest rate. The very hot new jobs data puts another very large, 0.75%? 1.00%?, rate increase in play when they next meet. Investors reacted to this by wiping out last week’s rate decline, ending a three consecutive weeks of declining rates.

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

30-year conforming                              4.875%        Up 0.25%

30-year high-balance conforming        5.625%         Up 0.25%

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.

Our personal quest for student housing is taking place in New York City, more specifically Brooklyn, where we have been trying to herd potential roommates to get applications into an agent for an apartment.

Were I the winner of last week’s $1.3 billion lottery jackpot we would skip the rental and buy a building for our young student and friends.

Speaking of lotteries, interesting human behavior is when people won’t buy tickets until the jackpot exceeds $100 million, $500 million, $1 billion. Winning a measly $12 or $32 million is not worth the cost? My brother has always said that lotteries are a tax on those who are bad at math.

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 is your why?

Question of the week: What is your why?

Answer: This is a question that has come up a few times in past few weeks. Most recently it was posed by Rotarian Dan Ouweleen, who is the District Governor Rotary International District 5320; the district which includes the Rotary Club of Long Beach, of which I am a member.

Dan gave a short presentation titled, “What is My Why?” the purpose of which was to have each of us in the audience ask ourselves the same question. Listening to Dan and then pondering the question, on my way back from our meeting on Wednesday I thought, “I should have this be my question of the week.”

We have many roles in our life, and each role has its own “why.”

In January 2007 I wrote personal value, mission, and vision statements. My mission statement is, “My family, personal, work, and community commitments are in balance and congruent to allow me to bring happiness into the lives with whom I interact.”

This week I would like to share my “why” for being a mortgage professional. It took me quite a while to understand my why, but once I did my job satisfaction increased considerably.

I started in the mortgage industry in 1987 because a friend of mine was in the business and was making very good money. My motivation was that, making money. After several years I realized I was not very satisfied with what I was doing and thought about another career. The source of my dissatisfaction was I felt that I didn’t produce anything, at the end of the day, week, month…I couldn’t see tangible number of units that I produced.

Then in 1994 a few things happened to change my perspective. First, and most importantly, within nine months Leslie and I began dating, bought a home, got engaged and then married. I was a homeowner.

In the beginning of the year, I received a letter from a client who had been somewhat gruff, and frankly challenging to communicate with through our transaction. In his letter, he thanked me for helping he and his wife purchase their first home. He did not realize how important it was until before Christmas as they purchased a home with a fireplace. His young daughter kept saying how now that they had a fireplace Santa would be sure to find them and bring presents. He did not realize how quickly having their own home would change their family, knowing that they would raise their children in the home, removing some anxiety that he always had about where would they be living in a year, two years, or more at the whim of a landlord.

Being a new homeowner, without yet having children, and reading his letter really opened my eyes as to how important my work is to ensure homeownership. Yes, I realized before this time that homeownership is important, but I did not fully understand the depth of importance it has.

My “why” started to come more into focus. It became crystal clear a few years later after we had purchased a bigger home and started our family.  

Growing up we moved around. A lot. My mom was married to my dad for twenty-four years before she passed away and, in that time, they shared around twenty addresses as he moved around in the petroleum industry. Some addresses were a hotel in some small oil town for seven to eight months, others were home for longer as he rose in the industry and stayed in one place longer. Of those many addresses, by the time I graduated high school I lived in six of them. Home to me was a temporary place with new friends who would become old friends when we moved again.

In March 2004 Leslie and I had lived in our home for five years and seven months, equally the longest I had ever lived in the same home. We had two young daughters, who I knew would live in this home through their childhood. By then I got it. I got that importance of homeownership, the security, the stability, the comfort, that everyone has knowing we would be in this home as long as we wanted to be in it.

My why is to do all I can to help other families attain homeownership and enjoy the same security, stability, and comfort. My why is to provide education and information to prospective homeowners so they can purchase the best home they can afford in such a way they that they can own that home as long as they like.

We started losing business before the real estate and mortgage market meltdowns that started in 2008. We lost business because our philosophy is that we are helping you buy a home not a get-rich-quick investment. Because of this we stressed 30-year fixed rate mortgages. We had the opportunity to use stated-income, or no qualifying mortgages to help families purchase more expensive homes; but doing the math on their payments and their incomes we could not in good conscience put people in mortgages that they could not afford and would lead to trouble down the road. Our goal was to support and enable homeownership that would last as long as the family wanted to keep that home, not to get into a home and figure out to pay for it later.

