Can we build an ADU?

Question of the week: Can we build and ADU on our lot?

Answer:  Yes.

  • ADUs, or Accessory Dwelling Units, are an integral part of the State of California’s plan to expand affordable housing throughout the state. As such state laws regarding ADUs supersede local zoning and building codes and ordinances.
  • If you own a residential mixed-use zone property you can build an ADU with minimal restrictions on lot coverage.
  • Here are some of the state regulations that local agencies must adhere to when property owners present applications for the construction of ADUs.
  • Local agency cannot establish a maximum size of less than 850 square feet, or less than 1000 square feet if the unit contains more than one-bedroom.
  • Local density ordinances are not in effect for ADUs. For example, is only one unit is permitted on a 5000 square foot lot by local ordinance, an ADU is not considered as an additional unit (yes, the Accessory Dwelling Unit is not considered a unit).
  • Lots with multi-unit structures, or in historic districts, are not exempt for the regulations and ADUs must be permitted. The local agency can enforce what type of windows or roof you home in a historic district must have, but cannot prevent a non-historic designed ADU.
  • Starting in 2023, two-story ADUs are permitted in many circumstances. Of the various allowances for multi-story ADUs the one that will perhaps impact most in Southern California is that the maximum height for an ADU will go from 16 feet (not high enough for a two-story dwelling) to 18 feet if the property is within one-half mile of a major transit stop or high-quality transit corridor. In Long Beach for example, most of the residential lots in the city meet this requirement.
  • There can be no parking restrictions to prevent the construction of an ADU. If a garage or other parking structure is converted to, or removed and replaced with an ADU, the local agency cannot require off-street parking.
  • Local agencies, nor “common interest developments” must allow ADUs to be rentals. If you live in a gated community with a Home Owners’ Association that does not permit rentals, if you build and ADU you can rent it.
  • Good news for those building ADUs, state law mandates that local agencies must act on a permit application within 60-days. If the act is to deny the application, the denial must state why the application was denied and corrective action that can be taken to meet approval.

This is a simplified set of points regarding ADU regulations in California, the main take-away is your local building department must approve most applications and do so within 60-days.

With the overwhelming majority of homeowners having a lot of equity in their properties and very low interest rates on their mortgages, the optimal financing method for building an ADU is using a Home Equity Line of Credit (HELOC, from WR&MU in 2021, Should we get a HELOC). After your ADU is completed, start monitoring the mortgage market to find the right time to refinance to possibly consolidate your existing mortgage and HELOC. Even though the new rate may be higher than you existing mortgage, the math may make sense to refinance.

ADUs add value to property, and possibly income to the property owner. With the significant elimination of local building codes and ordinances many homeowners are constructing mother-in law quarters, granny units, casitas, and mini-homes on their properties to add value and room for their families.

The California Department of Housing and Community Development has a handbook for those interested in diving deeper into ADU development.

Have a question? Ask me!

Shove the corks back in the champaign bottles? Last week markets celebrated the news that the Consumer Price Index dropped below 8% in October. Evidently, the less higher prices encouraged consumers. Retail sales surged 1.3% in October, not getting the message from the Federal Reserve that their objective is to slow down the economy. A large part of the increase was due to higher oil prices, which pushed gas station sales up 4.1% for the month. Absent gas and auto sales, other retailers reported a 0.9% increase in spending, with restaurants up 1.6%, double the inflation rate.

 Markets slumped on the news, as the robust spending by consumers supported large rate increases from the Fed. However, Target announced that it expected slower holiday sales and warned that profits will be impacted. As one of the top retailers in the country, the warning from Target concerned investors that October might be an anomaly and slower consumer spending, which the Fed desires, will slow the economy, possibly into another recession.

Rates for Friday November 18, 2022: Stable rates! For the first time since the week of August 12th we have back-to-back lFridays with the 30-year conforming rate showing no change.

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

30-year conforming                              6.25%          Flat

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.

Don’t forget to take your turkey out of the freezer and put in your refrigerator to defrost in time for Thanksgiving. The rule of thumb is 24-hours for every 5-pounds of frozen bird. If you want a defrosted 20-pound gobbler on Wednesday to start your brine, rub, prep, moving the Butterball from the freezer to the fridge on Saturday should have you in good shape.

True empty nesters, Leslie and I will be enjoying a 16-pound turkey with all the sides and accompaniment with Sammy…well he won’t be enjoying anything but a few turkey scraps…due to odd year when normal attendees at our Thanksgiving table have other familial obligations on the same year.

I wish you and your family a wonderful Thanksgiving.

Have a great week,

Dennis

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

Who do you know?

CORRECTION: In last week’s WR&MU I indicated the federal tax credit for residential solar installation would drop to 22% in 2023 and go away in 2024. Avid WR&MU reader Dennis (no relation) Boone let me know that included in the Inflation Reduction Act of 2022 was an increase and extension of the Residential Clean Energy Credit for solar installation, increasing the credit to 30% of the cost and extending the credit to 2032. Thanks Dennis!

Question of the week: Who do you know?

Answer:  With today being Veteran’s Day and many off work, this week’s question is more about you than about mortgages and real estate.

Having been in the mortgage industry for over 35 years I have acquired a large Rolodex (for the younger WR&MU readers, it was the “contact app” for decades, perhaps centuries) of professionals across many professions and services who I know to do a great job for clients.

Some of the most important people I know are attorneys, specifically those who specialize in trusts and estates, and family law.  In July 2019 our Question of the Week was “Do you have a will and a trust?” that covers why it is important to have wills and trusts, and that you work with a professional to prepare them and not a bargain website.

Family law, unfortunately, is an area where I am asked for referrals as all relationships do not always work out. Even when a separation is amicable, it is wise to have a professional work with both parties to ensure all the legal aspects are followed and to assist in completing the paperwork required.

When you own a home, or have a family, it is important that it is protected should something happen to one spouse or partner or the other. By “protected” I mean have insurance that can cover payments and expenses to replace the loss income that was depended upon to make mortgage, tax, insurance, and other payments. A licensed life insurance professional can assist you with the right policy and coverage for your needs.

Like myself, my client base is aging. What comes with age are various ailments and health issues. Some are more debilitating than others, and the older we get the more costly some of these can be. Protection for the family assets can be had in the form of long-term care insurance, and the younger you are when you obtain coverage the lower the cost. Yes, I know professionals who can walk you through options and help determine whether it is something that might be a benefit and if so various policy options.

Our tax codes do not get simpler regardless of which party controls the tax codes. Whether for yourself as an individual or couple, or if you have a small or medium sized business, I can refer professional CPAs and tax preparers to assist you in tax planning and preparation.

Financial advice and planning is an area where too many people wait too long before engaging professional assistance to plan for when your income goes from end of career heights to social security and retirement funds.

Speaking of social security, what about Medicare and your mandatory enrollment at age 65. What plan, what supplemental coverages, are best for you?

