Do we need an attorney?

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Question of the week: Do we need an attorney?

Answer: Long time readers of the WR&MU know I like to play golf. Not infrequently during the months when the sun rises early, I will play the back nine (for non-golf nomenclature, the back nine are holes 10-18 on a standard golf course) early in the morning—we tee off before the first group that started on the first hole makes it around to the 10th tee.

This is enjoyable, not only for the golf, but for the others that share the joy of playing nine holes of golf in about two hours so back home or in the office before others may be starting their days.

This morning I was fortunate to play the back nine at one of our local courses with three attorneys—yes spending time with attorneys can be fun, and if on a golf course affordable as they don’t charge you in six-minute increments, by the stroke, or by the hole (unless there is some friendly wagering).

Each of the attorneys has a different specialty within a specialty and hearing their discussions as we walked the fairways led to our question of the week.

The umbrella specialty is death. Well, not really death but what happens to your stuff when you die.

One is an estate and trust specialist. One is a probate specialist. One is a real estate specialist. While there is some cross-over, each has earned recognition from their peers in these specialties and engage in much referring between them and other attorneys and their specialties.

The longest discussion was a case that, as well as I could tell between shots, looking for balls, raking sand traps, was about a family that is dealing with the sale of a home that had a complicated trust that was not properly put together and requires filing of motions and coordinating the ability to sell the property, who gets what, and different laws that they are negotiating so the property can be sold and the proceeds distributed to heirs through the trust.

As I am getting bits and pieces, such that while above is what I inferred from the discussions the actual case may be a bit different, I think how much easier it would be for all concerned, and cheaper for the estate and its beneficiaries, if the initial trust had been set up in a less complicated way.

We have handled many transfers of property within estates where one, or more, beneficiaries are “purchasing” the property from the estate with the proceeds being distributed to other beneficiary(s). Very often they are somewhat simple for what is being accomplished, because the trust is pretty clear cut, and there is agreement between those involved as to property value and how much needs to be paid to other beneficiaries in exchange for the property being transferred to our client beneficiary.

Much less simple, are transactions where we there was not a legal plan in place as to what happens to a property when the owner dies; i.e., it is not in a trust, and/or there is no will. In these cases, the property goes through probate and a judge determines who owns the property and confirms its value if it is to be sold. This is not only very time consuming for the decedent’s heirs, typically children, but also costly due to attorney and court fees. Almost always more costly than the cost of working with an attorney to put your “stuff” into a trust and create a will documenting who gets what.

Playing golf with Robert, Paul, and Daniel, I could see the different legal options after people die for real estate, and retirement accounts, and savings, and the drawing Mom got from Warhol she got as a gift in her 20’s after a party one night in SoHo in the ‘50’s, before he started doing celebrity portraits.

Do you need an attorney? If you own stuff—especially real estate—yes. Because if you do not engage an attorney now to help with your estate (makes you sound wealthier than you may feel) and its assets and what happens to them when “It” happens. If you do not engage someone for these services now then your heirs will need to after “It” happens, and they will likely not have kind and fond memories of you for the trouble, expense and time spent expended due to your not engaging an attorney.

Be nice to your kids, and grandkids, if you do not have an estate and trust plan in place, get one.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

“Hawkish pause.” That was the term that the Wall Street Journal’s MarketWatch used to describe the Federal Reserve Chair Jerome Powell’s comments after the Fed announced that at its meeting this week it was taking a pause in rate increased and decided to not increase its benchmark interest rate. From his comments, we can expect the Fed will bump its rate another 0.25% (one-quarter of one percent) before the end of the year. But with economy growing at a “solid pace,” the Fed expects rates to be higher longer in order to push inflation down. It expects the core rate of inflation to be 2.6% in 2024 and not reach the Fed’s target rate of 2.0% until 2026.

Rate cuts will be coming in 2024, however instead of the projected four rate cuts next year, the Fed is anticipating two rate cuts—meaning the Fed’s benchmark rate will likely remain at or slightly above 5% through next year. The Fed funds rate is currently 5.25-5.50%, prior to the Fed’s quantitative tightening policy (raising rates, the rate was 0.00-0.25% from March 2020 to March 2022 when it made its first rate increase of 0.25%.

Rates for Friday September 22, 2023: The markets reactions to the Fed actions and comments were a steep drop in bond and mortgage markets (lower price mean higher rates), as well as equity markets. Despite talk of “soft landing,” avoiding a recession, and strong economy, the news that pushed investors were another increase this year, rates higher longer, and only two rate cuts next year. The result is that rates this Friday reach a multi-decade high.

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

30-year conforming                             7.375%        Up 0.125%

30-year high-balance conforming        7.875%        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.

Fall is officially here! Well almost as the fall equinox occurs tomorrow; the spring and fall equinoxes are when the sun falls equally on the northern and southern hemispheres. Moving forward, until the winter solstice for the northern hemisphere, our hours of sunlight will diminish.

Um, why the exclamation point? You’re happy with less daylight?

Because I love the fall, by far my favorite season. The cooler days, yes the shorter days, but also all the it means in terms of filling my love of sports. Baseball playoffs have essentially started with teams battling to make the playoffs, football is fully underway, and with the cooler weather I begin to unconsciously change my consumption habits from mostly bourbons and ryes, to mostly scotch and Irish whiskey.

Happy Autumn!

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 long do I need to keep my statements?

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Question of the week: How long should we keep statements?

Answer: “I’m cleaning out some boxes, how long do I need to keep my mortgage statements?” Was a message I received, almost identical in each message, over six days this past week from two different friends of mine.

My first thought was, isn’t it Spring cleaning when this happens? Is Autumn cleaning a new thing so it coincides with pumpkin spice everything?

My second thought was, this is a great question of the week we have not covered in several years.

I will expand the statements to include loan documents and other important files and documents in the answer.

The IRS answers the above question for us, keep records for 3-years from the date you filed your original return, or two years after you paid the tax, whichever is later. If you filed a claim for a loss for worthless security or bad debt deduction, keep the records for seven years.

If you have filed and paid your taxes due for 2022, you do not need to save any records for 2019 and earlier—but I am always safe and add one year, so our records from 2018 and earlier have all been shredded.

Always shred financial statements and documents! Home Depot has small shredders for as low as $25—which can save you thousands if your financial information gets in the wrong hands.

Documents of a legal nature are different however than records you maintain for tax purposes.

When you close a mortgage for a purchase or refinance you will receive a thick packet of documents after closing. Typically, these are all in one bundle so it is easy to retain everything you receive. However, if you are a bit OCD and only want to keep what you need to keep…retain any deeds that are recorded.

Deeds transfer ownership (Grant Deeds) or place the mortgage as a lien on your property (Trust Deed).

When you payoff a mortgage through sale, refinance, or you write a check, a reconveyance will be filed with the county clerk removing the Trust Deed from the property as a lien. You should receive a copy of this in the mail after it is recorded (and all recorded deeds), save the recorded reconveyance in case somewhere down the years someone says the lien is still owed.

