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Where are you?

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Question of the week:  Where are you?

Answer:  On I-94 West leaving Milwaukee and heading to Steamboat Lake, Minnesota (near Walker, near Bimidji).

Leslie has command of the rental Hyundai Tuscon at 7:45 local time while I spend a few minutes getting out the big economic news this week and rate shift.  

Have a question? Ask me!

As expected, the Federal Reserve cut its benchmark rate by 0.25% on Wednesday—that move was already priced into the markets. After the announcement Fed Chair Jerome Powell held a press conference and his answers to some of the questions set the markets into a tizzy. The general expectation has been that the Fed would lower rates up to three-quarters of one percent this year (0.75%). At his news conference Powell indicated that Wednesday’s rate move could be a one-and-done, made to put some confidence into the economy. Sensing no more cheap money to borrow to buy, investors dumped their stock holdings and purchased bonds (see last week’s WR&MU for brief overview of relationship between stocks and bonds). This sent stocks prices and bond and mortgage rates tumbling. It should be noted this is the first time since the financial crisis of 2008 that the Fed has increased rates, the second longest period in history—the longest being from 1942 to 1954.

But wait, there’s more! In reaction to the markets collapse in 2008 the Fed began a policy known as “quantitative easing” during which it purchased U.S. Treasury bonds and Mortgage Backed Securities (MBS) to soak up supply and keep rates low. Last year the Fed announced a policy of “quantitative tightening.” Under this policy the Fed would start to sell its holdings of U.S. Treasury debt and mortgages. The impact of this policy is to tighten interest rates by lowering the prices on fixed rate assets, which as we learned last week pushes rates up. Originally the policy was to stay in effect for two more months, but the Fed cut the cycle by two months.

In other news…Economic data this week was counter to the Fed’s position of an economy that needs outside stimulus with lower rates. Positive economic news should lead to higher interest rates, ahead of the Fed rate cut we learned that consumer spending (65-70% of our economy) increased 0.3% in June and for the fifth month in a row personal income showed growth, increasing 0.4% for the month and up 3.2% from last year. With the gap between personal income growth and spending growth it is not a surprise that personal savings also increased, to 8.1%. Inflation concerns, a key factor for interest rates, are non-existent as prices increased a scant 0.1% in June and are up only 1.4% from last June; well, well below the Fed’s 2.0% inflation target. The inflation number is the only number that would hint at a rate increase, the other data all suggests an economy that is on track to continue record expansion that began in June 2009.

Lost in all the chatter about the Fed announcement will be today’s report from the Labor Department that the economy added another 164,000 jobs in July. More news that would suggest rates stay steady or face some upward pressure.

Rates for Friday August 2, 2019: The conforming rate is the lowest it has been since October 2016, hitting 3.5% this week following the Fed move and more importantly Powell’s comments. Will they last? Economic principles say no, and that they should not be this low.

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

30 year conforming                                            3.50%     Down 0.25%

30 year high-balance conforming                  3.75%     Down 0.125%  

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

Why Milwaukee? Why not? Leslie and I are having a Planes, Trains and Automobiles summer trip. We flew to Oakland last Saturday evening and the next morning board the California Zephyr train headed for Chicago. The trip was beautiful, though a bit challenging at night as we opted for the small “sleepette” compartment rather than a sleeper. We crossed the Sierras and Rockies during the day and we really enjoyed the ride. Two nights in Chicago which included a fantastic meal with friends one night and “obstructed view” seats the next night to see Hamilton—a huge discount in price for seats near the back of the mezzanine that blocked the upper part of the stage—rarely used and no negative impact on our enjoyment.

In plotting our trip with the ultimate destination being Camp Birchwood, where one daughter has been since May as a counselor and the other there since early July as a camper, we saw Milwaukee was not out of the way for our automobile leg of the trip. Since neither of us had ever been we decided to make a stop. We are glad we did! A nice lunch river side, a great walk through the lake side part of the city to a fun and tasty Irish pub, then a walk back to our hotel had us wishing we scheduled a bit more time in the city.

The next two nights a Camp Birchwood, which is owned and run by a man who was my counselor at the camp when I was young, and was started by his father who was my dad’s counselor when he was a kid. We fly home from Minneapolis on Monday with our girls to complete the trip.

Signing off from I-94 a bit southeast of Madison.

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

12-14-18: Should we use auto-pay for our mortgage payment?

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Question of the week:  Should we use auto-pay for our mortgage payment?

 

 Answer:  Yes, but…

 

One of the biggest benefits I derived from the advent of everyday web availability for the common citizen was on-line banking. My desire to not have to write a bunch of checks every month and put in the mail was so strong that I left the bank I had been with for almost twenty years, and my first job out of college, that I closed my account and went to a big bank just because I could pay bills on-line. Subsequently, my preferred local bank that is strong, friendly and conservative (and Long Beach’s oldest family owned bank) established on-line banking and I immediately switched back.

 

Very few people write and mail checks for their monthly bills anymore. Most people pay their bills using their banks’ on-line service. That said, many people still log on one, two, three times a month and fill out their payments and then hit send. This is understandable as credit card balances and utility payments change every month. However, many still log on every month to fill out payments for accounts that have the same payment every month for house payment, mortgage or rent, auto loans, student loans, etc.

 

I strongly advise that if you have a payment that is the same amount every month that you establish an automatic payment every month. There are a few reasons for this. First, you do not need to remember while you are on vacation in Yellowstone, “oh shoot it’s the 14th and I need to log-on and pay the mortgage.” Second, well, there is no second. The reason to do this is to ensure your biggest payments—house, auto, other loans—are made on time all the time.

 

The next question I get from a lot of clients, or if they do not bring it up I try to when we close their loan, is “should I set up auto-pay with our new mortgage lender?”

 

My response is always, “No.”

 

Almost every creditor has the option to set up on their site for making payments. You input your banking information and then can set up for them to automatically pull the payment from your bank account, or you can log in and tell them how much money you want to transfer from your bank to your credit account.

 

I am not a big fan of having your creditors pull funds from your bank account and strongly recommend you push your payments from your bank account to your creditors.

 

There are several reasons I prefer the “push” over the “pull.” First, you are in total control. Once you set up the automatic payment from your bank every month you can quickly and easily make changes if necessary. If your bank account is compromised most banks will quickly assist you in setting up a new account and many will also enable the transfer of your existing autopayments to your new account. You immediately know if your payment has been made and applied to your account.

 

Recently one of our clients was setting up his first payment, and subsequent auto-pays, after we funded his mortgage. He input his banking information, input the payment amount and clicked, “confirm” on making the payment and having subsequent payments pulled on the same day every month in the future. After a few days he noticed his payment was showing “paid” on the lender website, but the funds had not left his bank. After several days, we conferenced called the lender and discovered he had entered his account number incorrectly. Because the lender’s computer software did not know the account number was incorrect it assumed the payment had been made. It took about ten days before the software discovered no payment was coming and marked the account as still due. Simple mistake, but had he not checked his bank account to see if the payment had been taken out by the lender he would not know for quite some time—long enough that he may have been subject to a late penalty.

 

Had he set up for the payment to be sent from his bank every month he would have been notified immediately by his bank had he incorrectly input his mortgage account number and been able to make the correction. He has cancelled his auto-pay with the mortgage company and set up auto-pay from his bank.

 

It is not uncommon for us to receive notifications that our personal data may have been compromised, hotel chains, retailers, even the IRS have been hacked and data taken on account holders. Should this happen to your mortgage company they will obtain some very critical information, name, address, social security number, date of birth. However, if you do not have your auto-pay set up for the lender to pull your payment every month the hackers will not have your bank accounts routing and account numbers.

 

Yes, your account information can be compromised from your bank. However, if this happens and your accounts are accessed and funds transferred your bank will very, very likely reimburse the funds taken and set up a new account. Will this be the case if someone obtains your account information from a mortgage, credit card or student loan lender? Perhaps, perhaps not.

 

I strongly encourage you use auto-pay, and strongly recommend as well that you set up the auto-payments to initiate from your bank and not from your creditors.

 

Have a question? Ask me!

 

Tame. That is the one word to describe prices for wholesalers and consumers in November. The Producer Price Index rose only 0.1% in November, after climbing 0.6% in October, and increased 2.5% from last November after year-over-year increase of 2.9% in October. Consumer prices rose at the same pace in November as October, up 0.2% and the annual increase from last year is up 2.2%. Both the PPI and CPI were strongly influenced by gas prices dropping 4.2% for the month, however stripping out food and energy the “core” CPI increase was still only 0.2% from the prior month. Overall the news is interest rate friendly as the price increases are close to the Fed’s target and provide some foundation to speculation the Fed may not go through with three rate increases in 2019.

 

Not as tame. Retail sales as a whole increased 0.2% from October, however taking out spending on gasoline and sales were up 0.5% for the month a strong increase, evidently consumers took their savings at the pump and logged on to buy stuff. On-line sales in November were up 2.3%, department sales increases at a much smaller rate but were still up 0.4% from the prior month. Further showing the strength of the retailers was the revision to a 1.1% increase in October sales from the prior release stating sales increased 0.8%. The strong November sales and very strong October sales indicates the Gross Domestic Product for the 4th quarter of 2018 should come in at a pretty high number. The retail sales data is not real friendly to lower rates. Since consumer spending is 65-70% of our economy strong sales puts upward pressure on prices as well as on the labor pool

 

Where are we going? That is the question investors are asking and there is no consensus—which typically indicates an economy in transition. On the one hand, some are predicting inflation will rise through 2019 due to higher prices for wholesalers and consumers due to higher tariffs as well as higher costs for wages and salaries due to tight labor markets. If this is the case rates will continue to increase in 2019. On the other hand, some are predicting that inflation will remain flat near current levels or decline due to the economy slowing due to rising rates.

 

Rates for Friday December 14, 2018: Rates are retaining their levels after the recent dip, mainly due to investors pulling money out of stocks and putting into long-term fixed rate investments, such as bonds and mortgages. It appears that with inflation somewhat benign that the mortgage rates in the near future will be strongly influenced by the U.S. government. How? Because the Treasury has announced its borrowing needs and they are significantly higher than last year. Because the government can print money to pay its bills it is not very rate conscious, therefore if it needs to pay higher rates to borrow in order to finance operations it will borrow at higher rates. Between the government coming to market to borrow and the Federal Reserve putting its assets on the market to unwind its balance sheet from it Quantitative Easing programs starting in 2008, there is a lot of supply in the fixed rate markets. Over supply leads to higher interest rates. The economic data indicates somewhat stable rates, the financial markets indicate upward pressure. In the meantime rates have dropped in recent weeks—time to take advantage.