Beyond professionals who work in law, insurance, and financial service areas, I have connections other services you may need, from installing solar or HVAC systems, to putting in a swimming pool.

And of course, quality real estate agents for many areas of the state who treat their clients as if they are family.

Best of all with my network, if I do not have a contact for what you may need, my contacts likely do know someone they know and trust to refer.

Google and Yelp are great resources to find a place to eat lunch while in

Charleston, South Carolina, or meeting your daughter and friends for dinner between your midtown hotel and their apartment in East Harlem, but not as great for engaging a professional service that is for protecting your home, family and health, or working on your most valued asset—your home.

Please contact me if I can be a resource for you, you know a guy who…knows a lot of guys and gals who do great work!

By the way, if you are travelling and looking for some restaurant ideas, I have quite a few on my Yelp profile!

Have a question? Ask me!

If you had told me a year ago that a Consumer Price Index report showing 7.7% inflation would be celebrated, I would have given you a very funny look. But that’s what happened yesterday when the Commerce Department released CPI data showing prices increased 0.4% in October, below the consensus estimate of 0.6%. The 7.7% year over year price increase was a half-percent drop from September’s 8.2% CPI increase, and the lowest amount since January.

Investors reacted positively to the large decline in price increases, and particularly the 0.3% increase for the month, 6.3% from 2021, of the “core” rate, which has energy and food stripped from the price index. This is the data the Fed looks at when making policy as it is more stable due to volatility in food and energy prices.

Markets reacted very positively to the data, however…let’s not pop the corks on all the bottles just yet. As most of the country heads into colder weather and higher energy consumption, there are several items in the report that cause trepidation to announcing inflation is falling to an extent that it will be in a “normal” range sooner than later.

Grocery prices were up 0.4% for the month and 12.4% for the year, the highest increase since 1979. Interestingly the cost to eat at home has been increasing at a higher rate than the cost of eating out, up, 8.6% for the year, and has been since last October. Restauranteurs have been struggling to hold the line against higher food, beverage, energy and most importantly wage increases.

Gasoline, after dropping in prior months, leapt 4% for the month and up 17.5% from 2021. For home heating, electricity prices were up 14% and home heating gas up 20% compared to last October.

On the housing line, rents are up .7% for the month and 7.5% annually, the largest increase since 1982. On the positive side of dropping prices are used cars, medical expenses, closing, house wares, and airline tickets.

Inflation may be slowing, but wages are still not catching up, with inflation adjusted wages down 2.3% from last October, putting pressure on households to refrain from running up credit or cutting heavily into savings. The news will not stop the Fed from increasing rates, however it may offer some cover to slow the pace of the increases.

One final note, the cost to relax and get-away from news, inflation, election dissection, your team losing in the playoffs, or winning, alcohol prices are up 5% for the past year, the highest increase since 1992.

Rates for Friday November 11, 2022: The CPI news had an instant reaction in the markets, and mortgage rates benefited. The drop in rates from last Friday is the largest since the final week of March 2020 as rates dropped following a 0.875% increase in two weeks in reaction to the shutting down of the economy for the pandemic.

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

30-year conforming                              6.25%          Down 0.74%

30-year high-balance conforming        6.625%        Down 0.75%

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.

From the call to volunteers in April 1775 to protect the cache of arms that had been amassed by militiamen in Concord, Massachusetts, through too many wars, to today, men and women have stepped up to put themselves between those who wish to attack our country, our allies, and our citizens. No amount of gratitude can be properly stated to convey what we owe these brave men and women. Thank you.

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

Should we get solar panels?

Question of the week: Should we get solar panels?

Answer: This is a question we covered a little over two years ago when Leslie and I were in the process of starting the process to install solar panels on our home. A subsequent WR&MU covered ways to finance a home solar project.

Due to legislation in Sacramento, regulations from the California Air Resources Board (CARB) and other departments, and energy markets, this question is one that should be explored once again. Particularly in light of the housing markets the past three years that resulted in many families purchasing new homes that will very likely be their “forever home,” or at least until they are retired and ready to downsize.

Let’s start with energy use and supply in many homes in Southern California. With the exception of homes built this century, and perhaps many built in the 1990’s, many homes have a combination of electric and gas appliances. Many homes still have gas ovens and ranges, water heaters, clothes dryers, and home heating. Lighting, refrigerators, air conditioning, laundry units, and, if part of the property, pool equipment use electricity.

In September CARB banned the sale of natural gas heaters and water heaters by 2030, which will require and replacement units to use electricity.

The state has moved to ban the sale of gasoline powered cars by 2035.

Sacramento has developed a housing plan that requires local governments to submit housing plans that will result in 2.5 million new homes across the state by 2030.

California has a goal of 100% of energy supply to meet electrical needs by from renewable sources (i.e. wind and solar) by 2045.

California currently imports 30% of its electricity from other states.

With the above regulations to convert homes, cars, and new buildings away from gas and to electricity, adding over two million new homes to electrical grids, within eight years, and requiring 100% of electricity to be from renewable sources by 2045, there will be a great demand for electricity year over year.

Underlying all of this is that for the past several years we have experienced rolling blackouts across the state when heat waves hit each summer.

The question that arises is with consumers being pushed to rely on electricity, and the required electricity having to be generated from renewable sources, what are the plans to increase renewable energy production within the state to handle the increased demand?

The California Energy Commission website has a page about developing renewable energy. There is no information on new power sources coming on line in the state, but it does indicated that financial incentives have been provided to homebuilders to encourage installing solar panels on new homes, and tens of millions being disbursed to local governments support geothermal development and to agriculture entities to install renewable energy on their farms and land holdings.

The website also indicates the regulations that utility companies must follow to increase their renewable energy sources for the state’s power grid to 100% by 2045.

From an economics viewpoint, all signs point to ever increasing costs for electricity and gas to light, heat, cool, and run our homes.

While California does not have a tax credit for the installation of solar energy panels for your home, with the exception of qualifying low-income single-family homeowners, the federal government does—but hurry as the credit is 22% of the installation costs in 2023 and goes away in 2024.

Another tax incentive, if you finance the purchase of the panels with a HELOC or home refinance, the interest is deductible as it is for home improvement (not a CPA or tax professional, please consult yours to determine the extent of any tax credits, write-offs, or rebates).

Another financial incentive is the “buy-back,” or net-metering, from your local electricity supplier for electricity your solar panels are producing but you are not using.

All the above factors, plus our finally adding air conditioning to our 85+ year old home, went into our decision two years ago to install solar panels. As part of our A/C install is also new heating supply, so good-bye to our old gas furnace; next will likely be an electric water heater when the current one is due to be replaced after 2030.

If you are intending to stay in your home for several years the timing is definitely right to convert to solar energy for your home. With the incentives and costs the “pay-back” period (cost less incentives/annual electric bill cost) is probably around 7-8 years.

If you sell before that time frame, it is estimated that solar panels add 5-8% to your home’s value, likely to increase if/when costs to purchase electricity from the utilities increase over the years.