If you have been sued and a judgment has been placed against you for an unpaid debt or other obligation that may be owed. When the debt is paid off make sure you get a release of lien from the creditor, and retain a copy of that after filed with the county clerk.

Besides the deeds, another very important document to save from your loan closing documents is the Note. This document contains the terms of the loan. This is particularly important if the loan is an adjustable-rate loan (as in a Home Equity Loan) to ensure when rate changes occur, they are in line with the terms of the Note. As well, if (perhaps when) the servicing of your loan payments changes from one lender to another, it is important to have a copy of the Note in case the new servicer makes an error in the amount owed for your payments.

An aside of transfer of servicing, if you receive notification that this is occurring, make sure you have access to the last two statements from the prior servicer to compare the details of amount paid, loan balance, etc.

Any loan applications documents you receive from closing should probably be shredded as they contain everything a person would need to engage in identity theft and run up credit in your name.

If you have several years’ worth of statements, forms, documents you no longer need that will overwhelm the capacity of a home shredder, there are several places where you can bring the files to be shredded—Google is your friend to find them.

Finally, this question becomes increasingly less relevant as almost all statements you need are available on-line through your lenders, banks, insurance companies, credit card vendors and other businesses. Taking advantage of paperless statements not only frees you from shredding parties every year, but reduce the opportunity for theft of your statements through mail interception.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Three months in a row, that is the run for increases in the Consumer Price Index as data showed prices rose 0.6% in August (highest one-month increase in 14-months), and is up 3.7% year over year; CPI was up 3.00% in June and 3.2% in July. The Federal Reserve, when looking at price data for decisions as to whether to change its benchmark rate, analyzes the “core” CPI data, which strips out food and energy prices—the Fed prefers this part of the index as it is less volatile. Core CPI dropped in August from 4.7% in July to 4.3% in August, the lowest in 22-months. The core index dropped so much because gas prices jumped 11% in August (as you likely have noticed) and was responsible for over half the CPI increase. Inflation increasing three straight months is not positive for mortgage rates.

Gas not only had a large impact on CPI, but also retail sales in August, which increased 0.6% from July—the 5th straight month of increasing sales. Because gas prices jumped in August, and because gasoline sales are included in retail sales, pump sales were the primary reason for the increase in sales.

Rates for Friday September 15, 2023: Rates up again this week on the economic data showing an economy that may see some reduction in prices on goods and services that aren’t basic necessities, like food and gas, but overall an economy with high inflation.

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

30-year conforming                             7.25%          Up 0.25%

30-year high-balance conforming        7.625%        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.

Every year the gear comes out a bit earlier and earlier for Halloween, Thanksgiving, Back-to-School, Easter, and of course Christmas. It causes me pause to see an over-lap of skeletons, cornucopia centerpieces and Santa Clauses in the aisles at the same time.

What did not give me pause was seeing some establishments that were promoting “starting Octoberfest early.” No special decorations needed, no cards or gifts to fret over, just finding time in the schedule to enjoy some beer and German food—particularly delicious sausages.

So while others are searching for the perfect pumpkin spice Halloween punch that can be adapted for Thanksgiving—some of us may be at the local with a sausage platter, pretzel with an assortment of mustards, and a stein of the perfect beverage to accompany them.

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 are rates higher on condos?

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Question of the week: Why are rates higher for condos?

Answer:  Risk.

Long time readers of the WR&MU know that when discussing rates, the conversation is usually about markets, investors, economy, and factors that cause rates to go up or down.

In this case we are talking about why is the rate different, all other factors being exactly the same with the exception of the type of dwelling; in this case condominiums. The question of the week has come up more often this year as with higher rates many prospective buyers are looking to purchase condos since they are generally more affordable than single family homes.

Early last year we covered “LLPAs” Loan Level Pricing Adjustments, fees that are added to base pricing by the Federal Housing Finance Agency that Fannie Mae and Freddie Mac must charge for certain factors in a mortgage application.

Most mortgage applicants are aware that the lower their credit score the higher their rate will be. Technically, it is not necessarily that the rate is higher for the lower score, but that the cost that Fannie/Freddie must charge is higher. Instead of charging more costs, i.e. points, most lenders offer a higher interest rate. (The higher the rate the lower to cost, or points; the lower the rate the higher the cost, or points.)

The LLPAs are an expression of risk to investors for certain aspects of a mortgage application, such as higher or lower credit score, higher or lower down payment, owner occupied or investment.

Risk is measured by late payment, defaults, and foreclosure rates. Each of the factors listed above, credit score, loan to value (i.e. how much down payment), occupancy of property, have measurable differences in risk—therefore variable costs on mortgages for those factors to compensate for the risk.

Another factor is the type of property that is the subject of the mortgage. The least risky type of property is a detached single-family residence (SFR). There are no LLPAs for an SFR. Significantly riskier, per historical payment data, are condominium units.

Why are they riskier?

When you purchase a home in a neighborhood, you are in a loose business relationship with your neighbors. If your neighbor has a run down home, lawn is weeds, dirt and the back seat of a 1982 AMC Gremlin, it will impact the value of your home.

When you purchase a condo, you are in an intimate business relationship with every other unit owner in your complex and homeowners’ association (HOA). The health of the HOA directly impacts the value of your unit.

Your neighbors, individually and collectively, make up the board of your HOA, they pay, or don’t pay, dues to the HOA, determine what capital improvements, maintenance and repairs are to be completed. All of these factors impact the financial health of HOAs, and therefore the value, or ability to sell, units in the complex.

If a HOA starts to have poor fiscal management, has increase in owners who are late, or do not pay, their monthly dues, has not properly maintained the property resulting in leaky roofs, broken sidewalks, or other hazards, the result will be, not only higher dues for owners to cover the shortfalls, but likely being taken off lists of approved condos for lenders. This will result in fewer available loans, therefore fewer qualified buyers, which will result in lower values.

Also, having a potentially negative impact on values will be the occupancy of the units in the complex. One potential risk for lenders in regards to condo is that a large percentage of condos are converted to rental properties. I have had many clients over the years purchase a condo for their first home, then when they are able purchasing a new single-family residence and retain their condo unit as a rental.

Because of this property ownership trend, there is a two-fold risk for lenders with mortgages in a condo complex. First, is the direct risk of their prior owner-occupied loan now being a loan on an investment property. Investment properties are a big risk to lenders are if borrowers are having financial challenges, they are much more likely to let a rental property go to foreclosure than their primary residence.

Second, many condo complexes can see the number of rental units increase over the years, in some instances seeing more than half of the residents being residents. Having fewer owner occupants in a complex tends to see a decline in care for the common grounds and units. Absentee owners are less likely to pay close attention to HOA governance and finances. This can lead to a decline in values.