 

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

30 year conforming                                                4.50%       Flat

30 year high-balance conforming                       4.625%     Down 0.125%

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On my Facebook page I have been running a “Best Christmas Movie” poll for several weeks. I started by asking people to nominate their favorite films. The following week I posted the top sixteen nominees and every week since people have voted for their favorites to whittle the contestants down to the final two, posted today. It has been interesting as throughout there has been a balance between “old” (made prior to 1960’s) to “new” (made 1980’s or later). Our final two mirror the balance with “It’s a Wonderful Life” (1946) in a run-off against “A Christmas Story” (1983). Interesting, though both are widely considered two of the best Christmas movies of all time, neither did well at the box office and gained their popularity several years after their releases.

 

Like types of cookies, pie, whiskeys or kids, it is very hard to pick a favorite Christmas movie; but it is always fun to experience them all while trying to decide!

 

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

11-30-18: What will be the cost of waiting, or is there one, to purchase your new home in mid to late 2019, or 2020, instead of now or the near future?

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Question of the week:  What will be the cost of waiting, or is there one, to purchase your new home in mid to late 2019, or 2020, instead of now or the near future?

 

 Answer:  This installment of the Weekly Rate & Market update is a follow up to the WR&MU of November 16th when the question of the week was “What was the cost of waiting?”

 

I got very carried away writing the update this week and to follow is a lot of detailed economic information. My conclusion shown at the end is that there is little cost to waiting, but likely not a lot of benefit, if you can afford to purchase where you want to purchase today. If you are waiting for prices to drop significantly so you can afford to purchase in area you could afford a few years ago but cannot today, then your cost of waiting is the cost of homes in areas you can afford likely going up as will the home you currently cannot afford—essentially to see a decline in values of 15-20% is not very likely so you should change your expectations and neighborhoods to where you can buy. For those interested in my more detailed observations, bless you and read on!

 

The answer to this week’s question is speculation on my part based on several economic factors, trends and some educated guessing. Regarding the educated guessing part, I have degree in economics and political studies and have been a student of both for over 35 years. (Two famous jokes about economics at the end of the update for those interested. They were funny when I was in college, not sure they still are…)

 

To answer the question of the week, I am going to flip the standard format of the WR&MU by presenting economic news this week and how it relates to interest rates, then extrapolate out to what I see for 2019.

 

As you read the following keep in mind that there is upward pressure on rates when economies are doing well and there is inflation, there is downward pressure when economies are sluggish, slow growth or recession, and if there are extremely negative events such as threats of war, war, or economic collapse in other nations.

 

While economic data is usually the primary driver for interest rates, politics also has an influence. This weekend a political event will occur that could/should impact not only rates but our economy for the near and possibly long-term future. President Trump will be in Buenos Aires for the G20 summit and has a meeting scheduled with Chinese President Xi Jinping for the purpose of discussing the tariff war between the two largest economies in the world—by three to four-fold over the next nearest.

 

If the meeting goes poorly and there no movement to lower tariffs, or either or both sides are so upset they raise more tariffs, we will see higher rates due to higher inflation. With tariffs increasing prices of Chinese goods imported into the United States those goods will need to either be manufactured in the United States or imported from other nations. Either scenario will increase the prices of the goods, for those manufactured in the U.S. companies will need to hire workers in an economy that is at or near full employment, which will require higher wages, as well as purchase materials required to manufacture the increased supply of goods they will need to sell. Higher prices lead to higher rates.

 

The meeting will be considered “good” if there are mutual statements of starting talks to find common ground on the issues that led to the tariffs, mainly market dumping, counterfeiting of American brands and piracy of intellectual property. Any indication that both sides are looking to de-escalate will likely lead to lower rates as the expectation will be a relief on inflationary pressures and avoidance of further conflict.

 

This critical meeting between Trump and Xi can have a significant impact on our housing markets due to their potential impact on mortgage rates.

 

Another non-data event this week has had an impact on mortgage rates. Federal Reserve Chair Jerome Powell gave a speech to the Economic Club of New York. In the speech, he said that he believes rates are “near neutral,” and that prior business cycles have ended not due to inflation but rather because of asset prices. Regarding “near neutral,” this comment had investors buying bonds, and mortgages, putting downward pressure on rates as they read the comment to mean that the Fed may not increase rates four times between now and the end of 2019. Instead of the Fed rate increasing one percent over the next thirteen months, perhaps only three-quarters of a percent, or one-half of a percent. The comment about asset prices ending cycles instead of inflation brings forth another interpretation is that the Fed may shift from using inflation as their primary basis for rate increases and somehow may be looking at over all prices in different markets such as stocks and housing. If these interpretations are correct, and the Fed does strongly signal fewer rate increases in the near future the impact can be a sparking sales in the housing markets as rates remain near current levels or perhaps dip in the coming months/year.

 

Real and potential statements are not the only news impacting rates, and therefore housing markets, this week. We also had some real data, starting with consumer confidence for November. Consumer confidence impacts rates as consumer spending is 65-70% of our economy, happy and confident consumers are expected to spend more, leading to economic growth, leading to inflationary pressures, which lead to higher rates. The consumer confidence index dropped in November for the first time in five months, however the decline is not overly surprising since the October index was the highest in 18 years. The primary factor in the November decline was primarily due to feelings by respondents that they would see little to no income growth in 2019.

 

Speaking of consumers, this week we receive data on their spending and income in October. Consumer spending in October saw a big increase, 0.6%, from September, a good sign for retailers heading into the Christmas shopping season and a good sign for the Gross Domestic Product growth number for the 4th quarter, and for the year. Strong GDP growth is a strong indicator of inflation, which, as we have said repeatedly, leads to higher rates. Consumers increased spending in October, and earned more as incomes rose 0.5% from September, the highest monthly increase since January. Stronger earnings are also inflationary as they a) provide more money in households for spending and b) increase costs for employers who must raise their prices to accommodate the higher costs.

 

Released the same day as the reports on income and spending was the rate of inflation as calculated using the “PCE gauge,” which is the Federal Reserve’s preferred inflation index (it excludes food and energy and thus is labelled the “core inflation rate”). Despite higher spending and incomes, the annualized rate of inflation for October was 2%, right around the Fed’s target rate of inflation. The news is interest rate friendly and supports the Fed Chair’s statement about rates being “near neutral.”

 

Before we answer the question about if there will be a continued cost to waiting to purchase a new home we must look at the most recent housing data for our Southern California markets. The quick synopsis is that local markets are in a period of transition according to data from the California Association of Realtors.  State wide the median price in October for single family homes was down 1.2% from September, but up 4.7% from last October at $572,000. More locally, in LA and Orange Counties the median movement month to month and year to year somewhat mirror the activity statewide. The median price in LA County in October was $614,500, 3.2% lower than September and 5.9% higher than 2017; Orange County saw the median price from September drop 1.8% to $810,000 but was still 3.1% higher than in 2017.

 

Total sales volume, i.e. units sold, were up statewide month over month, 3.8%, and down 7.9% year over year. Like with prices, units sold locally were also up monthly and down annually. In LA County, there was surge in sales in October, climbing 29% from September, however the total sales volume for the month was down 5.9% from last year. In Orange County, sales also increased from September but a much more modest 3.9%, and also decreased from 2017 with a drop of 11.3%.

 

Month to month the trend is more sales at lower prices, plus increasing inventory on the market and longer periods of homes on the market before being sold. One other pattern is a growth in the number of cancelled or expired listings that are not renewed.

 

Back to our question, what does all this mean about housing markets and if there will be a cost to waiting to purchase a new home.

 

The data is somewhat murky for both the economy and the housing markets—murky usually means transition. Is the transition in the benefit of those looking to purchase homes? If there is a buyer’s market, how much of benefit will there be and for long?

 

The economic transition seems to point to a recession late in 2019, which means the slow down starts in early to mid-2019. This is not an uncommon thesis, as others reading the economic data are also indicating a stronger probability for a recession in the next twelve months. If this occurs the biggest question will be the depth and length. In my opinion, the depth will be fairly shallow and the length fairly short. Keep in mind a recession is defined as two consecutive quarters of negative economic growth, that would cover six months or more.

 

If there is a recession the impact on housing markets would depend on the cause of the recession, is it a decline in asset values as Fed Chair Powell stated? Is it inflation? The cause will be a primary factor in impact on housing markets.

 

If the cause is primarily driven by asset prices being too high, then as prices decline, or remain somewhat stable with incomes and other prices increasing, then rates will be dropping into and during any price corrections or stabilization making homes more affordable than they are today.

 

If the cause is primarily driven by inflation then even if housing prices drop the affordability will not necessarily increase as rates will be increasing to slow inflation. We can see an economy with rising energy, food, clothing, houseware costs but dropping, or stable, costs for large ticket items such as housing and automobiles. If this is the case rates will be climbing resulting in the month costs of housing, i.e. mortgage rates, climbing. If this is the case then the length and depth of a housing correction will likely be longer and perhaps a bit deeper than if there is an asset based cause for a correction.

 

When looking at housing markets we must acknowledge the uniqueness of California as a whole and Southern California in particular. Besides the weather, which will always be a draw, the lack of available land to build more homes in the any county that touches the ocean is a huge factor. Yes, there are some areas still in the region for new homes to be built, however overall the vast majority is fully developed. In many areas, new housing is going vertical with high rises and not horizontal with single family residences with yards. This inability to add significant supply will sustain a certain level for housing markets locally.

 

What about the housing crash ten years ago, space availability was not much different, so why did home prices drop so much? Great question to look at. The foundation for the market was built largely on panic buying and people more concerned with making money on a property purchase instead of a buying a family home. Homes were purchased with no verification of income, funds to purchase and in many cases no hard appraisals. Mortgage products were available that enable buyers to purchase way beyond their capabilities, and as prices rose many were looking to sell their homes quickly for a profit and buy their next home. When prices started to drop many found themselves in homes with loan balances higher than property values due to no down payment purchases, rather than pay it many walked away and foreclosures rose putting more downward pressure on the market. Eventually prices did stabilize as buyers who had been priced out of the market were able to purchase due to lower prices and rates.

 

Finally, the market collapse a decade ago was not a result of a recession caused by inflation, or high interest rates, but rather because of poor lending standards and mortgage products that created an unnatural inflation in housing prices. When investors started looking into the mortgages being sold on the market that were based on little to no verification of ability to repay on homes that had climbed in value at unheard of rates, they stopped buying those mortgages. The result was a domino effect that pulled the nation, and the globe, into recession.

 

One very large impact that compounded the decline in values was the lack of qualified buyers to purchase homes as they hit the market—lower demand with higher supply continued the price declines. Many families that might have qualified to purchase a new home were prevented from doing so for several years because of the foreclosure or short-sale on their credit records. This group was a significant number that otherwise would have absorbed inventory on the market.