Have a question? Ask me!

As expected, the Federal Reserve’s Open Market Committee (FOMC) increased its benchmark rate by 0.75% earlier this week; the increase met expectations and was already priced into the mortgage markets. Not priced in were comments from Fed Chair Jerome Powell. Powell indicated that the final landing spot for its rate hikes will be 5% or higher, prior estimates were for a ceiling of 4.75% (current rate is between 3.75-4.00%) from a starting point of 0-0.25% when the current policy of raising rates started. Rates will continue to be pushed higher until they are “sufficiently restrictive” to push inflation to 2% or below “over time.”

A small hint of possibly positive information in Powell’s comments is that future rate increases may come at a slower pace. With climbing 4% in eight months, it appears that the Fed wants to slow the pace to let the economy catch up to the rate hikes and other monetary moves being made by the Fed. The expectation has been for a 0.5% in December by the Fed, but the market appears to be pricing in another 0.75% increase.

Finally, regarding Powell, he said the window for a “soft landing” is narrowing; meaning the window for the Fed to push inflation down without pushing the economy into a recession. If (when?) there is a recession, it will not stop the Fed’s policy of higher rates as it has been made clear that there is greater concern for getting inflation down than economic recession and job losses.

Speaking of jobs. The Labor Department released its monthly jobs report that showed 261,000 new jobs last month. While this is the lowest number of new jobs since April 2021, it is still a historically high number based on the monthly average being 200,000 new jobs in the five years before the pandemic. As a result of layoffs and a shrinking labor force, unemployment climbed from 3.5% to 3.7% in October. With a net of 260,000 jobs added, there are still almost 11 million job openings and fewer people to fill them. Wages continue to increase, those at 4.7% year over year the amount has slowed down and is still far behind inflation.

Rates for Friday November 4, 2022: Everything in the economy is slowing but labor markets. This is a big concern for the Fed as they wait for wages lagging inflation to impact consumer spending and slow down inflation and the economy. For now, the news this week pushed rates back up from last Friday after dropping last week.

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

30-year conforming                              6.99%          Up 0.24%

30-year high-balance conforming        7.375%        Up 0.255%

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 appears not to be. Philadelphia sports fans are very pessimistically hopeful, I am no different. While excited with the two wins the Phillies have had, it appears that may be all we will have to celebrate against a great pitching staff for Houston. Before the Series started I told Leslie that while I was thrilled they, improbably, made the Series there was a big chance they would get swept. Hopeful for two wins in Houston, but…

Thanks to all the people who replied last week regarding the baseball books I recommended, happy reading and gifting!

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 now a good time to buy a home?

Question of the week: Is now a good time to buy a home?

Answer: Over the years (decades) this question pops up in the WR&MU, most recently in May 2020, when the pandemic was a few months old and rates had dropped 1% in eight weeks after spiking 1% in two weeks.

There was great uncertainty in the markets and economy with the shut downs, transition away from offices, and millions of homeowners requesting and being granted deferments for their mortgage payments. Unknown at the time was it those deferments would lead to foreclosures, which would lead to a 2008ish collapse of housing markets.

The question of the week was pertinent, and the answer was that it was a good time to buy with rates so low and, at the time, the housing markets being soft. By August, the median home price in California would jump from $588,070 in May to $706,900 as the 30-year conventional mortgage rate dropped from 3.875% to 3.375%.

Today, the median home price was $821,680 in September, down from all time high of $900,170 in May. Down 9.6% from the high in May, the median price is up 1.6% from last September—essentially flat. In the past year however, rates are up almost 4% from 52-weeks ago.

Some comparative math from last year to this:

September 2021

  • Median price $808,890
  • 20% down payment $161,890
  • 30-yr fixed rate mortgage $647,000
  • 30-yr high balance fixed rate* 3.125%  *this is high-balance rate as conforming loan limit was $548,250
  • Monthly mortgage payment $2772

October 2022

  • Median price $821,680
  • 20% down payment $164,340**
  • 30-yr fixed rate mortgage $657,340**
  • 30-yr high balance fixed rate 7.125%**
  • Monthly mortgage payment $4429**

**The current conforming loan limit is $647,000, it is anticipated the limit for 2023 will be $715,000 and many lenders accepting loans using the 2023 limits. If this is the case:

  • 30-yr fixed rate 6.75%
  • Monthly mortgage payment $4263

Reframing our question of the week, is it a good time to buy a home that costs about the same as a year ago but with a payment that is $1657 higher than last year, an increase of 60% (sixty percent!)?

Perhaps.

A few questions to answer to determine if the answer for you is “perhaps not” or “perhaps so.”

  • Can you qualify for the home you would like to buy? Using the median home price for our example, are there homes on the market in this price range that are in area(s) you would like to live in and of the size you want/need?
  • How long do you foresee living in this property? If the home you can afford is smaller than you would like, will you likely be looking for a larger home in 2-3 years, 3-5 years? Or can you afford to purchase a home that you will live in for more than five years?
  • Is your income likely to increase for the next several years, stay the same, or possibly decline?

There are likely many more questions you will ask yourselves, what will happen to prices in the future, what will happen to rates, will we regret buying now, will we regret waiting to buy, and many more. Let’s take a look at two scenarios, rates stay high and prices decline, rates drop and prices increase.

Prices drop in the next twelve months by 5%, rates remain near 7%.

  • Price $780,500
  • Down payment $156,100
  • Loan amount $624,400
  • Rate 7%
  • Monthly payment $4154

Prices go up 5% in the next twelve months by 5% rates drop to 5%.

  • Price $862,750
  • Down payment $172,550
  • Loan Amount $690,200
  • Rate 5%
  • Monthly payment $3705

As you can see, the mortgage interest drives affordability considerably more than price. An difference in price of over $82,000 with a decline in rate of 2%, results in a difference of almost $450 per month lower for the higher priced home.

Back to your questions, the most important question is what can you afford to own today and does it fit your family’s needs? If so the other questions, while relevant, are less so because you have procured a home for your family that will provide housing and payment stability, unless the instability is a lower payment.

Over time the chances are that rates will drop below their current levels. While likely not approaching the historic lows during the pandemic, it is not unreasonable to think they will drop to the 5% range in the future when inflation abates. This provides you the opportunity in the future to refinance your mortgage to a lower rate and payment in the future from current rates.

There is softness in the housing markets as more inventory comes to market. With rates where they are the demand is down as many buyers are sitting on the sidelines waiting for prices and/or rates to fall.  Those active in buying are not facing very much, if any, competition for the homes they desire, and in many cases sellers who are open to negotiating prices and terms.

How long will this softness continue? Likely as long as rates are high pricing some, many, buyers out of the market. What happens when rates soften and begin to decline? More buyers entering the market tipping the supply and demand balance, and prices, slowly back to the sellers.

In our region, Southern California, home owners have a built-in market advantage: almost all the dirt that can support homes is already developed. This means no new supply of housing, which means there is a set number of homes that can come on the market. Over time values in the region will go up through inflation and demand. Yes, in short periods prices have, and likely will in the future, decline for a period, but always from record high prices.