My why is to enable and support homeownership by working with individuals and families and presenting them options to purchase their home within their financial capabilities.

Our business is generated completely from referrals. We get referrals because we care about the families we work with and listening to them about their wants and needs and then showing their capabilities.

The most important purchase of your life needs more assistance and guidance that purchasing a car, or an appliance. We provide that assistance and guidance.

If you, or someone you know, are in the market for a new home, or considering a mortgage for other non-purchase, contact me.

Have a question? Ask me!

A lot of economic data this week that impact rates. On Wednesday data was released showing consumer confidence dropped for the third month in a row. This is somewhat good news for rates as lower consumer confidence can lead to less consumer spending, which can lead to lower inflation as economy slows due to less spending (consumer spending is about 70% of our economy).

Unrelated to the consumer confidence data, but also announced Wednesday, was the Federal Reserve announcing it was increasing its benchmark interest rate by 0.75% for the second month in a row. This was met very positively by the markets and resulted in a rally in mortgage markets pushing rates down.

Yesterday data was released that created much debate. Like many issues these days, the 2nd quarter Gross Domestic Product data enabled pundits, politicians, average Joe’s and Jane’s to become economic experts. Our GDP shrank by 0.9% in the 2nd quarter, this follows a 1.5% contraction in the 1st quarter. The debate is “are we in a recession.” When I was getting my economics degree in the early 1980’s a recession was defined as two consecutive quarters of negative GDP, and that remains the technical definition. The argument, that is centered around politics, surprisingly…, is that while that is the technical definition, in the United States the official determination of whether the economy is (was) in a recession comes from the National Bureau of Economic Research. The NBER looks at several factors beyond GDP to determine whether there has been a recession, so some are saying we don’t know yet if we are in a recession or not. I use past tense because it can take months before the NBER makes its determination.

In my view, if it looks like a duck, whether a mallard, a canvasback, or a white-faced whistling, it is still a duck. Having two consecutive quarters of negative GDP has us in a recession, a shallow one at this time but in one, nonetheless. This is positive news for mortgage rates as it portends slower economic activity, therefore a drag on inflation and the return of lower rates in the future. How long into the future? It depends on how slow inflation is to respond to a slowing economy.

Today we received news on inflation, spending and income. The personal-consumption price index (PCE—why not PCP I don’t know unless the government doesn’t what people to think they are giving prices for illicit drugs) spiked by 1% in June, pushed by fuel prices. The “core” rate (fuel and food taken out) was up 0.6% for the month. Year over year the PCE increased 6.8%, 4.8% for the core rate. The somewhat good news is that with a large part of the increase being higher gas and oil costs in June, with those costs dropping in July we should see a tamer inflation number. The PCE is used by the Fed when gauging inflation as it takes into account how consumers change their spending habits due by buying cheaper goods.

Finally, we round out the week with spending and income data. Both increased in June, before inflation is considered. Consumer spending increased 1% in June, accounting for inflation the increase was only 0.1% above spending in May. Personal incomes continue to grow, up 0.6% in June, but as can be seen if inflation was 1% and your income increased 0.6%, you are making more not enough to keep up with your expenses due to inflation.

Rates for Friday July 29, 2022:  The result of all the data this week was that rates dropped for the third straight Friday, with the conforming rate down 0.75% since the first Friday of the month.

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

30-year conforming                              4.625%        Down 0.375%

30-year high-balance conforming        5.375%        Down 0.25%

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 don’t mind that I used the Question the Week for what usually goes into this part of the WR&MU, personal information and not mortgage or real estate related. One thing Dan said on Wednesday when talking about his “why” was that he realized it didn’t mean anything unless he let others know. Following Dan’s example, I feel I need to let others, you, know my why for being in the mortgage industry. Thank you for reading and understanding!

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

Are rates historically high?

Question of the week: Are rates historically high?

Answer: It depends on how we define “high” and “historically.”

For purposes of answering our question, historically will be January 2006. Why? Because I have consistent data with rates from the Weekly Rate & Market Updates that have used the same criteria each Friday for the conforming mortgage rate (see fine print below under the chart weekly rate chart).