 

Since 2010 buyers of homes have overwhelmingly been purchasing homes in which to raise families and not to make money. They have been qualified for their mortgages by proving income and funds for purchasing. Most buyers have been putting more than the minimum required down payment, so they have “skin in the game” and will be less likely to walk away or panic sell if/when market prices dip.

 

The run up in real estate values over the past several years was created by qualified buyers competing with other qualified buyers to purchase homes. The mixed market we now see, with housing values starting to decline, sales down one month and up the next, is based on affordability due to the price increases exacerbated by the increase in rates since the start of the year. The pool of buyers has not shrunk, and will not shrink because of any market transition, what has changed is the price for which they can qualify and/or their desire to purchase in a market they see as transitioning so they are waiting for prices and rates to drop.

 

All of this said, and I apologize for my long-winded path to this point but I wanted to be somewhat thorough, I do not feel there is a large cost to waiting, but I also do not feel there is a large benefit to be gained by waiting to purchase a new home.

 

Many sellers, or would be sellers, are holding properties off the market as they desire a higher price for their home than the market will support. For the past few years new listings have come on the market at the highest price in the neighborhood, or just beyond, and buyers have been over-bidding the list price to obtain the home. More recently homes are selling at or just below list prices, causing potential seller to hold off until prices increase again.

 

Note, “again.” Because of the lack of ability to build more housing near the coasts (let’s define “near” 25 to 30 miles from the ocean from San Diego to Santa Monica) there is limited ability to expand supply, any increase in demand will push up housing prices. Natural attrition is due to death, divorce, and relocation will dictate supply, population growth and aging as more people enter the age of homeownership will dictate demand. Demand will not be able to be sated with new housing, hence existing housing will be what is available for buyers to bid on. Over time Southern California coastal residential housing goes up. How soon and how much changes depending on what time frame, over longer periods of time  however prices climb.

 

Looking into 2019 housing prices will dip in some areas, drop in others and stay somewhat constant in other areas. Rates should remain near current levels, possibly declining towards the middle to end of year if/when economy slows down, but since they are already so low (historically discounting the false rates created by the government and Fed starting in 2008) there will not be a significant drop as we saw following the last recession. What I do see happening is families slowly moving their geographical areas of desirability to neighborhoods they can afford. The home they can purchase to purchase for $500,000 is no longer available in the neighborhood they were hoping to purchase in one, two or three years ago; that $500,000 home is now selling for $550,000 to $600,000. Where homes were selling for perhaps $425,000 – $450,000 two or three years ago are likely the $500,000 homes today. The decision will be, do we buy a home in an area we did not want to purchase in before or do we wait and hope real estate prices drop 15-20% to $500,000 to buy where we initially wanted to, or do we continue to rent with rents still increasing?

 

I believe the cost of waiting will be that if you stick to your desired area to purchase and hope for prices to decline significantly you will continue to rent until some major change in your financial situation to purchase a home in that area. The cost of waiting into the future will be lost opportunity in neighborhoods of lesser value that you can afford as families start to purchase in those areas, slowly increase their values and changing the neighborhoods with higher ownership density.

 

If you are able to purchase a home in your desired area, I do not see any significant cost in waiting, but not a lot of benefit to waiting either. Yes, prices may dip some more into the new year, yes rates may dip some more into the new year; however when will you know that the dips have stopped? When will you know that the time is perfect to purchase with rates and prices, and what will be on the market at that time?

 

My advice has always been, when buying a home, if you like and can afford it buy it. You will be there for a long time, any changes in price over the early years of ownership will be more than made up for in the long run due to where you are buying—California. Your ultimate cost of waiting may be hoping the house you really like still being on the market when you feel the price is right.

 

Sellers on the market now want to sell, make an offer!

 

Disclaimer on this very long-winded update:

 

The WR&MU on October 21, 2016 had a total miss on my part for predicting economic recession, in fact the exact opposite happened as I did not put a lot of thought into Trump winning the election and the resulting economic growth. That will provide a filter for any predictions I make, as well as others—it is all an educated guess and different guesses result on how each guesser is trained to read the tea leaves.

 

Have a question? Ask me!

 

Rates for Friday November 30, 2018: The comments by Fed Chairman Powell resulted in a nice rally for bonds and as a result the 30 year conforming rate is lower than the previous Friday for the first time in five weeks. Will it hold? Per comments above a lot depends on the meeting between Presidents Trump and Xi this weekend.

 

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

30 year conforming                                               4.625%       Down 0.125%

30 year high-balance conforming                       4.875%      Down 0.125%

 

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

 

 

 

 

We have three seasons in Southern California that cycle annually: Dry, Fire, Mud. When it is dry we have more fires, when it rains we get mud in many areas but especially the fire zones and the rain creates more undergrowth that gets very dry leading into the next fire season causing more and bigger fires that are then turned to mud slides….yet our state and local governments continue to allow more and more housing to be rebuilt where there are histories of fires, floods and mudslides. See Einstein’s definition of insanity.

 

Since it has been quite a while since we have had a drenching like yesterday, I hope your roofs, windows and other parts of your homes held tight. While we have had no water penetration the same cannot be said of the other scourge for most of the region: ants finding ways into our homes as their colonies get flooded out. The battle is on! We seem to have won the first one but know there are more to come. All that said, I don’t mind the ants a few times a year as opposed to snakes or very large arachnoids!

 

Enjoy the official start of the holiday season as parades and other activities begin!

 

Have a great week,

 

Dennis

 

Economic Jokes:

 

Every question asked of any economist has the same answer, resulting in no definitive answer: “On the one hand blah blah blah; one the other hand blaw, blaw, blaw.”

 

A company is looking to hire an analyst. There are three finalists, a physicist, a mathematician and an economist.

 

The physicist walks into the interview and on the white board is a question; What is the answer and why: (12-4)3 + (4(13/4)+7) – 21 = ?

 

After explaining his process as he is writing down several equations using vectors, calculus, etc he writes down 23, circles it and puts down the marker and stares at the interviewer. The interviewer says, “Thank you, please erase your work and send in the mathematician.”

 

The mathematician enters, sees the equations and mumbles to herself as she solves the problem using basic math, circles the answer of 23. She caps the marker, looks at the interviewer and says, “It is basic math and the answer is 23.”

 

The interviewer says, “Thank you, please erase your work and send in the economist.”

 

The economist walks into the room and sees the question and reads aloud, “What is the answer and why.  This is a job for an analyst position correct?”

 

“Yes.”

 

“Are you the one I will be reporting to?”

 

“Yes.”

 

“Are you the one giving me the information to analyze and I presume it will then be passed along to your superiors?”

 

“Yes.”

 

The economist looks around the room. Walks to the door and locks it. Pulls a chair up very close to the interviewer, leans in and whispers, “What is the answer and why….what do you want the answer to be?”

 

The economist got the job.

 

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

11-16-18 What was the cost of waiting?

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Question of the week:  What was the cost of waiting?

 

 Answer:  Over the past few years we had a lot of clients who were waiting to buy a new home because they felt the market would correct at some point and they could purchase the home they wanted for less money. About once a year for the past few years our question of the week has been, “what is the cost of waiting.”

 

On March 2, 2018, this was the question of the week and in my answer the worst case scenario I presented, with highest cost increase and highest interest rate, has come to pass.

 

Instead of creating my own sales prices for the answer to this week’s question, I will use the median home price for Los Angeles County as published by the California Association of Realtors.

 

What was the cost of waiting to purchase a home from September 2017 to September 2018?

 

In September 2017, the median priced home in the county was $606,110, in September 2018 the median price rose to $634,680, and increase of 4.7%. During this same time the interest rate for a 30 year fixed rate loan for borrower with a 740 FICO score rose from 3.75% to 4.75% for the loan amounts needed to purchase the median priced home with 20% down.

 

With the prices and rates climbing it follows that the mortgage payment also increases. With the 20% down payment on the median price the loan amount in September 2017 was $484,890, in 2018 the loan amount rose to $507,940. As a result, the monthly payment for the median home in 2017 was $2245, this year that payment is $2650 per month, an increase of $405 per month, or about 18%.

 

Long-time readers of the WR&MU know the mortgage industry used debt-to-income (DTI) ratios to qualify income for mortgage applicants. The DTI is calculated by adding up the applied for housing payment (mortgage principal and interest, property taxes, homeowner’s insurance, homeowners’ association if applicable, aka PITI) plus credit obligations (credit cards, auto and student loans, alimony and parental support payments, etc). Once the obligations are added together that number is divided by your gross income and the result is your debt-to-income ratio. Example: your new house payment is $3000 per month, you have $1000 per month in revolving debt and car loans for a total of $4000 per month. Your salary is $10,000 per month. Divide the $4000 in obligations and house payment by your $10,000 per month salary and your DTI is 40%.

 

The catchall rule of thumb for most homebuyers is that the house payment, PITI, should be around 35% of your gross income. Why 35%? Because when we add in your other credit obligations we do not want to exceed 45% of your gross income for most loan programs and many households have about 10% of their income going to other debt obligations.

 

Using the 35% rule of thumb, how much more income did you need to qualify for the median home in September 2018 from September 2017?

 

Including estimates for taxes and insurance the PITI for the median home in 2017 with 20%, a 30-year fixed rate of 3.75% was $2998 per month. Divide the PITI by 35% and we see that you needed income of about $8550 per month ($102,600 per year) to qualify for the median September 2017 home.

 

The September 2018 median priced home in LA County, also with 20% down but with a rate of 4.75% for a 30-year fixed rate, had PITI of $3438 per month. Still using 35% as the factor for calculating qualifying income you needed income of about $9825 per month ($117,900) in September 2018 to purchase the median price home.

 

Summing up, the cost of waiting that past year resulting in needing about 5% more funds for down payment, a 18% increase in your mortgage payment and you would need to earn 15% more to qualify.

 

The last number is the most critical, in general you need to earn 15% more in 2018 than you did in 2017 to purchase the same home.

 

Most people are not getting 15% raises from year to year. So how do the numbers look based not on a hypothetical but a reality?

 

Bill is single and approaching retirement—he plans on retiring between 2023 and 2025. He pays almost $2000 per month in rent and recently came into a financial windfall of about $200,000. We first met in March of 2017 and proceeded to have several conversations regarding his ability to qualify, and more importantly what he felt comfortable paying, for a new home. Involved in the decision process were his tax preparer, financial advisor and real estate agent. The parameters were to keep Bill’s total housing payment, PITI, at $3000 per month or lower and including closing costs not to spend more than about $120,000 to purchase his new home. This put us in a price range of about $550,000 for a new home, with a 4% interest rate our limitation was on the amount of cash to close the transaction not the monthly payment.