I have been in the industry for 35 years, and my advice has always been the same for families considering to purchase a home: you are purchasing a home for the long-term and not as an investment, because of this over time your home’s value, even through dips in the market, will more than likely go higher during your period of ownership. Over time you income will likely increase, reducing the percentage of your income going to your housing costs. Rates go up and down, and hitting the downs you will likely have the opportunity to lower your rate and payment further.

Finally, what is rates and prices remain close to where they are for the next several years? You are still better off owning for many reasons, some of which are, you control your housing situation, you will build equity through your loan balance declining, your housing costs are pretty much fixed thanks to a 30-year fixed rate mortgage and Prop 13. None of this is true if you are renting. Over time your landlord can sell your home, rents will increase over time, none of your rent is building any equity or wealth.

Be curious, call me to see if you were to purchase a new home today what would the numbers look like, how much can you afford, what can you buy. It doesn’t cost you anything to find out and the result may be you are on a path to housing and financial stability.

Have a question? Ask me!

Is the data good or bad? Yesterday the Commerce Department announced that in the 3rd quarter the economy grew at a 2.6% annual pace, following declines in the first two quarters of the year. That should be good news, no recession, however…Somewhat robust growth puts upward pressure on wages and prices, which portends higher interest rates. However,…the economic growth was primarily due to shrinkage in the trade gap. Due to a stronger dollar and slowing consumer spending imports declined in the quarter, combined with an increase in exports the jump in GDP can be attributed to containers of goods entering and leaving our ports.

Further dissecting the data, almost zero growth (plus 0.1%) in the quarter for private domestic purchases (spending not including inventories or trade) following 0.5% growth in the 2nd quarter and 2.1% in the first, shows a larger reduction consumer spending due to inflation. The good news here is slower consumer spending should slow inflation.

Overall, the GDP data is seen by many economists as signs that the economy will fall into a recession, longer and deeper than the one earlier in the year, perhaps starting in the 4th quarter of 2022 and lasting into 2023. If this comes to pass it is good news for mortgage rates, as rates tend to drop when the economy slows. The primary driver for rates will remain the Federal Reserve’s aggressive policy to fight inflation with higher rates. At what point will they halt the increases if/when we enter a recession lasting more than two quarters.

Rates for Friday October 28, 2022: Against this backdrop of economic data, mortgages rates decline from Friday to Friday for the first time since the week ending July 29th, which was the last week-to-week decline over a 6-week period. The Fed will raise its benchmark rate next week, likely by another 0.75%, this increase is already priced into the mortgage markets.

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

30-year conforming                              6.75%          Down 0.24%

30-year high-balance conforming        7.49%          Down 0.365%

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 got my hope from last Friday! The Phillies are in the Series. Getting greedy, my hope this Friday is they have the trophy next Friday, or shortly thereafter.

When we moved to the Philadelphia area from Oklahoma we lived near Valley Forge, we would ride our bikes to and through the park. We took many visits to Independence Mall to see the Liberty Bell (we could touch it) and the tour on the Continental Congress. A passion for history grew, and I spent free time reading biographies and books on the Revolution and Civil War.

One reason I love baseball is its history, and how it reflects our nation’s history. For those who like history, or baseball, or both, here are a few very good books about baseball you may enjoy.

My most recent read, The Grandest Stage: A History of the World Series by Tyler Kepner, takes a unique approach to a history book, it is not in chronological order. Rather, the book is presented in seven chapters with each chapter focusing on an aspect of the game as seen in several series over the years. Muffs, heroics, managerial decisions, unheralded series changing plays, as they occurred from the first Series in 1903 to 2020.

Michael Lewis is one of my favorite authors. His books, at the core, are about economics, but they are written as if they are novels and easily tell the stories that present the economics. One of his most famous books is Moneyball: The Art of Winning an Unfair Game, perhaps made more famous by the movie starring Brad Pitt. The game of baseball has changed in recent history with more of an emphasis on analytics to make decisions on players and tactics during the game. Moneyball chronicles the first team to depend on analytics for building a team, for a team with a small budget.

Summer of ‘49 by David Halberstam is a baseball classic. Focused on the 1949 season, it takes the reader into one of the greatest rivalries in sports, certainly baseball, in a season when they fought for the pennant. The Yankees with the great Joe DiMaggio and the Red Sox with the even greater (in my opinion) Ted Williams lead us through the season with stories on the impact of the teams and race for first on the cities, fans, papers and others involved with the teams.

Roger Kahn’s The Boys of Summer is almost a sequel to Halberstam’s ’49 as the book centers on the Brooklyn Dodgers and the 1950’s. Kahn grew up in Brooklyn and gives a first hand look at some of the games greatest players who walked to the ballpark every day in the summer to play the games.

There are many more, but if you put any of these in stockings for Christmas the recipient will be in for a great read about the great game.

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 do my property taxes go?

Question of the week: Where do my property taxes go?

Answer: If you own property in California and have not yet received your property tax bill you may want to go to the tax agency for the county where the property is located and download a copy.

For those who have received our tax bills for the 2022-23 fiscal year, reading through the bill can raise several questions. Below are links to WR&MU from the past that have covered other topics regarding property taxes, but because this is an election year, the question of the week is somewhat pertinent.

Reading your Annual Secured Property Tax Bill, in the upper right quadrant is a detail of taxes due for your property.

The first line is the General Tax Levy of 1% of your property’s assessed value. This amount is set at 1% by the State, and due to Prop 13 any increase is limited to 2% per year increase in assessed property value. For instance, if your property is assessed at $500,000 the general levy is $5000 for the year. If property values increase during the year, the maximum assessed value for your property for 2023-2024 fiscal year is $510,000 and your general tax levy of 1% will $5100.

This general levy goes to the county in which the property is located. The county then distributes the funds to local governments and agencies within the county based on funding formulas, and of course budgeting controlled by elected officials.

Below the general tax levy section is, on almost all tax bills in California, “voted indebtedness.” These amounts are to pay for bonds issued by agencies for capital improvements and construction and have been placed on the property tax bill by voters. For instance, in Long Beach, we have three such levies on our tax bill, totaling about 14.5% of our total tax bill with the funds paying for bonds issued by the Metropolitan Water District, Long Beach Community College District, and Long Beach Unified School District.

Below the indebtedness items are direct assessments. These fees are levied against properties in the county where the property is located and go to specific agencies that provide services or product to residents. For instance, direct assessments may be for sanitation districts to maintain sewers and treatment plants, water delivery and filtration infrastructure. In Los Angeles County there is a levy for trauma and emergency services that was originally a measure passed by voters in 2002, the amount of the levy having been raised twice by the LA County Supervisors to increase revenue to support the budget of the LA County Department of Health Services.