Finally, a new wrinkle for risk in California is the insurance issue. Many HOAs are losing their approval from Fannie/Freddie because they are underinsured for replacement values due to higher construction and labor costs. With insurance carriers leaving the state, HOAs trying to increase their coverages in order to be eligible for conforming financing, and those who have sufficient coverage but are renewing, are seeing significant increases in premiums. Which result in significant increase in HOA dues, which may make it challenging for all owners to pay their dues.

These factors above paint a negative picture for condominium purchases. However, the vast majority of condo complexes are well run, fiscally responsible and ideal properties for buyers—particularly first-time buyers. I paint the negative picture because these are factors lenders look at when assessing risk, and therefore rates.

How much higher are rates for condos over single family residences? If you are putting 30% or more down there is no difference in pricing (high down payments can eliminate most LLPAs). For most buyers looking between a condo and SFR, the rate difference with 20% down is about 0.25% (one-quarter of one percent), the difference with 10% down is about 0.375% (three-eighths of one percent). Add on the HOA to the rate difference and it may pencil out that you can afford a single-family residence after all. Contact me to run your numbers.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rates for Friday September 8th, 2023 Markets back to traditional inverse movements, rates increase this week (lower prices) as stock markets go up. Not a lot of economic news that would cause major movements or trends—just traders chasing returns.

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

30-year conforming                             7.125%        Up 0.25%

30-year high-balance conforming        7.625%        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.

It is that time of year when I plan most of my Sundays by looking to see if the Eagles will be on local television, and if not (usually the case) what time they kickoff, 10:00 or 1:00 our time. If not on television I will plan my yard work, and other chores, around their kickoff so I can listen to the great Eagles radio announcer Merrill Reese, with his sidekick and ex-Eagle wide receiver Mike Quick (yes, the perfect name for an All-Pro receiver), do the radio broadcast.

Of all the many great things internet, near the top of the list for me is being able to listen to radio broadcasts for all the major sports teams—particularly the Philadelphia Phillies and Eagles. I find I learn a lot more about the teams, players, and game listening to the radio announcers as they describe the action and fill in the time between plays, or at-bats, whereas television announcers can often take long pauses as their medium is visual and not auditory.

I’m an old guy with the modern version of a transistor (which I had well into late 20’s).

Go Birds!

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 move up now?

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Question of the week: Why should we move up now?

Answer:  So you can have the home that you have wanted for the past several years.

Rob Chrisman, one of the, if not the, best commentators on the mortgage industry and markets geared to mortgage professionals, provides excellent information on a daily basis to thousands (tens of thousands) people in the industry every day. Rob has a great sense of humor as well and opened his daily commentary the other day with this:

Studies also show that there are three basic groups of people in the United States: homeowners with 3 percent mortgages who don’t want to move, wannabe homeowners who don’t want 8 percent mortgages, and renters who don’t care.

Over the past year or so I have written several times about what’s next for the housing market, and have had several conversations regarding “when to buy” with potential first-time buyers and move up buyers. The latter are the subject of our question of the week.

Last week the question was “when will rates come down?” It ties in nicely to this week’s question as in the commentary I said that rates will never get back to the Covid era rates just below or above 3%, so if you are waiting for that to happen to move, you will never move.

Back to Rob’s pithy comment, he is not wrong. Because of interest rates either preventing potential buyers from qualifying for the homes they want, or preventing potential buyers from moving up to their “dream” home, there is a significant amount of pent up demand—I’m not on a limb stating that there is a historic amount of pent up demand.

Consider those who were trying to buy a home during the pandemic, chasing homes as prices climbed and climbed and climbed. Losing out on their offers to others who bid well over asking price, and those, maybe the same competitors, offering all cash or significant down payments. For those looking to move up, they were hesitant, or stayed out of the market because they did not want to sell their homes and then not be able to buy a new one in the competitive market.

Exhausted from the market turning them down, many left the market to wait until it became “normal.” 

Instead of moving from historically low rates and a rabid market for homebuyers, the market moved with no slow transition into a period of historic increasing of rates that did not result in a softening of prices in the housing markets, but due to lack of move-up buyers resulting in a market with lack of supply and stable to rising prices.

Result of all this, at least two years of pent-up demand from first-time buyers and move-up buyers who are waiting for “the” rate to move into the market. What happens when “the” rate is hit? Buyers flood the market; supply is not sufficient and prices remain stable or increase.

Why buy now? Get your bigger home, your next home, your “dream” home now and remove anxiety and stress in the future as the market gets more rabid with dropping rates.

Here is an example using a fairly generic couple that represents a significant portion of our client base.

Shaun and Alison purchased their home in Long Beach in July 2015 near the County’s median price, $475,000. They put 20% down using savings, part of Alison’s 401(k), and a gift. They obtained a $380,000 mortgage at 4% with a payment of $1815 per month. In July 2021 they refinance what was now a $335,500 mortgage for 2.625% and a payment of 1525 per month.

Since they moved into their three bedroom, two bath house with two small kids in 2015, they now have a third child and the small kids are bigger. They very much want a larger home.

Looking at the market, there are some homes that they feel would be very good for their family in the one-million-dollar range.

Their neighborhood continues to track the median price for LA County and they are able to sell their home for $850,000. Estimating about 7% for the costs of their sale, paying off the $319,000 left on their original mortgage, they will have net proceeds of about $470,000 from the sale of their home.

Because the have sold their home for less than $500,000 above their acquisition cost, they will not need to withhold any of the proceeds to pay capital gains tax on their sale (DISCLAIMER: I am not a CPA or tax professional, please contact one if you are selling your home with substantial increase in value since your purchase.)

Shaun and Alison have an offer accepted on a home that meets their wants and needs for one-million-dollars. Putting down the $470,000 they obtain a $530,000 mortgage with a 7% rate and a payment of $3525 per month.

Crystal ball…last week I postulated that I thought next year rates will drop down to near 6%, and in 2025 to near 5%.

Rates begin to drop and Shaun and Alison notice a few more homes for sale in their neighborhood, and to their delight see that prices are moving up due to higher demand.

Next September, Shaun and Alison refinance their mortgage, now with a $524,500 balance, at 6% and their payment drops to $3145 per month, saving almost $400 per month.

Rates continue to drop, home prices are steady with some slight growth, and in September 2025, Shaun and Alison are able to refinance their now $518,000 mortgage at 5% with a payment of $2780 per month, a savings of over $350 per month. Their appraisal for the refinance indicated a value of close to $1.1 million dollars.

One issue many potential move up buyers have today is similar to the issue they had during the pandemic, “what if we sell our home and there is nothing on the market we would like to buy?”

This is an issue in any market, and the biggest hurdle many move up buyers. There are a few solutions to this issue.

When negotiating with buyers ask that they will allow you to stay in your current home for 60-days after closing, paying the housing payment (mortgage, taxes, insurance, aka PITI) for the period you are still occupying the home. This should give you plenty of time to find and negotiate the purchase of your new home.

The other primary solution is a condition that you have ten, fifteen, so many days to enter a contract to purchase a new home, if you are unable to do so then the buyer can cancel the contract, or give you more time to find your home by extending the time frame.