 

Bill actively entered the market looking at homes and condos that fell within his cash to spend and monthly payment parameters. You may recall that rates fell from the Spring of 2017 into the Summer and Fall, which was good news for Bill as he by using his cash to close as his limiting factor the same price homes became cheaper as the monthly payments went lower with interest rates.

 

Unfortunately, Bill could not find the right home for him, or by the time he made the decision to write an offer on a home another buyer had already entered escrow.

 

Because of the market as time went on the neighborhoods in which he was looking had rising prices, so to purchase the same house he needed more and more down payment to meet the 20% down we had budgeted.

 

Today, even with higher rates his ceiling of $120,000 to spend still is a sales price of around $550,000, however because of the rising prices in the market the 3-bedroom homes in that price range are now 2-bedroom homes in the same neighborhood, or perhaps even a neighborhood that is the next level lower in terms of price, location, etc.

 

Because of his hesitation throughout 2017 and into 2018, Bill has to either change his parameters to purchase the home he wants, or change locations where the average prices are lower, which creates a challenge for his commute to work, visiting family and where he would like to live in retirement.

 

We are now looking at condominiums for Bill as the prices are usually lower in the same market and we can purchase something within his cash spending restrictions as well as stay within his monthly payment restriction even with the HOA dues. In the meantime his rent has increased 5% and the landlord is considering selling the property to take advantage of current real estate prices.

 

Waiting has cost Bill not in cash to close or monthly payment but in size of home, location of home and/or type of home he can purchase today as opposed to one year ago.

 

All of which leads to a follow up question: What will be the cost of waiting, or is there one, to purchase your new home in 2019, or 2020, instead of now or the near future? A question I will explore in next week’s WR&MU.

 

 

Have a question? Ask me!

 

 

Consumer prices jumped last month. The prices consumers pay for goods and services rose 0.3% in October and year over year the general inflation index climbed 2.5%, the highest it has been in the past year, according to Consume Price Index data released this week. Leading the charge upwards in prices were gas, rent and used vehicles. This data would put upward pressure on rates, however the data used to calculate inflation by the Federal Reserve is the “core” rate of inflation—which strips out volatile gas and food prices. The core rate for October came in with a 0.2% monthly increase and the annual rate dipped to 2.1% from the prior month’s rate of 2.2%. This is a bit confusing with the two different calculations, consumers are seeing a cost of living increase of 2.5% from last year, but if they didn’t buy and gas or clothes they only saw an increase of 2.1%. Because the core rate was within expectations and the Fed’s target inflation rate mortgage rates were not impacted by the news.

 

Consumers are the most important part of our economy. Personal spending and consumption accounts for 65-70% or our economy, because of this retail sales data is an important indicator of the economy’s strength. The retail sales data for October were released this week and included revisions to the prior two month’s data. In the revisions retail sales in August and September went from slightly positive to slightly negative, the first back-to-back negative months since 2015. For October, the data showed the biggest increase since last fall with an increase of 0.8% for the month. As with the CPI data, the spending increase was led by gasoline prices, and helped with a surge in new auto purchases. Taking out gas and car sales and the increase in retail sales drops to a much more modest 0.3%, so good news for auto dealers who saw an increase in sales, not as good news for retailers who saw their customers spend on gas and cars instead of sweaters and meals out. Overall the news is neutral for mortgage rates, the revisions downward for August and September will likely result in a revision downward for 3rd quarter GDP growth from the initial estimate of 3.5%, which is good for rates, and the increase in total sales being led by volatile gas prices and one-off new car purchases is discounted by investors.

 

Rates for Friday November 16, 2018:  Rates should be a bit lower today than they are, but it appears lenders are hanging on a bit to increases in the markets (higher prices equal lower rates) due to the weekend before Thanksgiving and potential volatility in the short week. Overall rates see some upward pressure easing this week due to stocks selling off and a comment from a member of the Fed board that decides rates indicating that moving forward the Fed will be very cautious—putting some question into whether there will be three rate increases as scheduled in 2019.

 

 

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

30 year conforming                                            4.75%       Flat

30 year high-balance conforming                    5.00%      Flat

 

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

 

 

 

 

Unfortunately, it often takes the misfortunes of others to appreciate the fortunes we have. Such is the case for most of us this week as we gather with family and friends for Thanksgiving. Coming together in gratitude for what we have in our lives as we observe the incredible upheaval thousands, tens of thousands, of families have had in our Southern California region via the media, both traditional and social.

 

Those impacted by the wildfires in Southern and Northern California are extremely grateful for one of America’s most important organizations, the Red Cross, who show up at every disaster with all sorts of assistance from arranging shelter, food, water, clothing, even dolls and toys for children. This comes at a cost, which is almost all from charitable donations.

 

Here is where the readers of the Weekly Rate & Market Update can help those who no longer have a home this Thanksgiving, or are displaced, due to the fires, by clicking this link and making a donation of any size: Red Cross Donations

 

We will have guests at our table from near, my father in-law, and far as two families from Chicago, Leslie’s cousins as well as a family spending their vacation week in Southern California whose daughter has gone to camp for several years with our daughters. I am anticipating some talk about the Cubs and Bears.

 

My family and I are very thankful for the support we have had over the decades from our clients, business and referral partners. As well the incredible family at Stratis Financial who work diligently to ensure our clients’ files processed, approved and funded with the utmost on professionalism and efficiency.

 

Have a wonderful Thanksgiving with family and friends wherever the holiday may take you.

 

With gratitude,

 

Dennis

 

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

10-26-18 Why can’t you use my bonus income to qualify me for my new home?

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Question of the week:  Why can’t you use my bonus income to qualify me for my new home?

 

 Answer:  Income must be of a constant and continuing nature.

 

What constitutes “constant and continuing?” Generally, at least a two year history of receiving the income fulfills the requirement. There are some exceptions which I will cover below, but the question of the week specifically addresses bonus income, and much of this will apply to overtime and commission income as well.

 

Bonus income typically fluctuates from year to year depending on the matrix upon which the bonus is based. Because of the fluctuation there must be a guideline for the lender to consider the income for qualification purposes for your mortgage application. The industry standard is that if you have received a certain type of income for two years are more then we have reached the threshold of constancy. To reach the continuing nature policy we generally need a statement from your employer that the bonus will in all probability continue; this guideline is usually met with a letter from the employer or with a Verification of Employment (VOE) that we send your employer to complete. The VOE has sections for your employer to complete stating the length of employment, income for each of the past two years plus year to date broken down into base, bonus, overtime and commission. As well there is a place to indicate whether the continued payment of bonus, overtime and commission is likely to continue in the future.

 

Whether your bonus is paid annually, quarterly, monthly or per pay period does not matter for qualifying, we will convert the amount received into a monthly amount based on the amount received for the past two years, and if applicable year to date. The rule of thumb for bonus income, as well as overtime and commissions, is to use at least a two year average, unless the most recent year is lower than the prior year in which case the lower amount is taken.

 

Example: You have been with your company for five years and have received bonuses every quarter for the past three years and the bonus is paid on the first paycheck after the end of the quarter. In 2016 your bonuses totaled $12,000, in 2017 $12,600 and on your October 15th pay period your total bonuses year to date including September totaled $9700. The total amount received in bonuses is $34,300 over the past 33 months (two full years plus nine months in 2018), so we divide the total amount received by the time period over which it was received and get $1039.39, this is the amount of bonus income we will use for your qualifying for your mortgage—provided your employer verifies that you are likely to continue to receive bonuses in the future.

 

Example 2: Same employment scenario as above, however in 2016 you received $12,000 bonus, in 2017 you received $10,000 bonus and through September you have received $9000 in bonus income as reflected on your recent paycheck. It is evident you received $1000 per month in 2016 and so far in 2018. However, in 2017 your bonus was $833.33 per month—this is the bonus income that most lenders will use for income qualifying as it follows the standard guidelines from Fannie Mae and Freddie Mac. Even with a letter from your employer regarding 4th quarter bonus the lender will take the worst case scenario when calculating income.

 

All this covers how we do calculate and count your bonus income, back to our question, why is your bonus income not allowed? Reading through the above it is likely because of any or all of the following:

 

  • You have not received your bonus for at least two years
  • Your bonus has been inconsistent, i.e. you received bonus income in 2016 but not 2017
  • Your employer will acknowledge that your bonus is likely to continue, which we saw not infrequently during the recession with employers very hesitant to put in writing bonuses are guaranteed or likely to continue creating a legal document an employee may use against the employer should bonuses be canceled.

 

Any non-wage employment income is generally treated in a similar manner, most prevalent being overtime, commission and self-employment income.

 

As mentioned above there are some exceptions to the two year income rule:

 

New job—If you are starting a new job, depending on the circumstances, we can generally count your income with a short, or perhaps no, history of employment at the new job. Typically, showing at least thirty days of income is needed. If you are transferring from working for Dennis Sprockets to Smith Widgets and in somewhat the same type of work, we can use your new income—but not overtime or bonus unless expressly addressed and quantified in an employment contract and if you received similar amounts in your prior job. New professionals can also have “young” income used for qualifying with proof of education in the field and an employment contract. If transferring geographically and a new job with a new company we can usually use your new employment income before you start on your job with an employment contract and separate letter from a senior executive at the company.

 

Spousal support—If you have a divorce decree or separation agreement that is recorded that includes your receiving alimony or child support we can use that income once you can prove you have received six monthly payments in a timely fashion. Note the income must be received as one payment every six months and not six months’ worth of payments upfront. As well the agreement must indicate the income will be received for at least three years after the date of your mortgage application; for instance, if you are receiving $800 per month for each of your two children until they are 18 and your son is 16 then we will only accept $800 for qualifying for your youngest child.

 

Retirement income—If you receive a pension or social security income you do not need to show a two-year history. Provide your award letter stating the amount of income you are to receive and we will use the current income for social security; for a pension, we must show that the pension income will continue for at least three years.

 

Asset accounts—Most individuals and couples have their financial assets in a retirement account and/or taxable investment and bank accounts. Depending on several factors these accounts could be used for qualifying income. Retirement accounts can be used for income if you are taking regular withdrawals from the account. Depending on your age and the type of retirement account you may be having to take mandatory distributions on an annual basis, this can be used for income. Or if you are taking regular distributions we can use those amounts as income as well. If you have funds in non-retirement accounts there are some cases where we can perform a calculation called “asset depletion” so we can achieve qualifying income.

 

Rent—If you are purchasing a new home and renting out your existing home there are guidelines we can follow to use the rental income from your current residence as qualifying income to offset the mortgage, tax and insurance payments.

 

Bonuses, commissions, retirement, wages, there are many different sources of income; whether yours is eligible for use as qualifying income can depend on different factors. If you, or someone you know, if looking to purchase or refinance property please contact me to ensure you are fully qualified for the transaction you want to make.