Using our tax bill in Long Beach, Los Angeles County, the total taxes due equal almost 1.3% of our assessed value. Because of the 2% limit on increases in assessed value, our assessment is 46% higher than our purchase price in 1998; without Prop 13 our tax bill would be about two and a quarter-times higher than the one we received last week.

 Breaking down our total tax bill, the general levy is 67% of the total bill and the levies for bond payments (direct indebtedness) and direct assessments total 23% of our total bill.

Looking ahead, the later charges will likely be even greater percentages of our taxes as politicians and voters approve other assessments and indebtedness to be paid via the tax bill. It should be noted that the State Constitution limits the amount of additional levies (ad valorem taxes) that can be imposed on property owners to 1% of the assessed value of the property and increases are limited by the 2% per year assessment adjustment. This means, theoretically, that voters and elected officials could double, triple, quadruple…your tax bill by passing measures that equal 1% of your current assessed value, to be paid on top of the 1% general tax levy and the other assessments listed on the property tax bill.

For instance, on our ballots in Long Beach this year is a measure placed on the ballot by LBUSD for a bond that will raise funds for school retrofitting and construction, adding an additional $60 per $100,000 of assessed value, on top of the current $125 per $100,000 if approved by 55% of voters. The measure is likely to pass and improving schools is always a priority for residents and voters, pushing the LBUSD portion of the tax bill to close to 10% of the total tax bill.

To finish, one important take away, the State of California does not receive any revenue from property taxes. All property taxes collected remain in the county in which they are collected.

When you look at your property tax bill, and then you look at your ballot, understand the connection between the two—your actions on one may impact the other! As someone once said, elections have consequences.

Other WR&MU’s addressing property taxes:

Have a question? Ask me!

Rates for Friday October 21, 2022: The good news is that rates are up by the least amount week-to-week in past ten weeks, the bad news is that rates have increased 10-weeks in a row. Consensus seems to be growing that the Fed will increase its benchmark rate to over 5% in 2023, despite prior Fed comments that they were looking at a 4.25-4.5% high end. This will continue to be priced into the markets.

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

30-year conforming                              6.99%          Up 0.115%

30-year high-balance conforming        7.49%          Up 0.115%

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 hopeful, so very, very hopeful, that when I write the WR&MU next Friday I will be excited to see the Phillies in Game 1 of the World Series that night. Phillies phans are appreciative and welcoming of the good vibes and cheering they are getting from Dodger fans—can you believe Giants fans are rooting for the Padres?!? On the other side, in the American League, even many life-long Yankee detesters (grandma Sis told not to say hate) are rooting against the Astros.

Whoever wins in the National League, both American League teams will be tough to beat. In the meantime, as they say in Philly, Ring the Bell! (Get it, Liberty Bell…Philadelphia…😊)

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 buy a new car while buying our new home?

Question of the week: Can we buy a car while buying our new home?

Answer: Maybe, but you better disclose the purchase or you could be in for a big surprise, and not a good surprise.

It is not uncommon for us to have a client call us while they are in escrow for their new home inquiring if they can purchase a new car, or change jobs, or loan their brother in-law Fred some money.

That is good, very good. Call us before doing any of the above, because if you do not issues may occur for you in the future.

Let’s go back to the beginning of the purchase mortgage process.

Ideally our initial contact is your calling to get pre-approved to purchase a home. We discuss your financial situation, determining the income that will be used for qualifying, obtaining a credit report to determine the debt obligations that will be used for qualifying, verify the funds you will have available for your new home purchase, and with this information determine the price range for which you qualify.

If any of these variables change the purchase price and loan amount for which you qualify may change. Perhaps for a higher sales price, perhaps for a lower sales price. Because of this, once we start the process of your purchasing a new home, or refinance, it is imperative that we know any changes to the three categories of income, debt, and/or cash available.

There have been instances where after pre-approval and before having an offer accepted clients have purchased a new car, with a higher loan payment than their prior auto loan. Not having been informed, we obtain an updated credit report, and the new payment has created an issue with qualifying.

As well, we have had clients change jobs just before, or during, escrow. Depending on the new position, how they are paid, and the amount they are paid, this may or may not be a problem. Like with new loans or other credit obligations, the sooner we know and due the qualifying calculations, the sooner we can determine if this causes an issue or not.

Typically, job changes are easier for us to discover than new credit obligations because part of the closing process is to verify you are still employed with the employer listed on the loan application, as well recent paystubs confirming your income has remained the same.

New credit obligations are not as easily discovered due to the timing of credit reports. The first credit report we pull will be to support any pre-approval letters we send out to accompany your purchase offer. Credit reports have a shelf life of 60-days. When we obtain your credit report we will ask you the purpose of any inquiries listed on your report, if they resulted in a new credit card account, auto loan, or other credit obligation that are not showing on the report as an active account with a balance and monthly payment.

If you are closing within the 60-day time frame a new report will be required to confirm that there are no new accounts, confirm the credit score has not changed significantly that can impact the rate lock on your loan, and see if there have been any other inquiries that may have resulted in new credit accounts not showing on the report.

As you can tell, if you do purchase, or lease, a new car, from the time of our initial report to the closing on your new home, there is a decent chance we will find out, and we all hope if this is the case it does not negatively impact your ability to qualify for the loan for which you have applied.

However, depending on timing of this process, it is possible for homebuyers to purchase a new car, or open other new credit accounts, without our discovering unless you tell us you have done so. If this happens there could be problems with you after your close on your new home.

One of the documents you sign with the other loan documents is the Uniform Residential Loan Application (URLA). This is a form we complete to start your mortgage application at the start of your purchase, or refinance, transaction. During processing changes may be made to the information on the original form; the initial income may be different when verified with the employer, account balances may have changed due to adding an additional account or recalculated due to updated bank statements, a copy of a divorce decree may add income or debt for spousal/child support.

The URLA signed during loan documents has all the data for income, assets to show funds for closing, and credit obligations that the underwriter used to approve the loan. By signing the form you are acknowledging that all the information on the form is accurate and correct.

Scenario, the Smith’s get pre-approved to purchase a new home for $875,000, putting 10% down in July. On their initial credit report there are some inquiries from auto dealers earlier in the month. When asked if they purchased a new car, they say they have not as they decided to wait until after they purchase their new home. They are told that if they do buy a new car that we have to know so we can calculate the payment in their mortgage qualifying. They are told that we are qualifying them at the top of their ability to purchase based on their debt-to-income ratio, so any changes could impact the sales price. Not an issue, they are waiting to purchase.

At the beginning of September, they have an offer accepted for $865,000, the timing is very good as we are able to lock them in at the same rate we used to pre-approve them in July. Because our credit report is about to expire, we pull a new report and it shows no changes or new inquiries. We are on our way.

In mid-September we have loan approval and are ready to close on time at the end of the month. The Smiths sign their loan documents, including the URLA listing the income, assets, debts, etc used for the lender’s approval. On September 30th escrow closes and they own their new home.