Finally, you may need to move into temporary housing with your household items in storage—the least attractive option for every potential move up buyer.

If you are wanting to move up but are worried about a large increase in your housing payment, or not having a potential new home, schedule a time for us to talk about your numbers to see what your options are.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Data, data, data—it’s that time of the month when lots of economic date is released that can impact markets, and rates. The highlights this week:

  • Relevant to commentary above, pending home sales up in August from July, the 2nd monthly increase in a row.
  • GDP for the 2nd quarter was revised down from the initial estimate of 2.4% growth to 2.1% growth.
  • Consumer spending jumped 0.8% in July, highest increase in six months, listed causes for the increase are Amazon Prime Day (it’s biggest ever), “Barbenheimer” and the phenomenon of the summer—Swifties spending lots of money on tickets, merchandise, hotels, etc to see Taylor’s record breaking concert tour.
  • Overall spending up 1.7% in the second quarter after inflation
  • Personal Consumption Index (PCE), the inflation gauge used by the Fed when deciding what to do with its benchmark interest rate, was up 3.3% for the 12-month period from July 2022 to 2023, much higher than 3% year over year increase in June.
  • 187,000 jobs were added to the economy in August, the 3rd month in a row with an increase, more people are looking and not finding work however, as shown by the increase in the unemployment rate from 3.5% in July to 3.8% in August—the higher rates in the past year and a half.

What’s it mean? The data was a mixed bag. On the one hand the increase in PCE supports the Fed increase rates, on the other the higher unemployment rate supports a pause. On the one hand the revised GDP data showing slower gross is positive for no rate increases, on the other the increase in personal spending puts pressure on higher rates. Overall the news this week fairly good for rates as the data’s mixed bag of positive-negative shows an economy in flux trending to slowing, which is good for lower inflation and eventually rates.

Rates for Friday September 1st, 2023 Conforming rates have their biggest weekly drop since mid-July as investors react to the economic data and potential for lower rates continuing.

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

30-year conforming                             7.00%          Down 0.25%

30-year high-balance conforming        7.50%          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.

The years continue to pass, letting us acknowledge and celebrate the big changes in our life. Last week marked the twenty-fifth anniversary for us in our current home, having moved in at the end of August 1998 in the middle of a heat wave. Our biggest concern was not what went where, but our dog Cooper in the heat in a new home with no shade outside. Our first projects were to tear out a brick patio area and replace it with grass, and put a roof over the patio by the house for a sitting area.

A bigger life event anniversary occurs on Monday when Leslie and I celebrate our 29th wedding anniversary. Two kids, two houses, three dogs, and many, many, wonderful adventures have shaped our lives together—some men may be as fortunate to have a wonderful wife and life partner, but none more so than me.

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 will rates go down?

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Question of the week: When will rates go down?

Answer: This is a question I, and everyone in the mortgage industry, has been asked at dinner parties, neighborhood gatherings, golf outings and on vacation when the John Deere salesman at the pool bar finds out what you do for a living.

My initial response is, “go down to what rate?”

I quickly get the answer they are really looking for out of the way—mortgage rates will never, never being most of our lifetimes, go down to where they were in the pandemic, the 3% range.

Short of a major catastrophe, a major economic depression or significant international armed conflict as examples, rates will very likely not go down to the 4% range either, except in the case of minor catastrophe(s).

For those wanting to move-up, or down, from their current home that has an extremely low “Covid rate,” around 3%, but are waiting for rates to come down to near their current interest rate—if you really want to move, raise considerably the rate you are okay with on your next home as you will likely never see your current rate in the market again.

With those expectations out of the way, we focus the discussion on the more immediate future, the end of this year, and all of next.

Long time readers of the WR&MU know that in general, poor economic news is good for mortgage rates (i.e. lower), and bad economic news is not good for mortgage rates (higher); with general political and geopolitical news having the same relationship.

While mortgage rates are not directly tied to the Federal Reserve’s benchmark rate, the reasons for the Fed moving its rate up and down are the same reasons investors buy or sell mortgage-backed securities (MBS), which dictate mortgage rates.

With inflation still well above the Fed’s target rate of inflation of 2%, the expectation, as provided by statements from Fed Chair Jerome Powell, is that the Fed will increase its benchmark one more time in 2023. This increase is pretty much priced into investment markets. What is unknown, to some extent, is what is the Fed’s plan leading into next year?

The plan will depend on economic activity through the end of the year, inflation, and labor markets. The past several months we have seen inflation slowing, while economic activity remains between moderate to strong from month to month.

If strong will the Fed stick with the expectations provided to investors over the past several months on only one more rate increase this year and then a hold to evaluate the economy, inflation, and jobs, for the first quarter or more in 2024? Or will the Fed lose its patience and enact another rate cut, or more in the 1st quarter and/or beyond in 2024?

If the Fed signals that it will push the pause button on rate hikes, investors will move into the MBS and bond markets to lock in the high rates. This increase in demand will move prices higher for those investments, thereby pushing rates down. When will this signal come that will put downward pressure on rates? That depends on when the Fed feels economic growth and inflation are “normal” and sustainable.

“Normal” will be when what is known as the Fed funds rate (the rate the Fed moves up and down) is at the “neutral rate,” the rate at which the Fed is neither stimulating nor depressing the economy. When the current cycle of fighting inflation is over, be it late in 2023, mid-2024, or ???, the economy should reach a period of stability at which the Fed will not change rates.

After the current cycle is over, the Fed will, at some point, slowly lower rates to find the “neutral rate.” When this period occurs, the Fed rate will be lower than it is today, and the range of the rate will be higher than it was from the period of the Great Recession to the Covid pandemic. From 2009 to 2015, the Fed funds rate was near zero; from 20215 to the middle of 2019, it slowly rose to 2.25-2.5%, today the rate is 5.00-5.25%.

When will the Fed end it pause and lower rates, and at what rate range will they stop lowering rates, thinking the rate is neutral. Some feel the Fed will begin to lower its rate in the 3rd quarter of next year, others later in the year. I have seen predictions that the rate range after the rate decreases will be between 2.75-3.5%.

What does all this economic gobbly-gook mean? What will rates be in the near future?

It’s always dangerous to make predictions that will be left on the world wide web, that said, my feeling is that the 30-year conforming rate will be between 6.75-7.00% at the end of this year. By the middle of 2024 the rate will be between 6.25-6.5% and at the end of 2024 5.75-6.00%. Depending on economic activity, world events, the 2024 Presidential and Congressional elections, rates could near 5-5.5% by the middle of 2025.

As I have written a few times this past year, when rates begin to drop, we will see an influx of buyers into the market, maintaining or pushing prices higher. At some point supply and demand will reach some sense of equilibrium, stabilizing prices, but how much higher will prices go and how low will rates be when that happens? I think we will be near that point when rates close in on 6%.