 

 

Have a question? Ask me!

 

Don’t bury the lead. A couple of big pieces of economic news, since weekly update is primarily about mortgages and real estate we will start with the major news on home sales. This week the California Association of Realtors released its housing report for September. Based on the data I am of the opinion the real estate markets have become a buyer’s market. Los Angeles County saw the median home price increase 4.5% from August and 4.7% from 2017 to a value of $634,680. While the median price increased there was a dramatic drop in total sales. Sales volume for the month was down 18.3% from the prior month and 22% from last year. Neighboring Orange County saw both the median price and total sales volume drop in September. The county median price of $825,000 was down 1.6% for the month and 3.3% for the year, total volume was down 20.3% from August and 21.8% from September 2017. The data that supports my contention of our regional market being a buyer’s market is the increase in the number of active listings on the market and the time a home is on the market before it is sold and enters escrow. Basic premise, more supply leads to lower prices. Supply is growing and demand is not due to several factors, primarily higher interest rates.

 

Impacts sales and refinances. The softening market not only impacts sellers as they see values slowly erode, but also can have an impact on homeowners looking to refinance to lower payments, consolidate equity lines or obtain equity for various reasons. How? With a softer market there is more downward pressure on appraisals and therefore values needed for refinancing, or the rate and cost of the refinance due to potentially higher loan to value based on potentially lower appraised values.

 

The national economy is not following housing. This morning the initial estimate for the Gross Domestic Product was released and it showed growth in the quarter of 3.5%, slower than the 4.2% GDP growth in the second quarter. The expectation is that 2018 will end with total economic growth of 3% or greater, the first year with such growth since 2005. The report was, as you can expect, sprinkled with good news most notably the decline in inflation from 2% in the second quarter to 1.6% in the third quarter. That is good for consumers, but is it good for the economy? With some weakness in business spending and investment, slowing inflation and the equity markets dropping in recent weeks the signals are there for economic growth slowing, or reversing in 2019. It is quite possible, probable?, that a mild recession will begin in the third or fourth quarter of 2019. Overall the GDP news was market neutral as the growth figures met expectations.

 

Rates for Friday October 26, 2018: With stocks falling this week investors have been moving their funds to bonds and mortgages resulting in rates falling from last Friday. We remain in a volatile market and caution is strongly advised when thinking about floating your rate.

 

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

30 year conforming                                            4.75%     Down 0.125%

30 year high-balance conforming                       5.00%     Down 0.125%

 

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

 

 

 

 

Few things are better than a short trip that feels like a very long trip. That was the experience Leslie, our daughter and I had last week when we flew out to Boston to see our college freshman. Leslie and I walked about 13 miles on Saturday, mostly up the Charles River while the internationally famous Head of the Charles rowing regatta was going on, watched a performance by the marching band, where ironically our daughter is the tallest in the flute section as she was in high school, then we all enjoyed a fantastic and leisurely lunch/dinner at an Italian restaurant, topped off with the ubiquitous visit to Mike’s for some pastries. Another long walk to LL Bean to get our girl squared away with duck boots for the coming winter and it was back to our hotel for a few hours of catching up and just being together. A packed day, with plenty of needed hugs, mostly for me, and just seeing how happy she is with her friends, college and new city and mom and dad have come home at ease.

 

Now we are looking forward to our next time seeing her when she is home for four weeks at Christmas!

 

Have a Happy Halloween and don’t get too spooked by the gremlins and goblins showing up on your doorstep…I’ve noticed they leave you alone if you bribe them with some sugary treats!

 

Have a great week,

 

Dennis

 

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

9-21-18: Should we refinance and use proceeds to payoff debt?

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Question of the week:  Should we refinance and use proceeds to payoff debt?

 

 Answer:  Not if you can payoff your debt without tapping into your equity.

 

With rates still low many families are looking at their accumulated consumer debt and wondering if they should refinance, or get a home equity loan, to payoff their debt and lower their monthly credit payments. Being able to get a rate for a cash-out refinance possibly somewhere around 5% for a 30 year fixed rate mortgage seems better than paying high, possibly as high as 20%, on credit cards. But is it a good idea?

 

On paper, the math seems really good, but a deeper look shows it probably is not for most families.

 

Take a scenario where you have a home worth $550,000 and you have a balance of $365,000 on your current mortgage with a rate of 3.75% and your payment is $1850 with about 25 years left on the loan. You do not intend to move anytime in the future as your kids are in, or just about in, middle school.

 

For various reasons, some emergency, some just consumer spending, you have accumulated about $35,000 in revolving debt (credit cards) with minimum payments totaling about $700 per month, have a few collections from past medical expenses for another $2000, a car payment of $560 with a balance of $20,000 and you need to replace your roof which will cost about $20,000. You have about $10,000 in savings and are making maximum contributions to your retirement accounts. You have been trying to pay down your credit cards but have not seem to be able to make a dent in the total balances and are at the stage where you make minimum payments and pay off most of what you charge each month.

 

Recapping, you have about $57,000 in debt costing you $1260 per month in minimum payments, this includes collection accounts with no payments being made, and you need about $20,000 for a roof. Should you either refinance and add $77,000 to your mortgage or get a home equity line for close to that amount, to payoff all your debt, fix the roof and start over with only a mortgage payment? To do so would require about $442,000 for a mortgage balance, or your current mortgage with a home equity line.

 

We would want to keep your new loan amount at or below 80% loan to value, which would be a new mortgage for $440,000, a bit short of what you require but you would be able to pay that off quickly with your new financial obligation shift.

 

Taking a look at a new mortgage of $440,000 for a cash-out refinance at 80% loan to value you would be looking at a rate of about 5% depending on credit score and other factors. This would make your new mortgage payment about $2350 per month, or $500 more per month than what you are spending now on your credit obligations plus replacing your roof. With the new loan and $500 per month higher payment you are getting rid of $1260 in monthly payments for a net savings of $760 per month.

 

Sounds pretty good, payoff debt, get a new roof and save $1260 per month. But is this something you should do?

 

Scenarios I run by clients before initiating the application for such a debt-relief refinance are as follows:

 

Reconsider including your vehicle loan in any debt consolidation scenario. Auto loans are generally lower rates than credit cards, and in the past several years with decent credit rates below mortgage rates. They are also fully amortized, meaning with every payment you are paying down the loan balance until it reaches zero. In the above scenario, you have about three years left on the loan and you are paid off. If you include it in a mortgage refinance you will be paying for the car as part of a thirty year mortgage. Taking the loan out the new mortgage balance would be $420,000, your payment on the mortgage would drop to about $2245. You would now have a mortgage payment that is just over $400 per month higher than your current mortgage, you are paying off debt with payments of about $700 month for net savings of $200 plus have funds to replace your roof.

 

Consider a home equity line of credit (HELOC) instead of refinancing your mortgage. The rate will be higher, and adjustable with it going up the next few years, however you will have the opportunity to save on monthly payments, or not depending on how you handle the repayment of the HELOC. If you go this route, you obtain a HELOC for $50,000 (following advice above and leaving vehicle loan out of the consolidation plan) at a rate of Prime plus one-half of one percent. Prime is at 5.00% today giving you a rate of 5.5% on the HELOC. The minimum payment for most equity lines is interest only, in this case that would be about $230 per month which looks like a big savings over what you are paying now—and that is the debt trap. If you pay interest only you are in worse position than you are now. Yes, your monthly cash flow is better but you are making no reduction in the balance. If you get a HELOC my very strong recommendation is you continue making the same total of payments you were making before, except instead of paying minimum payments on credit cards you are paying down your HELOC balance. Currently you are paying $700 on the cards, so pay $700 on the HELOC, this will decrease the balance $470 per month at the current rate. If the rate never changes and you make $700 per month payments you will have the HELOC paid off in about seven years. However, the rate will very likely be going up at least one percent in the next year, and perhaps more in the future. When calculating long term HELOC rates I usually use an average Prime rate of about 8% to be safe, at this average rate and a payment of $700 per month your time frame to payoff the loan for your credit card debt and roof repair is about eight years.

 

Equity lines often have balloons. One factor to consider with the equity line is the repayment terms. Many are “open” for ten years, meaning you can reuse them as the balance is paid down/off, and during this period they require only interest only. After ten years HELOCs are either fully amortized for the remaining term, or are due with a balloon payment. Because of the change in terms later in the loan it is important to have a payoff plan on the HELOC when you obtain it so you are not in a position in the future where you need to potentially refinance again in the future.

 

Create a realistic plan to payoff you consumer debt yourself and just borrow to pay for the new roof. Make a very realistic budget of your net income and expenses, including debt payments. See what adjustments you can make to your lifestyle and how much those adjustments will save you per month. Take the savings and dedicate them to paying off your credit cards. Many years ago, before Dave Ramsey became a multi-millionaire by counseling families on paying off debt I would help clients with debt payoff plans that pretty much matches Ramsey’s plan. I called my plan Stop, Drop and Roll. Stop using credit. Drop your credit card balances one at a time, starting with the lowest balance. Roll the payments into the next lowest card when one is paid off. It takes commitment to the payments and whatever austerity measures you put in place but if followed will enable you to payoff your consumer debt without refinancing your mortgage and adding tens of thousands of dollars and years to your existing mortgage.

I am in the debt business, a mortgage after all is a debt—the largest debt for almost every homeowner. If you are feeling overwhelmed with your debt please contact me and I can help you, at no obligation or cost, work through options for paying down/off your credit obligations.

 

 

Have a question? Ask me!

 

August home sales are a bit of a mixed bag. While the total number of sales are down in the state from last year prices continue to rise and days on the market are stretching out in most areas as inventory on the market has grown for the past five months. Looking at the data it looks like the market is trending towards equilibrium between buyers and sellers after we have experienced several years of a sellers’ market. Statewide total sales in August were down 1.8% from July and off 6.6% from August 2018. The statewide median price, $596,410, is up 0.8% for the month and 5.5% from last year. Sales and prices locally are in line with the statewide direction on prices and units sold. In LA County, the median price in August was $607,490, up 1.7% from July and 6.4% from last August, the total number of sales were up 5.5% for the month but down 8.9% from last year. Orange County’s median price in August of $838,500 was 1.1% jump from July and 6.3% increase from 2018 with total sales showing 2.9% drop month to month from July and a 9.7% fall from 2018.

 

 

 

Rates for Friday September 21, 2018: Rates are up from last Friday as investors put money into the equity markets (i.e. stocks) and hedge against next week’s Federal Reserve Open Market Committee meeting—these are the folks that set the Fed rates that impact consumer rates, such as the prime rate that determines equity line rates. The Fed will bump their funds rate by 0.25%, that is expected and priced into the markets. Hedging is occurring because of what the FOMC members say about the future of short term rates, how many future increases, how soon, how high? While they will not directly answer these questions those who can read the Fed tea leaves will discern much from the minutes of their meeting. The consensus appears to be that the Fed will raise rates faster and higher than previously thought. Lock your rate when you can!