In December we receive a call from the lender. In the post-closing audit process, a new credit report was obtained and it showed the Smiths funded an auto loan with a $900 per month payment on September 23rd, three days before they signed their loan documents.

The payment has pushed their debt-to-income ratios beyond the qualifying limits. Since the loan and payment was not disclosed on their URLA signed with loan documents, the Smiths have submitted a false loan application, the lender is putting the loan in default and requiring it be paid off.

They are calling the loan due after only two payments have been made. This is a big problem for the Smiths.

When called regarding the issue and why they purchased the car the week before closing they replied, “the dealership called us, the car we were looking at was available at a much lower price as they wanted it off the lot. If we didn’t buy it they were calling the next family on their list.”

Because the loan was approved and they were signing loan documents in a few days they didn’t think it was an issue.

They have their nice new car at a great price, but there is a chance they could lose the garage where they park it at night because they did not wait to purchase the car until after they purchased the garage.

If there are any changes between your initial pre-qualification/approval and the funding of your mortgage you must disclose it immediately. Ideally, we discuss the potential change before it happens.

A new job, even if the position and salary are the same or higher.

A new credit account, even if a credit card obtained to consolidate other balances “with no interest” that results in a lower payment.

Changes to your bank, or investment, accounts, whether higher or lower. If you deposited funds from a source that is not your employer, we need to track the source and explain the reason—if you receive a large bonus check from your employer, we will need to trace that as well.

Even if any of these do not show up on during our processing and prior to funding, a post-closing audit by the lender may very well discover the change. If it any changes have an adverse effect on qualifying guidelines the result could be a significant headache, and possible financial detriment, to you.

With information before any major changes occur, we can assist with planning and actions that may be taken to keep your home purchase process on track and result in your owning your home for many, many years.

Buy the garage, then the car, regardless of the “deal” being offered.

Have a question? Ask me!

A busy week for economics writers. Fed meeting minutes, consumer prices, retail sales, were all in the news, these are some of the major areas of economics that move markets. No new data was released with the minutes from the meeting of the Federal Reserve Open Market Committee in September (the FOMC sets the Fed’s benchmark rate). The minutes of the discussion at the meeting that resulted in a 0.75% increase in the Fed’s rate showed that the voting members of the FOMC are more concerned about taking too little action in their rate increases than taking too much action with their rate hikes. In other words, they are more concerned with high inflation than the results if they over-jump inflation with rate hikes than the results in a “hard” landing if they push rates too high.

Their concerns were not in any way allayed by the data in the Consumer Price Index release on Thursday. Prices increased 0.4% in September, up 8.2% from last year (down from 9.1% in June). Weighing down the CPI were gasoline prices, which were down for the third month in a row. The “core” CPI (food and energy prices removed from index) was up 0.6% in the month, and 6.6% year-over-year. This is important as the Fed considers the core index a better indicator of inflation when formulating policy.

Increases that create concerns that inflation is hard to fight were seen in groceries, up 13% annually (highest since 1979); and rents which were up 0.8% for the month and 7.2% for the year. Rents are concerning as rents are a major contributor to inflation and are sticky going down; groceries are concerning as they are not a discretionary purchase and impact many segments of the economy. Of note, butter and margarine, eggs, and flour are all up 24% or higher from last year.

Higher prices for food, housing, consumer goods, and many other sectors have eroded the purchasing power of higher paychecks over the past year. Real wages, defined as current wages adjusted for current inflation, were down 0.1% in September and down 3% from last year. Take away the downward weight for prices at the pump in September and those losses are greater. Higher salaries and wages are adding to the costs of goods and services we buy, however they are not keeping pace with goods and services.

Speaking of goods and services, the retail sales report showed a relatively flat month for retailers in September—a historically slow month for retail sales as it is sandwiched between back to school and holiday shopping seasons. Overall sales were up 0.3%, just below CPI, with declines in auto sales (-0.4%), and gasoline (-1.4%) pulling the overall data lower. One area that continues to surprise is bar and restaurant spending, despite higher labor and food costs for the sector, which impacts prices on menus, spending increased in September 0.5%, which is greater than overall inflation. Because dining out is a discretionary expense, it is an indicator of consumers mood and possible concerns about impact of the economy on their personal finances. Maybe they are consuming too much in bars because it takes their minds off rising rent, butter and clothing costs, or they are not as concerned about those rising costs as economists and pundits feel they should be.

Rates for Friday October 14, 2022:  Markets were closed on Monday, and when the Mortgage Backed Securities markets opened on Tuesday they did so significantly lower than closing last Friday (lower MBS prices mean higher rates). Despite the news and data mentioned above that puts upward pressure on rates, despite bouncing around the past three days, rates have remained somewhat flat after opening on Tuesday. Flat for the week, but not from last Friday. The upward climb continues.

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        7.375%        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.

It finally feels like Fall in Southern California, Dodger playoff games, Angels having MVP caliber players know sees after the regular season, football well under way, hockey and basketball starting…and rain! And cooler weather! And pumpkin spiced coffee, cereal, oatmeal bars, and dog biscuits clogging shelves.

Well most of the above are good to see in the middle of October!

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

Survey Results from poll on economy and housing

Question of the week: What were the results of your poll on housing market and the economy?

Answer: Before we get to data, thank you to all who responded. It appears that respondents were a pretty good cross section of the WR&MU email list, plus several who clicked on from posting on social media and my website.

Respondents were from as far north as San Luis Obispo, south to San Diego County, and east to Palm Springs/Desert area. Not surprising given where our home is, as well as where many of my referral sources and clients live and work, that the 65% of the respondents were from the 908xx zip codes (i.e. Long Beach).

The two highest categories for type of employment or income source were those are salaried on an annual basis and retired, each composing 24% of respondents. Given that I have been in the industry since 1987, and creeping up on eligibility for Medicare and Social Security, the high percentage of retirees was not a surprise—plus many of them obviously need more to do on Fridays than read the WR&MU!

Other areas responding were 15% in real estate or affiliated industries, 15% in two income families, and 12% in professional fields of accounting, legal or financial industries. The remaining respondents were hourly wage earners or preferred not to answer the question.

The overwhelming majority of respondents have owned their current homes for 10-years or more 71%. The next two highest respondent categories at 12.5% each were owners for less than 3-years, or from 7-10 years. Not surprising given how most people get on the email list for the WR&MU, 90% of respondents own their own home, to the other 10%, let’s talk about your plan to buy in the future!

When it comes to real estate values in the coming year in respondents’ areas, 54% feel prices will drop. The largest response for the question was 31% feel values in their area will drop up to 5%, the second largest response were the 23% who feel prices will drop more than 5%.

The optimists 35% of respondents feel prices in their areas will increase over the next year, with 19% estimating up to 5% and 15% estimating more than 5%. What is interesting about those who feel prices will increase more than 5%, all of them live in high-value/income areas. Counter to others in the neighborhood(s), 20% of those in similar areas feel prices will decline more than 5% in their area.