All this absent some major event pushing the economy into recession or depression.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rates for Friday August 25, 2023 Markets were holding their breath the past several days in anticipation of a speech the Fed Chair Jerome Powell was giving today at an annual retreat in Jackson Hole (swanky!). Powell helped mortgage rates by stating that given “cloudy” economic outlook that the Fed would move “carefully” before raising rates, “awaiting further date” resulting in a holding the current policy rate constant. Phew! said markets. We have rates flat Friday to Friday for the first time since the end of June, and the first time in five weeks the conforming rate is not higher than the prior Friday.

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

30-year conforming                             7.25%          Flat

30-year high-balance conforming        7.625%        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.

A very sad weekend across Long Beach and other areas of Southern California as it is the last weekend of the year for kids before they start school on Monday. With both our girls out of the house, one starting second semester of her junior year at Pace University and the other having graduated from Boston University last spring, we no longer have the school calendar as the house calendar.

In some ways I miss the dependable cyclical routine and school breaks. But mostly I don’t—glad that Leslie and I can manipulate our calendars however we want.

I hope everyone had a great summer, and for those with school age children, have a great school year.

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 the liability of a co-signer?

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

Answer: This is a repeat question from last summer, but due to different reasons. Last August when the QoW was about co-signer liability, it was a follow up to the prior week’s WR&MU when the question was Can we put our college student on a mortgage?

This week the question percolates from conversations with potential first time buyers who are facing challenges purchasing a new home due to high interest rates and needing more income in the file to qualify.

For instance, Wendy has sufficient funds to purchase a $500,000 condo unit, minimal credit, and a very good credit score. One year ago, when rates were approaching and passing 5%, even six months ago when rates were around 6%, Wendy qualified for such a purchase. Unfortunately, at that time she wanted to wait until rates fell to purchase her new home.

Watching the market, having a lease expire on her apartment, and having more funds for down payment, she wants to buy her first home—but due to higher rates she no longer qualifies for the units she likes.

She asked what she could do, and I told her that her best option in lieu of nailing 6-numbers on a Lotto ticket, was if there was someone who could help her qualify by co-signing.

Getting prepared to have such a conversation with a family member, likely her parents, she wanted to know what they needed to do and what their obligations were if they did co-sign.

First, we need to make sure adding the co-signer (also known as co-borrower, I’ll use co-signer as it is less typing) enables qualifying for the desired mortgage. When a co-signer is added to a mortgage transaction all the income and liabilities are put into the same pots and then the debt-to-income ratio is calculated. For the non-occupant co-signer, we include their monthly housing payment into the calculation. In some instances, this can eliminate them as a co-signer as their housing payment is a substantial amount of their total income.

Presuming that Wendy’s parent’s income and monthly obligations are such that we qualify for the $500,000 condo, what is their liability?

Exactly the same as Wendy’s once the loan funds.

Co-signing on any credit obligation does not mean diminished obligation, or consequences, if the debt is not paid in a timely fashion, or goes into default or collection.

Each signer on a mortgage has a 100% liability on the mortgage. If title is split between two borrowers, each with a 50% ownership in the property, each borrower is still 100% obligated for 100% of the payments and loan balance.

Should the loan have late payments, go into default, negative reports will be made to all borrowers’ credit records. If the loan goes into foreclosure, the legal filing will show on all borrowers’ records.

This obligation should ensure that non-occupant co-borrowers stay aware of the timeliness of payments, and if payments are going to be late or missed have the means to help make those payments.

In the conversations I have had lately regarding co-signers, with the primary occupant borrower and their co-signers, I mention that ideally the period the co-signer will be on the mortgage should be considerably shorter than in prior years due to the high interest rates.

In our case with Wendy, if we are able to purchase as home with her parents co-signing, when rates drop to a level whereby she can qualify for her mortgage without a co-signer, we can refinance her mortgage and remove mom and dad from the mortgage, and their liability.

One question regarding the mortgage appearing on the co-signers’ credit reports is their ability to qualify for a mortgage or other credit with the co-signed mortgage payment on their credit report.

In the mortgage industry the standard underwriting guideline is omitting the mortgage, and total housing payment including taxes, insurance, homeowners association fees, if we are able to show that the other party on the loan, in this case Wendy, has made every payment for the total housing obligations for the past twelve months.

For instance, next fall Wendy’s sister June wants to purchase her first home, but need a co-signer. Wendy provides 12-month bank statements showing she has made every mortgage, tax, insurance, and HOA payment on the condo for which her parents have co-signed to June’s lender (ideally me), and Wendy and June’s parents can help June with the purchase of her home since the housing payment obligation will not be included in the qualifying for June’s new home.

I have had parents that have had three mortgages for their children on their credit reports because each of their children have purchased at least one year after the prior mortgage for a sibling has closed.

With rates high and salaries stagnant, or not increasing nearly as quickly as mortgage rates, with the likeliness that rates will possibly enable refinancing the co-signer off the property in the future, the use of co-signers to enable a home purchase, is a strong option for many families in today’s markets.

One final question: Who can be a co-signer? Co-signers must be a family member (including aunts, uncles, cousins), employer, or someone that it can be shown has a close personal relationship with the primary, and occupying, borrower.

Okay, that was not the final note, this is: you cannot co-sign to mitigate bad credit. If a borrower has a credit score below 500 and their brother has a score over 750, the loan will be eligible based on the lower score. As well, any charge offs, collections, etc that led to the low score will be included in the application package.

If you think co-signing will help you, or a family member, friend, co-worker, purchase a new home, please contact me discuss options.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

What inflation, what economic slow-down? Consumers were slinging credit cards all over the economy in July, pushing retail sales up 0.7% from June. One target for the slung cards was the internet, in particular Amazon during its Amazon Prime Days—the on-line retailer reported the first day of its Prime Days was the biggest single day the company has ever seen for sales.  With Amazon leading the way, internet sales are up 10.3% year over year.

Retail sales are stronger, but less so, as consumer spending has shifted from retail spending to spending on services, such as travel, recreation, and bars and restaurants. The latter saw very strong gains, again, with sales up 1.4% from June. Spending on many services indicates consumers have confidence in the economy and their personal economic situation and future as such spending is discretional and not necessary.

Rates for Friday August 18, 2023 Rates continue to rise, the conforming rate is up from the prior Friday for the fifth week in a row. With consumers not showing any signs of altering spending habits, and slowing economic growth, little relief for rates can be seen on the horizon.

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

30-year conforming                             7.25%          Up 0.125%

30-year high-balance conforming        7.625%        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.

Thank you!

Every week the WR&MU goes out to over 500 people, and per the records at Constant Contact over 50%, actually 53% the past several months, open the WR&MU email every week—not sure how many read it but that many open it. I am overwhelmed by the, dare I say following, of the WR&MU.

What is very gratifying are the replies each week from those you I have not heard from in some time, and those I hear from regularly. Before I go all Sally Fields at the 1985 Oscars, I’ll just once again say thank you for your support.