Speaking of charts, this week we have a bonus chart:

Since January 2006 the median interest rate (the middle of all the rates listed, the median of 6, 5, 4, 3, 2 is 4; there are two numbers above 4 and two numbers below) is 4.00%. During the period the highest rate was 6.625% in June 2006, the lowest was 2.375% a few times between November 2020 and January 2021.

The average price of rates (add up all the rates and divide by 862 weeks) for every Friday from January 2006 to last Friday is 4.228%, about one-quarter of one-percent above the median. Because the average is higher than the median, this means that the conforming rate was over 4% by higher values for more weeks than under 4%.

As you mentioned, the highest rate in our time frame was 6.625% in June 2006. From June 2006 until the real estate and mortgage market meltdowns that pulled the country (world) into the Great Recession, rates bounced from about 5.5% to 6.5%.

In 2006 the median home price in Los Angeles County was $585,400, and the conforming loan limit was $417,000. To purchase the median home in June 2006 with 20% down, a homebuyer would need a jumbo loan, with a rate of 6.75%. For a $468,320 30-year fixed rate mortgage at 6.75%, the June 2006 monthly mortgage payment would be $3,038 per month.

In June 2022 the median LA County home price was $860,000. I will make an assumption that the median price is the same for this exercise. Purchasing the median price with 20% down would require a loan amount of $688,000—above our maximum conforming limit of $647,200; the high-balance rate, which as you can see below is 5.625%. The payment for 30-year fixed rate $647,200 mortgage at 5.625% is $3725 per month.

From the highest rate in 2006 to today’s rate, the median home value has increased 47% and the payment for the median home has increased 23%.

Using an inflation calculator, I put in purchasing an item for $3038 in 2006 (the monthly mortgage payment) what the item would cost today due to inflation over the past sixteen years. The result was $4465, or it would cost 47% more—the same rate the median home in LA County increased in value.

At the lowest rate during this period, we will use November 2020, of 2.375% the median home price was $664,160 in Los Angeles County. Putting 20% down results in a $531,325 mortgage, above the $510,000 conforming loan limit. The high-balance rate for the third week of November 2020 was 2.625%. The payment for a $531,325 30-year fixed rate mortgage at 2.625% is $2134 per month.

The payment for the median home in LA County when rates were at their lowest in the past sixteen years was 75% lower than the monthly payment for the median home price today and the median priced home increased 29%.

Historically over the past sixteen years, rates today are higher than the average and median rates during the period. However, calculating purchasing a new home over the historical period, the current rates produce a payment that is in-line, or better, than adjustments for inflation. Rates have climbed less than inflation over the past decade.

One other point. Purchasing a home today does not mean you are always going to have that rate. If, when, rates drop after your purchase you can refinance and lower your payment, while benefiting from increasing home values over time. Someone who purchased their home in June 2006 at the highest rate and refinanced several times over the years as rates dropped, would be paying about one-third of their original payment today, or if they kept making the same payment every month would be close to paying off their home.

Yes, rates are higher than a year ago, and so are property prices. Waiting for either to drop creates the risk that neither will, and one, the other, or both, may go up in the near and medium future. How long will you wait to buy? How will you know when the time is right if, when, prices increase, even if rates do decline? If you are considering purchasing a new home, give me a call and we can run through your options and “what-ifs” for different values and rates.

Have a question? Ask me!

Rates for Friday July 22, 2022:  Not a lot of economic news impacting markets this week. The Fed is expected to push its benchmark rate up another 0.75% next week, which is priced into the market. Investors are feeling less bearish on fixed rate assets, like mortgages, evidenced by rates dropping for the second week in a row, and third Friday of the last four.

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

30-year conforming                              5.00%          Down 0.125%

30-year high-balance conforming        5.625%        Down 0.25%

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 love baseball. In the morning I will look at the schedule and hope that there is a day game on the East Coast so I can put the radio broadcast of the game on my computer as background while I work. I don’t care what teams are playing, I just enjoy listening to baseball radio broadcasts.

When I mention this to others, some look at me a bit sideways wondering what kind of person listens to games instead of music. For that matter, who listens to baseball games on the radio? Older guys like me, I guess.

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