Fifteen percent stated that were considering purchasing a new home within the next one to two years in January. Twenty-five percent of these respondents have already purchased their new home this year, almost all of them before rates climbed to 5% at the end of April.

Of those who have not yet purchased, most cited prices rather than rates as the primary reason, with 75% stating they are waiting for prices to fall, and 25% feel rates are too high to purchase. This cohort of respondents are hopeful that the 53% who feel rates will decrease are correct.

The results of the question, “How concerned are you about inflation impacting your family in the next 6-months” we a bit surprising to me. Sixty-five percent of respondents replied they were not very concerned, 35% were very concerned. Breaking down the data for source of income respondents, almost one-third of the “not concerned” respondents are retired. Only about one-third of retirees are very concerned about inflation and the impact on their families.

The cohort that is most concerned about inflation is the two-income family group with 40% of them very concerned about inflation and its impact.

Looking at this data, the interesting aspect is that most retirees are on fixed incomes, which is obviously eroded by inflation. While this is also true for wage and salary earners, generally this group receives salary and wage increases at a greater rate than retirees. Another view of this is many two-income families have children and attendant expenses, whether growing out of clothes every year, or more fully grown and additional expenses for education, etc.

Overall, I was anticipating a greater number of respondents being concerned about the impact inflation is and will have on their families.

More respondents are concerned that the Fed’s battle against inflation will result in a recession that will negatively impact their family, but still not a majority of responses showed concern. Almost 54% said they were not very concerned about a possible recession and it having a negative impact, while 46% are very concerned. Breaking it down vis-à-vis inflation, 12% more respondents are concerned about a future economic event that may negatively impact their families than those who feel a current economic event will have a negative impact.

The retirees were evenly split on being concerned or not about a recession having a negative impact; like the overall responses more retirees are concerned about the possible future recession than the current inflationary economy. Two-income families were very consistent with the same 60%-40% split being not very concerned and very concerned respectively.

The highest percentage of respondents who are very concerned about the Fed’s action resulting in a recession that could harm their families were those in real estate or affiliated industries, with 75%. I’m guessing these responses are mainly focused on the run up in interest rates that could lead to a recession resulting in declining home sales.

Those least concerned with a potential recession and a negative impact were salaried income earners, with 75% indicating they are not very concerned.

Looking at the results of the question, “Do inflation, interest rates, housing markets influence how you may vote in November,” I realize I may have worded that differently and had a different result. The way the question is worded a “no” vote could mean that respondent is not happy with what is happening but their vote is not changing as they intend to vote the same way regardless of the variables provided—likely due to party affiliation. All that said, respondents hit exactly 50% on each answer as to whether the factors listed influence how they intend to vote next month. This is the only category that no matter how I looked at the data, from zip codes, to source of income, the results were at or very near a perfect split.

I wanted to shy away from politics in the question, doing so did not really show much. Perhaps if I had asked if the factors will influence you to vote differently than you normally vote—i.e. switch parties or consider the economic variable before other issues they usually depend upon.

The final question regarding the economy and impact on families, “One year from now, September 2023, do you think your family’s financial situation will be…about the same, somewhat better, much better, somewhat worse, much worse” had almost half, 48%, indicate they feel their situation will be about the same.

No respondents feel they will be much worse off next year, but 28% feel they will be somewhat more worse off than today. On the optimistic side of the scale, 16% feel they will be somewhat better off and 8% feel they will be in a much better financial situation next September.

Echoing their greater concern about recession (50%) than inflation (33%), half of retirees feel they will be in a worse situation next year, this group makes up about 57% of those who replied they see themselves as worse off in one year.

Showing the age of readers of the WR&MU, or at least respondents—as if the percentage of respondents who are retirees and homeowners of current residence for at least then years was not enough—were the replies to where people go to get information for financial markets and news.

The number one answer was television, with 26% of respondents. As this was a category where more than one answer could be selected, this answer also shows almost three-quarters do not rely on television for their news.

Granted the question did not asked how they received their newspapers, but that was the second highest answer with 23%. With newspaper advertising being considerably cheaper than television advertising, for our group it seems a lot more bang for the advertisers to go with the original mass media of newspapers.

Not surprising was that social media was the third category, but lower than I expected given the mediocre responses for t.v. and newspapers, with only 13% scrolling social media and clicking on articles and media for financial news and information. The remaining responses were all near or below 10%.

Thank to those who responded the Weekly Rate & Market Update was a primary source!

Wrapping up, in the comments many indicate that tougher times are coming before the economy improves—which was interesting in that the majority do not feel that inflation and/or possible recession will not have a negative impact on them and their families. I take this as good news that the respondents are, mostly, financially secure and optimistic about the future.

As well, this likely shows that homeowners feel this security, in part, because of their homeownership. The stability in housing and for the most part monthly costs is likely a contributor as they know they where they will be living and what it will cost.

In closing, Anonymous from Westminster left this comment, which I think you will agree is perfect, “Buy what you NEED, save what you can and turn off the news. We will get through this.”

Great advice Anonymous!

Have a question? Ask me!

First Friday means Jobs Friday, as the Labor Department releases data on September employment figures. The economy added 263,000 jobs last month, the lowest total in a year and well below the 439,000 per month average since the start of the year. Wages gained 0.4% for the fifth straight month, and are up 5% from last September—well below inflation. Despite the drop in new jobs, the unemployment rate contracted to 3.5% due to a smaller labor pool. The Fed is anticipating that the unemployment rate will increase to 4.4% in 2023 as it fights inflation and slows the economy.

With the number of job openings having 2nd largest decline in history from July to August, from 11.2 million to 10 million, and layoffs being the most in 18-months, combined with slower total job growth, the data shows a slowing in labor markets. In normal economic times, this information would push rates lowers as investors see the slowing labor markets leading to a slowing, shrinking, economy. In our current environment this is not the case. With the Fed intent on pushing inflation down to its 2% target, and publicly stating that they foresee up to four million jobs being lost in the fight against rising prices, the data is not enough for the Fed to raise its benchmark rate another 0.75% in November. With five rate increases totaling 3% since March, the Fed is expected to raise its rate two more time in 2022 for another 1.25 – 1.50% in total.

Rates for Friday October 7, 2022:  Rates continue their upward march, the conforming rate increasing 0.25% this week, that is over 1% since a month ago. As we are seeing, jobs and GDP are not a factor in rates as they are traditionally. The only metric that has impact is inflation. Until it starts to dramatically decline, high(er) rates will continue.

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

30-year conforming                              6.750%        Up 0.25%

30-year high-balance conforming        7.125%        Up 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

If you notice more than the normal amount of tipohs, badly grammar, and other misteaks this week it is because I have been writing the WR&MU with the Phillies playoff game against the Cards on while i right.

Go Phillies! Ring the Bell!

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 collapsing?

For those who did not click through to survey in last week’s WR&MU please do so for better poll results! Here is link, should take less than three minutes: https://s.surveyplanet.com/0xbb1zby

Question of the week: Is the housing market collapsing?