I have mentioned this before, but will repeat. My dad used to say, “why do you have all that personal stuff at the bottom of a business communication, get rid of it, no one cares if your new dog chewed  your coffee table.” To which I replied, “Dad, I think that more than half the people who read this go right to the bottom to see if my dog has chewed something else, if the kids are still at camp, or to see what I have put in that section.”

I wonder how he felt the week this bottom section was devoted to him after he passed away—hopefully grateful for my kind words!

Thanks for reading any and all sections of the WR&MU.

Wow! Thank you once more time, this time for your generosity. Almost 25% of those who opened the WR&MU last week click the Red Cross donation link where you can make a donation to assist not only those on the island of Maui, but around the country impacted by disasters.

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 buy with an FHA loan?

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Question of the week: Why should we buy with an FHA loan?

Answer: Because it’s cheaper.

But there’s mortgage insurance?

Let’s compare apples to apples, or in this case highly leveraged purchase with highly leveraged purchase. Long time readers of the WR&MU know I like leveraging into purchases with as little down payment as possible; read “Why mortgage insurance is a good thing” from WR&MU last August for more detail.

Many buyers in California have sufficient income to qualify for a new home purchase, but lack a large amount of funds for down payment and closing. Hence, many are understanding putting less than 20% down and having mortgage insurance as part of their monthly payment.

People have negative view point of FHA because the mortgage insurance (MI) for FHA loans is more onerous than mortgage insurance on conventional mortgages. As well, for conventional mortgages the MI can be removed after a period of time and reduced loan-to-value. The monthly mortgage insurance on FHA mortgages stays on the loan for the life of the loan.

In prior markets when there was a small spread between conventional rates and FHA rates, the ability to purchase with 5% down for conventional mortgages clearly gave conventional mortgages the advantage, because of the cheaper, and ability to eliminate, MI.

For the past year or more, FHA rates have been considerably lower than conforming rates, not only reducing the conforming loan advantage, but eliminating it. This is especially true for high-balance purchases.

Consider Alain and Rene. They are looking to purchase their first home. They have excellent income, little debt, but only about $60,000 available for their home purchase. Their debt-to-income ratio qualifies them for a home up to the maximum high-balance loan limits in LA and Orange Counties ($1,089,300). They found a home on the market for $1,100,000.

We run the numbers and compare purchasing with FHA versus Fannie Mae.

As you can see, the only advantage Fannie Mae has is the lower monthly mortgage insurance payment.

On a monthly basis the FHA mortgage is over $400 per month lower.

At closing the FHA loan requires $16,500 less cash for down payment.

But what about the upfront mortgage insurance FHA requires?

The upfront MI for FHA is expensive, 1.75% of the loan amount, or in this case $18,576. This amount is added to the loan, and is included in the FHA mortgage payment in the above chart.

But what about being able to eliminate the conventional MI but not the FHA?

To eliminate the conventional MI the borrower must make 24-consecutive payments on time (i.e. within the month due, if paid after the 15th of the month but before the 1st of the next month the payment is considered on time), and be able to obtain an appraisal via the lender’s approved appraisal management company showing the loan-to-value of the outstanding loan balance to current value is 78% or less.

This is an advantage, and if this happens two years after the purchase the savings per month flips from FHA having a $407 per month advantage to the conventional loan having a $3 per month advantage.

Consider that during that 2-year period the FHA buyer has saved $21,384 more money than the conventional buyer. If after the time the conventional buyer eliminates their MI and neither buyer makes any changes to their loans—they retain the same interest rates and payments, and the FHA buyer continues paying mortgage insurance, for the remaining 28-years of their mortgages the conventional buyer will have saved $1008 in monthly payments more than the FHA buyer paid.

If it takes the conventional mortgage buyer longer than 2-years to reach the required 78% loan-to-value, the total savings on the monthly payments will decline accordingly ($36 per year).

To summarize, two buyers, one with an FHA mortgage with minimum down payment, the other with a conventional mortgage with minimum down payment, with the conventional buyer eliminating their mortgage insurance as soon as eligible, after 30-years when the final mortgage payments are made, the FHA buyer will have saved $20,376 more than the conventional buyer.

But…mortgage insurance…is less important than saving cash at closing.

If you, or anyone  you know, wants to run numbers and options for your home purchase, or debt consolidation refinance (FHA has cashout refinance options), please contact me.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Meh, was pretty much the reaction of markets to yesterday’s Consumer Price Index data. Prices rose 0.2% in July, matching June’s price increase. Year over year, the report showed, CPI increased for the first time in 13-months, increasing from 3.0% in June to 3.2% in July. Driving CPI is housing, being given a 90% influence factor for the increase in prices; rents were up 0.4% and 8% from last July. Putting downward pressure on CPI were declines in prices for airline tickets, used cars and medical care. Overall the numbers add some credence to the Fed not making any change in its benchmark rate when it Open Market Committee meets in September.

Rates for Friday August 11, 2023 “Mystery” sell off was the term one of the mortgage market sites we subscribed to describe yesterday’s big sell off in mortgage-backed securities (sell off means lower prices and higher rates). The result is an increase of the conforming rate above 7.00%. I have weekly rate charts used for the WR&MU going back to 2005, this Friday’s rate is the highest for conforming mortgages on any of those charts.

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

30-year conforming                             7.125%        Up 0.125%

30-year high-balance conforming        7.500%        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 presume many of the WR&MU readers have spent some time in Maui, likely enjoying strolling Front Street in Lahaina enjoying the shops, eating some lunch, having a beverage, getting some shaved ice. The videos showing the complete devastation of the town are shocking, the speed with which the fires spread was mind-numbing.

As always when there are disasters, of any size or any cause, the Red Cross is there to help those in need. Here is a link to the Red Cross disaster relief page where you can make a donation to assist not only those on the island of Maui, but around the country impacted by disasters.

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 worth it to fix up our home before selling?

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Question of the week: Is it worth it to fix up our home before selling?

Answer: This is a question we get fairly often from clients, whether they are looking to up-size or down-size, but particularly from clients who are selling as the result of estate or divorce sale.

There is no cookie cutter answer to this question.

The obvious calculus is how much would it cost to “fix up” the property and how much more that would get in sales price on the market.

A big factor in this decision is what is the competition your property will have when it goes on the market? Are there several homes in your neighborhood on the market? Are they very few homes on the market? Are homes selling in two to three months, or two to three weeks?

The inventory on the market and the average time on the market impacts the benefit versus cost calculation. The fewer homes on the market, the faster homes are selling, it is likely the less you will have to do to get your home sold. If there are many homes on the market, it is likely you will need to do more work on the property to have it positively compete with other homes.

In either market, a seller’s market with low inventory, or a buyer’s with a lot of inventory, your asking price will always be the primary factor in how fast it will sell, whether it is fixed up or not.