 

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

30 year conforming                                            4.625%    Up 0.125%

30 year high-balance conforming                      4.875%     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.

 

 

Long time readers of the WR&MU know I can be a bit of a data geek…well more than a bit. So I found it interesting that the link to the Waffle House index last week had one of the highest click rates I can recall from readers. For those in Southern California the nearest Waffle House is in Goodyear, Arizona, 337 miles away from the Smith abode in Long Beach. There have been plenty of trips home in the family van from Scottsdale that have begun with breakfast at Waffle House, but have not been to the one in Goodyear as I recall. I do love me some waffles!

 

Looks like a perfect fall weekend, which commences tomorrow (fall and the weekend) in Southern California with great weather, playoff implication baseball plus college and pros going at it on the gridirons. Enjoy your weekend and the first days of fall!

 

Have a great week,

 

Dennis

7-27-18: What is primary factor that could slow the housing market and cause a drop in prices?

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Question of the week:  What do you see as primary factor that could slow the housing market and cause a drop in prices?

 

Answer:  In addressing this question I will be using the Southern California market as the “housing market” since that is where the majority of the Weekly Rate & Market Update live.

 

The most basic principle of economics is that of supply and demand determine price. If supply is greater than demand prices drop, if demand is greater than supply prices rise.

 

The past several years we have seen demand greater than supply and as a result prices have risen. During this period the number of sales has also increased. With prices and transactions increasing we have seen increasing inventory hitting the market but demand increasing faster than the inventory available for sale.

 

The most recent data show home prices continuing to grow, but the number of transactions decreasing. Demand still is higher than supply, but supply is shrinking. Will this lead to even higher prices, or is it an indicator that the market will slow and the total number of sales and prices will decline? This is the multi-billion dollar question, literally.

 

Over the past several weeks I have been in several discussions with professionals in the real estate, mortgage, accounting, commercial lending and financial services industries with the primary topic being, what is the threat to housing markets, what will cause the market to slow and put downward pressure on rates.

 

Demand will remain high for some time, which puts a nice floor under the market to absorb supply. Supply will remain tight for some time absent some major economic event, such as very high unemployment. With these factors prices should be strong. So where is the threat.

 

There is a difference between demand for a product and ability to purchase a product. Instead of demand we will say “desire.” There will remain a high desire to purchase homes by families, this becomes demand when their ability matches their desire.

 

There are two ways to purchase a home, with a loan or without a loan. Those able to purchase homes in Southern California without a loan are not overly prevalent, much more so in the very high end of the market, but those transactions have limited, if any, impact on the overall market. Therefore, the real estate market for the overwhelming majority of buyers and sellers is dependent on home buyers being able to obtain a mortgage for their purchase.

 

Qualifying for a mortgage has three main components, known as the three C’s: Credit, Capacity, and Cash. Credit is how much you owe, what your payments are and your history of making those payments. Capacity is your ability to repay the mortgage, i.e. income. Cash is how much money you have for down payment which determines the loan amount.

 

Every borrower is limited by one of these factors when determining the maximum sales price and mortgage for which they qualify.

 

While there are those who desire to purchase a home who have less than good credit, there are not enough of them to impact the housing market.

 

With increasing prices, which means higher loan amounts, and higher rates it takes more income today to qualify for the median priced home than it did last year, or the year before, or the year before, or… However, we have found that most of our clients have incomes sufficient to qualify for the home price they feel comfortable purchasing. While necessary income to qualify is a damper on the housing market due to prices and rates increasing, we have not seen it as a strong barrier for most families entering the market.

 

This brings us to cash. It is my feeling, and supported by many in my conversations, that cash for down payment is becoming the primary barrier to home ownership for many families. Further, part of this barrier is self-imposed.  What does that mean?

 

There has always been, and likely will always be, a very negative sentiment about mortgage insurance. For those not aware of mortgage insurance, it is a cost added to mortgages that are greater than 80% loan to value. As a result of this sentiment most families feel they need to have 20% of the purchase price to purchase a home. While they are working to save the 20% prices are increasing on homes they could have purchased with mortgage insurance.

 

Two families, the Bakers and the Fryerrs, each make $100,000 a year in 2016.  The median priced home in LA County is about $500,000 so $100,000 is needed for 20% down payment. Both families worked hard to save and both had saved $50,000. The Bakers decide they want to continue to save until they get to the 20% down number and figure by really cutting their expenses they could do this by June 2018.

 

The Fryers decides to purchase a home, and because they have only 10% down pay mortgage insurance. They purchase the median priced home for $500,000, get a $450,000 mortgage with an interest rate of 3.375% and pay $1990 for the mortgage $110 per month in mortgage insurance for a total of $2100.

 

Even with rising income and rising prices the Bakers meet their savings objective of 20% down payment and purchase the median priced home in June 2018. They pay $585,000 for the home put $117,000 down and get a $468,000 mortgage at 4.5% with a payment $2370 per month for their mortgage.

 

Due to the rising prices and their declining mortgage balance and that they have made twenty-four consecutive mortgage payments on time the Fryers are eligible to remove their mortgage insurance payment and lower their monthly payment by $110 per month to $1990.

 

By not waiting until they saved 20% for the down payment the Fryers have almost tripled their initial down payment in equity and have a house payment that is almost $400 per month lower than the Bakers and paying about $1000 less per year in property taxes.

 

So, what is the issue with mortgage insurance?

 

It takes a lot of money to purchase a home in California, especially in most Southern California areas. Even 10% down can be a very large percentage of your total gross income, 20% down may exceed your gross income. Because of this cash is the biggest barrier to homeownership in the region. However, those willing to pay some form of mortgage insurance can get in with as low as 3.5% down for FHA mortgages, or depending on the price 5% or 10% down for non-FHA mortgages (if you are a Vet you can purchase with zero down).

 

Those who have been waiting for to save higher down payments have lost tens, hundreds of thousands of dollars in equity while chasing higher prices.

 

While I see cash to close as the biggest barrier to home ownership, I know there are options to lower that barrier. As well, I do not see the housing market undergoing an extreme correction due to this barrier, but it could slow down the number of sales and cause home prices to slow or decline slightly in the medium to long term.

 

Do you, a family or friend have savings in your bank, investment or retirement accounts and want to purchase a home but feel you do not have enough money saved to do so? Call me to go through your options for purchasing your new home.

 

 

Have a question? Ask me!

 

It’s summer, it’s hot and so was the economy in the second quarter. Today the Gross Domestic Product for April through June was released and while it was lower than expectations it still showed 4.1% growth, almost double the 1st quarter growth. Leading the way was the consumer as spending jumped 4% in the quarter, mostly on services. Shrinking inventories kept the growth under 5%, however the low inventories are a positive for 3rd quarter growth as those inventories will need to be replaced causing economic activity. This is the first quarter with over 4% growth in the third quarter of 2014. In the report this morning was a 3% growth in the price index, which was above expectations. The report is negative for mortgage rates due to the combined strong economic growth and increase in prices. While the mortgage markets have built in rate hikes of 0.25% by the Federal Reserve in September and December, more reports showing economic growth and prices similar to today’s reports will push mortgage rates even higher.

 

Rates for Friday July 27, 2018:  While mortgage markets had no impact to today’s GDP numbers since they had been anticipated, the same cannot be said for Japanese credit markets. Earlier in the week speculation was out that the Japanese central bank was going to alter its policy and push up interest rates in Japan. If true this would impact U.S. credit markets and to get ahead of the actual news investors sold off American long term debt, like mortgages. The sell-off resulted in rates jumping on the speculation. The Japanese central bank meets on Monday and Tuesday and investors have held their position on long term debt to see what, if any, policy changes will be made. Should the speculation be true most of the impact has already been priced into our markets, if the announcement is no change we could see rates dip back down next week. For this Friday rates are up for the week, more so on the high-balance products than the conforming products, rates are at five week highs.

 

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

30 year conforming                                            4.50%                         Up 0.125%

30 year high-balance conforming                      4.75%               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.

 

On Sunday we visited the King Tut exhibit at the California Science Center. I highly recommend the exhibit, especially if you are a bit of a history geek like I am (okay, I’m more than a bit). We went early and it was not very crowded, though it did become more so towards the end as Leslie and I read everything, much to the chagrin of the 18 year old, and those mostly walking through caught up to us. The detail and workmanship on many of the pieces from 3,000 years ago is fantastic. Another bonus is the air conditioning!

 

Making the day even better was a short drive to Phillipes, the Original in its 110th year for some French dipped beef sandwiches—they invented it you have to have it!

 

Have a great week,

 

Dennis

7-20-18: What is the process for our mortgage application when we purchase a home?

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Question of the week:  What is the process for our mortgage application when we purchase a home?

 

Answer:  Mortgage application packages are very deadline oriented. For a purchase this is because we have a closing date that is agreed upon by the buyer and seller, for a refinance the deadline is when the rate lock expires.

 

Here is a not so detailed look at the timeline on a purchase, much of it is the same as with a refinance.

 

Ideally the first step in your mortgage process when purchasing a home is we have detailed conversations and review your records to determine your ability to qualify for a mortgage to purchase at a certain price with a certain amount down. This is the pre-qualification, or pre-approval, stage. We review your income by looking at paystubs and tax documents. We obtain a credit report to see you credit score and confirm your balances and payments on outstanding credit. We look at your asset statements so we know how much we have in funds for down payment, closing costs and reserves if necessary. And we discuss your objective, long term plans and other factors that may influence the amount and type of mortgage that would be ideal for you and your family. This step can take an hour or several days depending on the complexity of your finances or issues we need to address. Next step: Look at houses and write offers.

 

You have your offer accepted and we begin the formal application process. At this stage we complete any information for the loan application so you can sign the application and disclosures. We collect necessary documents supporting income, credit, obligations, funds being used for closing and other items we discuss as necessary. Once we have the signed application and necessary items we lock in your loan rate for a specified period of time that matches your escrow time frame but in 15 day increments (i.e. lock for 30 or 45 days). As well, we communicate with both your agent and the seller’s agent to establish clear lines of communication, confirm who will be the person for the appraiser to contact to set up inspection of the property. We also initiate contact with the escrow officer to make sure s/he and our staff have each other’s contact information as they will be sending a lot of information and documents back and forth. Finally in this stage, we order the appraisal. This stage is generally one to two days depending on how quickly you get the required items to us. Next step: Processing.