Answer: Not according to data, but don’t tell the media that.

This week’s question is the result of article in our local Press-Telegram with the headline, “Southern California’s housing collapse.”

Reading the headline, I immediately thought what a shame it is that most of those in the media (and elected office) are not very good at analyzing data. In this case the writer’s columns are all about data, and has been calling for housing prices to crash since 2020 and he presents data to support his position.

In this case the overall data does not support his position of housing market collapse. The simple reason is that reduced sales are not the same as reduced prices—in fact in many cases lower sales lead to higher prices. Housing markets are defined by prices, not by units sold. Let’s look at the data from August sales from the California Association of Realtors.

Before we address sales and price data, let’s look at two data sets that reflect where a housing market is headed, unsold inventory and median days on market.

Unsold inventory is the how long it would take for current properties on the market to be sold under current sales conditions. For example, if there are 100 homes on the market and 25 homes per month are being sold, the unsold inventory index is four months. In a market with moderate price increases unsold inventory is around six months. If the unsold inventory trends lower it generally indicates upward pressure on prices, if longer the pressure is for lower pressures.

Statewide, in August, the unsold inventory index was 2.9 months. In the Southern California region (Los Angeles, Orange, Riverside, San Bernardino, San Diego and Ventura Counties) the index was 3-months. This data indicates that there is still a low amount of inventory on the market compared to “normal” markets.

Median days on the market (DOM), is the amount of time it takes for a property to be sold from when it hits the market. If Leslie and I put our home on the market on October 1st and he open escrow on October 20th, the DOM is twenty days. (A quick math primer, the “median” amount is the number right in the middle between the highest and lowest in the data—the median of 1, 2, 3, 4, 5 is 3. In large data sets the “average” and the “median” can be close, but rarely are, the same.)

In “normal” markets the median DOM is typically around 30-days. Analyzing the data from January 2010, when market was coming out of the Great Recession, to February 2020, just before the Pandemic Market, the median DOM was 34.5 days from market to escrow in California, for Southern California Counties in the same period the median DOM was 38.5, not a big difference.

The August median DOM statewide was 19-days, last August it was 9-days. Southern California Counties median DOM was 18-days in August, up from 9-days in August 2021.

Shorter DOM indicate a market in which properties are going to escrow faster and should result in upward pressure on prices, longer DOM are typically associated with downward pressure on prices.

From the CAR website, here are the price and sales data for all of California, and LA and Orange Counties.

As you can see the median price had slight increases across the State and in LA County, up 0.7% and 1.0% respectively from July; Orange County saw a decline of 2.5% in the median price, which represents a drop from $1,231,000 to $1,200,000. All three areas saw an increase in median prices from August 2021, with the OC up $100,000 from last year.

Across all three areas the number of sales in August were up from July, in large part due to the dip in rates in August. As you can see the total number of sales we down considerably, essentially 30% in LA and Orange Counties, from August 2021. It is this number that is the basis for the columnist mentioned above stating the market is “collapsing.”

While the total number of sales are down, the unsold inventory and DOM data show the market is still somewhat warm. The slow down in price increases month to month indicate that equilibrium is present as sellers and buyers seem to agree the asking price from the seller is seen as a fair value to the buyer.

Also supporting this analysis is in Southern California Counties the sold price in  August averaged 98.7% of list price—a sign that sellers are pricing their properties to sell, as supported by the relatively short time their homes are on the market before being sold.

Statewide every region but two, Far North (-1.8%) and San Francisco Bay Area (-1.2%), show prices increases from August 2021 to August 2022. The highest being an 8.7% increase in the Inland Empire, the lowest being 2.2% in the Central Valley

Might the housing markets “collapse,” which I would define as a drop of 15% or more of prices? Sure, they might. But the current data does not support such a collapse under current market conditions. Note “current.” As we have seen, singular events can have a tremendous, and quick, impact of markets. Despite historic spike in mortgage rates and turbulent economic data (see below for some) housing markets in 2022 have thus far been resilient, avoiding collapse as the market gently eases from a complete sellers’ market to a more balanced market between buyers and sellers.

One more note, to the one of the points the columnist made in the doomsday article, the cost of the median price has gone up considerably due to higher rates. In August 2021 the median priced home in LA County was $830,070. To purchase the home with 20% down ($166,000), when the average interest rate for a 30-year mortgage was 2.625%, the monthly payment was $2667. For the median LA County home in 2021, the down payment only increased by $5000 to $171,000, but with the average rate in August at 5.06%, the monthly payment increase from a year ago is 39%, to $3697 per month.

That 39% increase in payment has slowed sales, and price increases, but prices are somewhat flat from a year ago despite rates more than doubling.

Have a question? Ask me!

Data this week shows confirmed that GDP shrank in 1st and 2nd quarters, inflation is not abating, consumers are spending less, and workers wages are increasing below inflation. Through this the job market is still tight with layoffs at a record low and companies still hiring as many workers as they can despite all this information and recession possibly worsening.

When measuring inflation, the Fed uses the PCE index, rather than CPI as it shows changes in consumers buying habits due to prices. In August the overall PCE rate increase a modest 0.3%, however that number was pulled down when gas prices dropped in August. Taking out volatile food and energy costs, the “core” rate increased at a 0.6% clip, higher than expected. Year over year prices are up 6.2%, down from July’s 6.4% annual increase. The price data indicates that the policies from the Fed are not having a discernable impact on inflation, which supports more large increases in their benchmark rate in the future.

The Commerce Department data release today on consumer spending showed an increase of 0.4% from July, however adjustments to July’s data showed a decline in spending from June. Adjusting for inflation spending was up a scant 0.1% for the month. Consumer spending is approximately 70% of our economy, slower spending portends even slower economic growth. August incomes rose 0.3% for the month, and continues to increase less than inflation. Employers need workers, workers want more pay to fill open jobs, companies need to hold prices as much as they can to capture consumers’ dollars. What breaks in this cycle, when will it break, and what will be the fallout from the break? Those are the literal multi-billion dollar questions.

Rates for Friday September 30, 2022:  The week opened with a major drop in prices for Mortgage-Backed Securities (determine mortgage rates), causing a spike in rates. The data mentioned above puts more upward pressure on rates with little sign of when the data will support lower rates. This week the 30-year mortgage hits its highest level since the middle of 2007. Those who locked in rates last month at or below 5% are pretty happy they did so.

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

30-year conforming                              6.50%          Up 0.375%

30-year high-balance conforming        7.00%          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.

In case you missed the message above because you scroll right to this section of the WR&MU, if you have not already done so, please click on this link to complete quick, 2–3-minute, survey for me: https://s.surveyplanet.com/0xbb1zby

It almost feels like my favorite season is here in reality instead of already being here technically. Walking the dog with a pull-over on in the morning, planning for what my mom called “on-off days” as you put on then take off a sweater or jacket, nights without all the windows open and two fans going…not to mention baseball playoffs, football well underway and the NHL and NBA getting ready!

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 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