If you are selling to purchase a next home, other variables come into play, such as how much work do you want happening in your home while you are still living in it? Right now contractors are extremely busy, in an industry, rightly or wrongly, known for unknown delays, how much time are you willing to have your home off the market while waiting for it to be “fixed-up?”

For many years I have termed some areas, such as the Gold Coast in Seal Beach with homes on the beach north of the pier, or homes on either the bay or ocean on the peninsula in Long Beach, as “D&D” areas; homes only came on the market due to death or divorce. Currently, throughout our region, state, and nation, the real estate market as a whole is D&D. There are some exceptions to those down-sizing, or moving out of the area, but overall, most homes on the market are because the have to be sold, not because the owners want to sell them.

This puts another wrinkle in the to fix up or not to fix up decision process.

In a divorce, the questions are who puts up the money to fix up the property, what is the cooperation between the parties, how contentious is the separation, how fast do we want it sold.  Division of assets, especially the family home, is the primary point of contention in most divorces, adding a potentially large expense for undetermined return when the home sells can, does, add more stress and contention in negotiations.

In an estate sale there are other factors to the decision to spend money fixing up the home. If the home has not been updated since the 1980’s or ‘90’s, what will be the cost to completely remodel the home? How much of that money will be recovered by the estate after sale? Does the estate have the assets to pay for the work that would be done?

Divorces are not the only legal settlements that have contentious participants, many estates also have contentious parties when it comes to division of assets—except instead of husband and wife the parties are generally siblings.

Two, three, four, five, brothers and sisters dealing with the loss of their parents, the family home, and depending on the home and how long mom and dad owned it, a lot of equity to be split, can lead to cracks that may have existed in life-long relationships becoming chasms that seem unable to be bridged.

Should the estate spend $100,000 to somewhat modernize the family home to gain an extra $125,000, $150,000? Possibly more, possibly less? Or just sell the property, split the proceeds and move on?

In some estates the question of fixing up the property is not a question as mom and/or dad, may have become hoarders, to some degree, in their final years. Most homes being sold after the occupants have passed on need some clean up; moving out the furniture, family treasures, and emptying the home. This task is exponentially more difficult, and expensive, if hoarding added to the amount of “stuff” that needs to be removed before the home can be sold.

Some families think they can clean out the home themselves, and in many cases they can. Divide up who wants mom’s old dresser, dad’s desk, the copper pots and pans, and have an estate sale for the rest. What’s left, donate to any charity what they may want, and have the rest hauled away.

In many instances the job is too big, too undesirable, for any siblings to take time from their work and family to spend days going through the home and cleaning it out. Thankfully, there are companies that perform this task, for a fee obviously, that can save a lot of time, and likely money, for the estate.

Is it worth it to fix up a home before selling it? Or is it better to put the home on the market at a lower price for a buyer who is willing to fix up the property the way they would like and pay a lower price knowing they will be spending more money over time to fix it up?

Do the math. Get realistic estimates from contractors and tradesmen for the scope of work to be done. Get price analyses from a few real estate agents who work the area to determine the price if fixed or not fixed. Consider the time the home would be off the market, and possibly with contractors in your home.

Finally, and very importantly, consider the relief of just having the home sold, and perhaps leaving some money on the table, but selling “as-is,” versus the cost and time of fixing the property up before putting on the market.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Phew…That was the reaction to bond and mortgage markets following the Labor Department’s release of July’s employment data. The economy added 187,000 jobs in July, and June’s job reported was revised downward, resulting in the first time since the beginning of the pandemic that the employment grew by less than 200,000 workers in back-to-back months. The slowing in hiring was met with relief as it takes some pressure of the Fed to raise its benchmark rate in the future. Adding some pressure was news wages continue to increase, up 0.4$ in July, and 4.4% for the year—outpacing recent inflation data. The Fed would like to see wage increase decline to 3% or below, due to this additional rate hikes are on the table still.

Rates for Friday August 4, 2023 While rates dipped down today on the employment data, they also dipped down after a week that saw a large sell of in fixed rate investments (bond and mortgages) yesterday for no singular reason other than technical trading. Conforming rates reach 7% for the fifth time in the past twelve months.

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

30-year conforming                             7.00%          Up 0.125%

30-year high-balance conforming        7.500%        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.

“The dog days of summer.” Typically, a phrase we hear when the calendar turns to August. It is meant to describe the hot and humid days usually prevalent in the month (though in Southern California we can add September to the hot part). The phrase originates with the Romans and the dates between July 3rd and August 11th. These dates are twenty days before and twenty days after when the star Sirius* rises and falls in conjunction with the sun.  *Before Sirius was known as a major character in the Harry Potter series, it was, and still is, known as the “Dog Star: as it is part of the Canis Major constellation.

In baseball the dog days of August refer to the toll of summer and over 100 games catching up to some teams and many players. If a team can do well in August and shrug off the dog days it sets itself up well for a run to make the playoffs in September.

It is my hope that the Phillies take advantage of the malaise the will hit other teams facing the dog days and once again make the playoffs, win the National League Pennant, and not only make the World Series but win it!

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

Did we overpay for our home?

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Question of the week: Did we overpay for our home?

Answer: Probably not.

The answer, of course, depends on when you purchased your home. If you purchased your home in 1998 then the answer is certainly, “No.”

However, if you purchased your home in the past year, you may feel like you may have paid more than you could have if you waited.

Here is a chart of the median home prices, courtesy of the California Association of Realtors website, in each of the past five Junes (2019 to 2023), for single family homes statewide, and in Los Angeles and Orange Counties.

As you can see, if you purchased the median priced home in 2022, in 2023 the value of your home has decreased in value by 2.3% statewide, 3.25% in Los Angeles County, and 0.40% in Orange County. Keeping in mind the large territories covered by this data, results may vary depending on zip code and neighborhood.

As you may have read, the total number of sales of single family homes has declined significantly from 2021 to 2022 and from 2022 to 2023. Because of this, statistically, the chances you have purchased your home in the past year is extremely small.

For the vast majority of WR&MU readers, the answer is “no,” you did not over pay for your home. If you overbid the listing price to purchase your home in June 2020, or June 2021, during the buyer-feeding frenzies, as you can see, the median price of that home is either significantly higher than it was in 2020, or somewhat higher than 2021.

This data is where I have an issue with many real estate writers who have spent the past year writing about falling home prices, which may be true year to year, but not in more of a historical context, which is relevant for most homeowners, the current period of declining prices is not negatively impacting those who purchased prior to 2022—which, again, is the overwhelming number of home owners.

But what if we did purchase your home in the past year, we over paid, right?

Perhaps. However considering the current market, where there is scant inventory, in most markets less than two to three months of inventory (how long it would take the listings currently on the market to sell if no new listing came on the market). The lack of inventory has created bidding war market in several areas, homes averaging about two weeks on the market before being sold, and buyers being frustrated as they were three years ago when trying to purchase their new home.

As I have mentioned in prior WR&MUs, because of high mortgage rates real estate markets are missing inventory from move-up buyers who are understandably reticent to sell their homes with rates at or below 3% to purchase a new home with a rate near, or above, 7%.