 

During the processing period our staff is collecting the necessary information to ensure underwriting will approve your loan as applied for. All your information will be reviewed and verified. During the review our staff will ask questions that may need additional information to support answers: what is this large deposit, there are some statements in the tax return that indicate another business or sources of income to verify. At this time they are also collecting necessary documents for the approval. The appraisal report will be completed and reviewed. We will obtain a copy of the preliminary title report on the property. Escrow will send us the escrow instructions which detail the agreement between you and the seller. We will communicate with your insurance company to ensure there will be sufficient coverage of the property to protect the lender should there be fire or other major damage. Any loose ends or issues that may arise as all this information is collected and reviewed are addressed and the necessary parties are contacted and additional information requested to cover the issue so underwriting will approve the file. The timing for this stage depends on the how quickly others respond to our request for items. If the listing agent puts off the appraisal inspection for a week or ten days that slows us down. If we request additional statements on an account, tax returns on a business entity, source of funds, this can slow us down if the information is not forthcoming. If everything is into us in a very timely manner this step should be about 10 business days. Next step: Underwriting.

 

The mortgage application package, at this point several inches thick (our record is over 1 foot high with clients who had multiple companies and properties resulting in about ten tax returns for various entities). All the documentation, disclosures, reports are then sent to the underwriting department. Once received it is assigned to an underwriter who reviews the file and issues an approval, usually “conditional” approval as the underwriter generally asks for items to complete the file, an updated paystub, a letter of explanation for some issue, clarification on the appraisal, support for continuing income from commissions, overtime or bonus, a myriad of items may come up. The underwriting period is generally two to three business days. Depending on the additional conditions requested the time frame from initial approval to final approval can be as short as 3 to 4 days or considerably longer depending on conditions requested and ability to provide them. Next step: Loan Docs.

 

Once we get the approval and are moving into the final stages of the transaction we will issue to you the Closing Disclosure (or CD). We usually like to issue this via DocuSign as when you acknowledge the CD will start a timer on when you can sign loan documents, which is three days not counting Sundays and holidays. So if we issue the CD on Friday and you open the link and “sign” on Sunday you cannot sign loan documents until Wednesday, if you had signed on Friday you could sign docs on Tuesday. Does one day make a difference? Next step: Funding.

 

The loan documents will be sent to escrow and available for you to sign the day you are eligible to sign after the CD rescission period is up. Escrow will contact you to set up a time to sign in their office, or if more convenient set up a mobile notary. At this time we will know the amount of funds needed to complete the closing of the transaction. Escrow does not take personal checks, the funds for closing need to be either via a cashier’s check or a wire (see important note below). After you sign loan docs and your funds are in escrow we fund the loan. If we have the loan docs in our office in the morning and all is in order we can fund the day we get the loan docs, the time from doc signing to funding can be as short as one day. Next step: Closing.

 

Closing occurs when the deeds are recorded by the title company at the county recorder where the property is located. The grant deed conveying title from the seller to you is recorded first, then the trust deed securing the property as collateral for the mortgage is recorded. Depending on what county you live in recording happens either the same day (Orange County is a same day recording county), or it occurs the next day (Los Angeles County will not allow funding and recording on the same day). This is where that one day difference on the CD can impact closing. Since we cannot fund and record on the same day in some counties we very rarely fund a loan in those counties on a Friday for many reasons, for one you are paying interest for two additional days on a property you do not own. Second, if something happens to the property, or the current owner, we have two loans on the property and two insurance policies (your policy must be in effect before we can fund). As you can imagine this creates several issues that need to be unwound. While something could happen to the property between funding on Wednesday and recording on Thursday, it is less likely than something happening between funding Friday and recording Monday. So the closing step is either same day or next day. Next step: Move In!

 

NOTE, VERY IMPORTANT! There has been a wire fraud scheme occurring with real estate closings. The scam works like this. You are in escrow to purchase a property and you receive an email from what looks like your escrow officer. It is instructing you to wire your funds for closing and provides the necessary information. The email has the escrow company’s email address, signature on the email looks the same and by all accounts is from the escrow company. This email will come near closing but before funds are usually asked for from escrow. What has occurred is that at some point your email was hacked, it could have been last month or last year or even longer ago. The hackers run your emails through their filters which are set to look for keywords in your emails, such as “escrow,” “mortgage,” “purchase home,” etc. When any keyword occurs the account is monitored to determine is you are engaging in a real estate transaction. The next step is to determine who is who in the communications and then spoof the email account for the closing agent, i.e. escrow, and send you the email requesting you wire the funds into the scammers account. Do not reply to the email, do not send the funds to the account listed in the email and do not call the number listed in the email as chances are it is not the escrow company you are using. Before sending funds call the escrow officer from the number printed on the escrow instructions you have, or by getting the number from us or your agent, and verify the amount of funds required and ask them to send you an email with the wire instructions, then call back to verify the information is correct.

 

As you can see the time frame for closing an escrow on a purchase can be 30 days or a little less, or longer depending on everyone having the information needed and requested and providing it in a very timely fashion. Closing times are dependent on many actors all performing together and when needed.

 

Have a question? Ask me!

 

Consumers appear to be happy. Retail sales for June were reported on Monday and showed a 0.5% increase from the prior month. This is good news, what was pretty incredible news was that May retail sales were revised upward 0.5% for a total increase of 1.3% from April, that is a very rare number to reach. Auto sales had strong months in May and June, up almost 1% each month, and restaurants also showed strong increases, up 1.5% in May and 2.6% in June. This news indicates consumers willing to increase their discretionary spending, what’s more discretionary than eating out instead of at home? The news is somewhat negative for rates as higher consumer spending supports stronger economic growth, which leads to higher interest rates.

 

Historic is the word to describe yesterday’s jobless claims report. Last week 207,000 initial jobless claims were filed, the lowest weekly amount since December 1969. Continuing jobless claims, as sign of length of unemployment, are at 1.738 million which is at a level last seen in the early 1970s. The news is interest rate unfriendly as a tight labor market can, should, lead to some wage inflation which will lead to higher interest rates.

 

Rates for Friday July 20, 2018:  The economic data suggests rates should be higher than they are, especially with the Fed selling off billions of dollars of mortgages and bonds every month. However investors, who ultimately control interest rates, do not look at just American economic data when making their decisions on what to buy and sell for long range profits, the also look at foreign economies, and as importantly domestic and international politics. It is the latter that has investors holding onto their fixed return investments (i.e. mortgages and bonds) as a hedge against some major event that could trigger a run on bonds and therefore lower rates. It is a strange set of market circumstances we have been experiencing. Thankfully we have benefited from flat rates for the past two months.

 

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

30 year conforming                                            4.375%            Flat

30 year high-balance conforming                      4.500%             Flat

 

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

 

We have been down to one kid in the house since early in the month as the younger one is spending her annual month in Minnesota at camp, unfortunately for the older one she is basically termed out this year and must spend the summer at home. It has been nice to have her home with us since she leaves in 4-5 weeks to Boston for college and then we will be a one kid home for a few years before the younger ones decides to leave as well. We are in that period when our oldest is still our daughter and little girl but our relationship is slowly transitioning to daughter and adult. Certainly a unique summer for our family, and one that we will fondly remember for years to come. I hope you and your family are having a great, and unique, summer as well!

 

Have a great week,

 

Dennis

3-9-18: Why do I need to pay for a home inspection and an appraisal?

/in /by

 

 

Question of the week: Why do I need to pay for a home inspection and an appraisal?

 

Answer: With many of our clients being first time buyers this is a question that pops up as they try to learn the vernacular of real estate, understandably because the appraiser does inspect the property.

 

The quick answer is, if you are getting a mortgage you will most likely need to pay for an appraisal*, and if you are buying a home you should pay for a home inspection.

 

(*) There are instances with conforming loans (Fannie Mae or Freddie Mac) where the Automated Underwriting System (AUS) will have in the approval findings that they (Fannie or Freddie) will purchase the mortgage from the lender with an “appraisal waiver” instead of a full appraisal. Not uncommon for the waiver to show up, but not real prevalent either. For our purposes today we assume there is no waiver.

 

While both the appraiser and home inspector look at, or inspect, the property, each is doing so with a different purpose and therefore have different reports for you to assist in your decision to continue with your transaction as agreed to with the seller, or perhaps ask for some modifications to the agreement. The purpose of the appraisal is value as collateral, the purpose of the inspection is condition of the property.

 

As mentioned, the appraiser’s purpose is to objectively determine the fair market value of the property for the lender. Since the home you are buying is the collateral for the lender there needs to be sufficient value to support the loan for which you are applying. Therefore the primary work of the appraiser is to evaluate the property in comparison to other similar properties that have sold, and are on the market, in the vicinity.

 

Many people are surprised at how little time most appraisers spend in the property when they are inspecting it. When the appraiser visits the property s/he will take pictures of the exterior and interior, note if certain compliance laws are being followed (smoke and carbon monoxide detectors, strapped and raised water heaters), and if there are any noticeable issues visible by cursory inspection that can create a safety hazard or impact value (broken windows, exposed wiring, obviously deteriorating roof). If there are any very noticeable adverse conditions the appraiser will take pictures and note in the report. The appraiser will also measure the property to include the floor plan in the report. Depending on the size and condition of the property the process takes 15-20 minutes.

 

Most of the work for the appraisal is done away from the property at the appraiser’s office researching recent closed sales, pending sales (in escrow but not closed) and active listings on the market, before visiting the property. Looking for properties that as close as possible to the subject property in square footage, bedroom and bath count, amenities such as pool or spa, condition and proximity, the appraiser notes the similarities and differences and of course the prices of the properties.

 

Using a matrix in the report the appraiser begins making adjustments to the “comps,” or comparable properties. One property is bigger by 200 square feet, so there is an adjustment of $10,000, another has only one and a half bathrooms and the subject has two full baths so there is an adjustment of $15,000, one property sold four months ago and the market has gone up since that sale resulting in a $17,500 adjustment.

 

The appraiser makes adjustments as the properties are compared and in the final column adds up the plusses and minuses to the comparable properties and adjusts the sales (or list if pending sale or active listing) price. If your sales price is $500,000 and the comparable sold for $490,000 but is slightly smaller, in similar condition and closed the sale last week the appraiser may have made $11,000 in adjustments for an adjusted price of $501,000. The next comparable sold for $515,000 but is bigger but in worse condition as it was a rental and the appraiser deducts $17,000 from the price for an adjusted value of $498,000.

 

From the adjusted prices the appraiser presents the opinion of value, if the other comparables are similar to the ones in the above example the appraiser will most likely conclude the value of the property is the sales price, $500,000. The lender now has professional, third party confirmation of the value of the collateral proposed for the loan.

 

In short, a bit late at this point to be short, the appraiser’s work is done without much need for detailed inspection of the property.

 

If you are meeting a home inspector at the property you are purchasing and intend to shadow him or her as the inspection is made you need to block at least two hours on your calendar. The purpose of this inspection is to thoroughly inspect all the physical attributes of the property and test all the mechanical systems. Because of this the inspector will need to spend quite a bit of time at the property. My advice is to always accompany the inspector as s/he does their duty. You will learn a lot about your new home and the inspector will make verbal comments to you that will make reading the report a bit easier later.

 

The inspector will crawl under the home if you have a raised foundation. Climb up on the roof. Go in the attic. Put electrical instruments in all the plugs. Switch every wall light switch on and off. Turn on all the faucets in the sinks and showers and then flush the toilets. Walk the perimeter of the building looking for cracks and how water drains. Doors will be opened and shut. Heating and cooling systems turned on and off. If appliances are included they will also be tested. The floors and flooring will be noted for wear and tear.

 

A good home inspector will look at your home in a more intimate way than your family doctor will you during a physical. Well, perhaps.

 

As the inspection is going the inspector is taking detailed notes which will result in report this is, no surprise given the scope, very detailed. The inspector will, or should, go through the report with you indicating what items are noted and to what extent there should be some concern on your part for future repairs or replacements.

 

It is easy to read through a report and think, “wow, what a mess…” but for most buyers in California you are buying a used home, most likely at least thirty or forty years old, and in many cases like ours over sixty years old when we purchased it almost twenty years ago. There will some flaws, some wear and tear. The important aspects of the inspection are any items that are in need of costly repairs or replacements in the not too distant future. Is the roof nearing the end of its life? Is the heating system antiquated? Does the electrical need upgrading?

 

The appraisal is a required expense for most buyers due to obtaining a mortgage to purchase the property. The inspection is optional, however I would never advise buying a home without first obtaining a home inspection from a professional inspector. Even if you are purchasing new construction it is strongly advised; a friend of mine, many real estate agents reading this will know, George Harper, who was an inspector for many years once told me, he found as many issues in brand new construction as older homes due to quality of workmanship when tract housing is being built—don’t assume because it is brand new it is perfect.

 

The purpose of the appraisal and the inspection are different, but both are important to your home buying process.

 

Have a question? Ask me!

 

Some really big news this week, both economic and political, that can impact rates. On the political side President Trump had an interesting day yesterday—well he has one everyday but for our purposes in composing the WR&MU it was particularly interesting. Directly impacting the economy of the United States and other nations Trump an authorization on tariffs for steel and aluminum imports. This could, probably will in the short run, result in higher prices for those commodities and the products requiring steel and aluminum for manufacture. Ordinarily this would result in investors fleeing stocks and buying bonds, thereby lowering interest rates. Yesterday it was also announced that Trump will be meeting face to face with Kim Jong-un the “supreme leader” of North Korea, at Kim’s request, for nuclear talks. Ordinarily this would be bad for bonds, meaning higher interest rates as good news has investors selling safe, fixed income investments and buying more risky stocks and equities. Neither bit of news had a tremendous impact on the markets, which is surprising to me as I thought the tariffs would result in a pretty strong boost to mortgages and lower rates.

 

Good news is bad, bad is good, when it comes to interest rates. Long time readers of the Weekly Rate & Market Update know this—bonds are fixed return investments, as are mortgages, and are considered “safe” because if you buy them you know what your return will be based on the interest of the bonds. When there is bad news that leads to an uncertain future investors engage in a “flight to safety,” purchasing fixed incomes products like bonds and mortgages creating lower interest rates, and to do this they usually sell stocks, resulting in lower stock prices. The converse is true with positive news, bonds are sold, resulting in higher rates, and stocks are purchased.

 

Today we had some unexpectedly very positive economic news. The Labor Department released its February employment report and it vastly exceeded expectations. The consensus range for new hires in February was 152,000 to 230,000 workers added to payrolls. The actual number was 313,000 new workers added to nonfarm payrolls, as well January’s new hire totals were adjusted up 54,000 workers. The only negative in today’s report was the concern for wage inflation with the strength in employment expansion with average hourly earnings year over year growing 2.6%, more than half a percent over inflation. The unemployment rate remained at 4.1% for the fourth month in a row. With the very strong employment signally economic growth, and possibly supporting a fourth increase in rates from the Fed this year instead of the scheduled three increases, rates opened higher this morning to the surprise of no one in the industry.

 

Rates for Friday March 9, 2018: With all the news this week rates remain constant from last Friday, our fifth straight week at the same rate on conforming. I will admit to being a bit surprised we are not higher than last Friday with the news this week.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.50%      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.

 

As most of you know, I am a big sports fan. This coming week is the start to one of my favorite sporting events—the NCAA Men’s Basketball Tournament. Few events have the nail biting finishes, numerous upsets and the energy that occur over three weeks of March Madness. On Sunday the teams participating will be announced and the brackets revealed showing each team the path they need to take if they are going to be cutting down the nets on April 2nd in San Antonio. On Monday campus and office tournament organizers across the country will be posting rules and “costs” and millions will fill out their brackets for “bragging rights.”

 

Every year there is more and more parity in college basketball, and this season was no exception, which should ensure us another tournament filled with surprises and excitement. I hope you are able to enjoy it as much as I will.

 

Have a great week,

 

Dennis

2-9-18: What is the impact from the falling stock market prices on mortgage rates?

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Question of the week: What is the impact from the falling stock market prices on mortgage rates?

 

Answer:  Before we answer the question, let’s do some Econ 101 review on stocks, bonds, rates and markets.

 

Traditionally there is an inverse relationship between stocks and bonds, when stock prices go up, bond prices go down and vice-versa, remembering that when bond prices go up rates go down, when bond prices drop rates rise. Therefore if stock prices drop, traditionally bond prices rise which means interest rates drop.

 

The underlying reason for the inverse relationship is that stocks are inherently volatile and bonds are inherently stable. When you purchase a bond, and keep in mind your mortgage is someone else’s investment that acts like a bond, you are buying a fixed return for a fixed period of time. If you purchase a 10-year bond for $1000 paying 5% per year, you know you will receive $50 per year in interest. In ten years, after receiving $500 in interest payments you will receive your $1000 initial investment back.

 

If you purchase $1000 of stock in DCSmithCo you may receive 20 shares if you purchase on Monday, 21 if you buy on Tuesday or 18 if you purchase on Wednesday. When you go to sell your shares in the future you may receive your original $1000 back, or $1250, or $875 depending on the market conditions.

 

Because of the volatility of stocks, when there is an “event” that creates uncertainty, investors will engage in “flight to safety,” taking their money out of stocks and purchase bonds. Supply and demand: selling stocks puts excess supply in the market causing prices to drop; buying bonds puts excess demand in the market causing prices to rise—and rates to drop.

 

Fundamentally, when there is a large sell-off, or correction as we appear to be having, in stocks investors selling their stock holdings purchase bonds causing rates to drop.

 

That is not what happened this week. Investors have been selling both stocks and bonds.

 

Why was the traditional relationship broken?

 

An underlying, perhaps overlying, reason for the sell-off in the stock market that started last Friday was concern about rising interest rates by investors. The Fed has been taking actions to create higher interest rates. First, they have announced that there will be at least three increases to the Fed Discount Rate in 2018, which will trickle through to increases in the prime rate, which trickles to other consumer rates. Second, the Fed has begun to sell off Treasury bonds and mortgages it began purchasing in 2008. Selling up to $30 billion per month of these assets, the Fed is adding supply to the interest rate market. What happens when there is over-supply in bonds? Prices drop which means rates rise.

 

With the expectation for higher rates, with the action by the Fed to increase rates by selling interest bearing assets in the market to support those expectations, Mortgage Backed Securities (MBS) have seen prices drop causing rates to rise. Reminder, MBS are the financial instruments that are bought and sold that determine mortgage rates.

 

What is the impact on falling stock prices on mortgage rates? In this current cycle, there is no impact on mortgage rates from falling stock prices. However, falling bond prices (which means higher rates) have had an impact on stock prices, causing them to fall.

 

Markets are very volatile right now as the stock market goes through a correction and the bond and mortgage markets search for stability trying to understand the impact the Fed asset sell-off will have in the long term.

 

 

Have a question? Ask me!

 

There was no significant economic data released this week that would impact mortgage rates—or stock prices. The only somewhat meaningful set of numbers released this week was unemployment claims for the week of February 3rd, which showed 221,000 initial claims filed and continuing claims down 33,000 to 1.9 million still on the rolls. What was very significant about the Department of Labor report was the four-week moving average of initial claims is the lowest in 45 years. The last time there were this few unemployment claims filed the American work force was at approximately 88.4 million workers, compared with approximately 161 million today.

 

While the number itself is not a direct impact on rates, the underlying message of a strong labor force that is showing more being employed and upward pressure on wages lends support to higher rates as they reflect a growing economy. The extrapolation is this will bring inflation and unless rates are higher inflation could become an economic danger, eroding returns on investment and slowing growth as people are priced out of consuming certain products and services. This is the real basis for the volatility in our markets—higher rates and potential inflation.

 

 

Rates for Friday February 9, 2018: As I type this Friday morning from the tire story, see below for those curious, mortgages are seeing their first real positive day in over a week. Is it a short-term blip slowing rising rates, or have we seen the recent jump in rates halted until the next cycle? Conforming rates are up another one-eighth of one percent (0.125% ) from last Friday, the third week in a row with such an increase, but high-balance conforming rates are flat from last week. Anyone who is thinking a downside rate correction is very near and is floating to capture a dip is taking a very big risk. Something I have said for years in up markets bears repeating, rates tend to go up like a rocket and come down like a feather. Lock your rate when you are able.

 

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

30 year conforming                                            4.25%       Up 0.125

30 year high-balance conforming                       4.375%     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.

 

Well they say things come in threes and for the Smith household threes have been tires. Last week Leslie had a mishap and needed a new tire. Yesterday the oldest clipped a curb in front of the house and took out a chunk of tire the size of a half-dollar. This morning I am on my merry way to work when I notice the car feels funny, pull up two houses down from ours and see one of my tires is a pancake—with a nail imbedded in it. Thank goodness for AAA, something we have had for 23 years and added our daughter as soon as we could.

 

I see the flats and tire expenses and waiting as the penance I must pay for the joy experienced last Sunday when the Eagles once again overcame underdog status to win their first Super Bowl. Thankfully my daughters were not fast enough with their cell phones to record Dad’s hysteronics as he flapped around the house singing the Eagles fight song and freely expressing his joy at the result of an incredible game. If going through three flat tires in a short period of time is the price of a championship I look forward to a similar cost in June, or perhaps in November, when the Flyers or improbably the Phillies, mimic the Eagles success!

 

Have a great week,

 

Dennis