When rates decline, more buyers will enter the market, inventory will be slow to catch up, and prices should increase.

Which should result in you being happy you purchased your home in 2022 or 2023 before prices took off again.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

A great week for writers and pundits who cover economics as there was some important data release every day. The three headline items were Fed interest rates, economic growth, and consumer prices.

Another rate increase from the Federal Reserve. As expected, the Fed increased its benchmark interest rate by 0.25% (one-quarter of one percent), this week, after no rate increase at its meeting in June. The increase pushed the prime rate to 8.5%, impacting those with Home Equity Lines of Credit. At Fed chair Jerome Powell’s press conference following the rate announcement, we learned that the Fed is no longer forecasting a recession. Which provides cover for more rate increases as members of the Fed can see the economy slowing to a “soft landing” on their current pace. The rate hike cover is my opinion as Powell did not answer any questions about possible hikes at it next meetings in September or October.

Supporting a possible rate hike was the initial estimate for 2nd quarter GDP, which showed 2.4% growth in the economy. Fueled by consumer spending increasing from April through June, the economy appears to be feeling few effects from rising interest rates. The news was not mortgage, or interest rate, friendly.

Supporting no rate hike was the PCE index (personal consumption expenditures), the preferred inflation index for the Federal Reserve. In June the index rose 0.2% from May, and 3.00% from last June, down from an annual increase of 3.8% last month. The annual increase was the lowest since October 2021. With inflation only 1% off the Fed’s 2.00% target, the speculation is that the Fed will back off rate increases if the PCE for August shows further decline. The PCE index data was favorable to rates.

Good news for real estate, somewhat in line with the Question of the Week, pending home sales are up 0.3%, the first increase in pending sales from the prior month since March.

On the other hand, (cliché statement for economists) personal spending jumped in June, up 0.5%, giving sentiment that 3rd quarter GDP may come in hot since consumer spending is 65-70% of our economy. The data is not favorable to rates as it not only puts fuel in the economy’s tank and can push inflation higher.

Rates for Friday July 28, 2023 Conforming rates popped yesterday on the GDP data resulting in rates being up for the second Friday in a row. High-balance conforming rates are flat for the week.

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

30-year conforming                             6.875%        Up 0.125%

30-year high-balance conforming        7.500%        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 am an avid reader. My routine is to read 30-40 minutes first thing every morning with some coffee, reading at lunch (where Kindle comes in handy as you don’t need something to weigh down the pages), if possible in the evening, and then in bed before lights out (me or the lamp—also Kindle friendly as when you fall asleep the Kindle hitting you is lighter than a thick hardbound book).

My reading passion supports me being a U.S. history buff, particularly the Revolution to Constitution era and the Civil War era. Yesterday I finished the final book in a trilogy of the Civil War by Bruce Catton. The books were written in the 1950’s and provide insight to the Union Army and the war that I had not known before. If you, or someone you know, enjoys learning about the Civil War, I highly recommend Catton’s books. Spoiler alert, had the command of the Union troops not been so inept and won the war in the early years, our country would be considerably different, likely two countries or more.

Stay cool, hydrate, have fun.

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 are more loans are being declined?

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Question of the week: Why are more loans being declined?

Answer: Last week the Federal Reserve released a report on consumer debt and reported that in June, across all credit lines, credit cards, auto loans, mortgages, lenders are denying applications at the highest rate in five years, with 21.8% being declined.

The most evident reason for the denials is rising interest rates. Not surprising, is the largest group of applicants being denied are those with credit scores under 680.

Mortgage denials for purchases were 13.2% of applicants, for refinances the rejection rate was 20.8%.

The higher rejection rate for refinances makes sense in that most people who are applying for cashout refinances are looking for money to payoff debt.

What is interesting is that credit applications fell over 40% in the past twelve months, interesting because fewer applicants and higher declines means the amount of credit being extended has dropped considerably.

Why are denials increasing? There are several factors, most impacted by higher rates.

From mortgage applicants, higher interest rates is the primary reason. Homeowners who started their journey to purchase a home and getting pre-qualified for a 6.5% rate, then having a rate of 7.00% when they open escrow with a $500,000 payment, that is an increase of 5% in their payment. If they were on the edge of qualifying before, the higher payment can push them from qualified to not qualified.

Another factor for declines in California is homeowners’ insurance. As many are aware, State Farm and All State have both stopped issuing new policies for home purchase. As a result, home buyers have to go to other sources for their policies, and many of the policies being issued are a much higher premiums than the industry uses for standard qualifying calculations.

Historically, for calculating insurance premiums for estimated payments the industry uses 0.30% of the loan amount. For a $500,000 loan that is $1500 per year, or $125 per month.

In speaking with friend and insurance agent Eric, many new policies for this same transaction can be as high as $3600 per year (maybe triple that in high-fire areas), or $300 per month.

Between the higher interest rate and the higher insurance premium, a new homeowner can see their total PITI (Principal, Interest, Taxes and Insurance) increase by over $300 per month—enough to move from qualified to unqualified.

Credit applications are not the only applications seeing higher rates of decline, friend and life insurance agent Bijan informed me that the life insurance industry is also seeing higher rates of decline.

Lenders are seeing rising numbers of delinquent payments, again primarily due to raising rates, combined with fewer applicants and approvals, are tightening their underwriting, which results in fewer approved applications.

One other reason mortgage declines are higher, lack of proper preparation prior to purchasing a new home. More and more potential buyers are going on-line to complete mortgage applications. In doing this they are side-stepping working with a mortgage professional with experience in helping potential buyers determine the price, mortgage amount, and payments for their new home that will enable them to qualify and close their purchase.

For Stratis Financial, and many other mortgage companies and professionals I know in the business, we can say that our decline rate is close to zero due to the preparation we do with our clients before they write an offer.

If you, or someone you know, is in the market for a new home, please contact me to determine the optimal price for you and your new home.

To schedule an initial meeting by phone or Zoom, click here for my calendar, please feel free to forward to a friend or family member!

Have a question? Ask me!

Rates for Friday July 21, 2023 Little activity in the mortgage markets this week. Retail sales had a very small increase in June from May; however sales are still strong overall, showing consumer confidence in the economy. Conforming rates are up a tad this week after last week’s steep drop, the high-balance rate falls down to more historic spread from the conforming rate.

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

30-year conforming                              6.755%        Up 0.125%

30-year high-balance conforming        7.500%        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.

Every year about this time I rent a dumpster and spend a few hours every day for several days trimming trees, bushes, wall-climbing ivy, and doing general grounds clean up. I enjoy doing the work, using all my yard toys, the clippers, the hedge-trimmers, the chain saw, while listening to either baseball games, in the mornings over the weekend the British Open, or podcasts.

With the weather we are having it does help to have a pool to dip into from time to time to cool off. The occasional Coors, or two, to quench the thirst isn’t a negative 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