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4-27-18: Should I buy the home I rent?

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Question of the week:  Should I buy the home I rent?

 

Answer: This question has a reverse side as well, “Should I sell my rental property to the tenant?”

 

I have a client who contacted me the other day about wanting to sell a home she rents out because the tenant has given notice. She is nearing the end of the time frame of living in a home two out of prior five years to avoid capital gains and the time is perfect. I asked if she contacted the tenant about purchasing the home, however the tenant is giving notice because they had already entered a contract—otherwise did not think of asking to buy the home or they would have.

 

This was a missed opportunity for both parties. When they decided they wanted to own their own home the tenant should have informed the landlord, who gladly would have worked with them to see if the right price and terms could be found, saving each party a lot of time and expenses.

 

What are the opportunities for the landlord and tenant in having the tenant purchase their rental home from their landlord?

 

From the landlord side, there are several advantages to selling to your tenant.

 

For most landlords selling their rental property the status of the tenant is a primary factor in how the process will proceed. If it is a single-family residence then the buyer will almost always be looking to owner occupy the property, so the property needs to be vacant.

 

Typically, the dwelling should be vacant during the marketing period to maximize the ability to show the property to the most buyers and encourage offers. If you have a long-term lease with the tenant you will need to wait until the lease is nearing termination and provide notice that the lease will not be renewed and the tenant must vacate. If the lease is month-to-month you will need to give the tenant a 30 day notice to vacate. Depending on your tenant at this point it can get sticky if your tenant decides to not vacate on time. In California, the tenant has significant rights to delay vacating the property and can prolong any eviction process for a very long time. Several times over the years I have witnessed landlords paying tenants to vacate properties to get the process over and property vacant for sale or closing.

 

If you tenant is cooperative and does vacate the property you will continue to have costs, mortgage, taxes, insurance, maintenance, until you close escrow with a buyer, without receiving any rent. Depending on many factors you could have a vacant, non-revenue producing property for two, three, four or more months.

 

Speaking of maintenance, when selling to the tenant there may be some repair work requested by the tenant-buyer following a home inspection, however there will not be the costs of preparing the home for showing. No landscaping for curb appeal, refreshing flooring, painting, or other touch-ups most sellers go through before marketing their home to try to maximize value.

When selling to your tenant you have a bit more control of the escrow period, which can be especially important if your intention is to purchase a new rental property, rolling over your proceeds in what is known as a 1031 Exchange to postpone capital gains taxes. When participating in a 1031 Exchange there are time frames to identify your “up-leg” and close on that transaction, if you miss them then your gains from the sale of the property are subject to capital gains. If your sale is an open market sale with two or three other transactions that you have little to no control over it is more difficult to extend the closing date of the sale of your rental property if you need more time to find and close on your up-leg.

 

Your costs of sale can be significantly lower selling to your tenant than going on the open market. You can have more control over timing of the transaction. If you are considering selling your rental property it is advisable you contact the tenant to see if they are willing and able to purchase the home.

 

From the tenant’s perspective purchasing the home you have been renting also has several advantages to going to the open market.

 

One big plus is you do not have to pack, move and unpack. You will not have the added expenses that occur when you move, new shower curtains, dustbins, pieces of furniture, lamps, fixtures, etc. Of course, now that the home is yours you may want to make some changes, however we have found most tenants who purchase their rental home make fewer changes and spend less than those who move into a new home.

 

Familiarity is another major benefit. If you like your neighbors and neighborhood you become a homeowner and still go to the same store for groceries, walk to your local coffee shop to meet friends, go to the same schools for your kids and the same dog park with Phideau.

 

Utilities, seemingly a small thing, but no getting set up with gas, electrical, cable. Dealing with timing to meet vendors or pay deposits.

 

Not every home is perfect, even if you purchase a newly constructed home there can be, and usually are, some issues. Purchasing the home you have lived in for a while you already know the quirks and issues, some of which your landlord may be willing to fix as part of the transaction.

 

A major plus, does not always happens but usually does, is the tenant-discount. Because the landlord does not have to have the property vacant, require your cooperation to show the property if on the market while you are still living there, nor spend the funds to get it “market-ready,” we typically see some discount to market for the tenant-buyer. Some landlords have refused to offer any discount and see their tenants leave the property instead of purchasing the home and the landlord later regrets trying to maximize price instead of maximizing combination of total costs and efficiency of the sale.

 

One more consideration both tenants and landlords should consider, rent control. In more and more cities throughout the state, and at the state level, the rent control movement has been gaining momentum. I will not use this space to present the case that rent control does the exact opposite of what it is intended to do, however it is something to consider if you are a tenant or landlord.

 

From the landlord side, if you have owned a single family home as a rental in an area that appears somewhat likely to be under rent control you will want to consider all options for the future. This includes the option of selling the property, getting out of the landlord business and paying your taxes, or selling the property and going through a 1031 Exchange to purchase a rental property in an area where there is less of a chance that rent control will be enacted. If the option that appeals to you most is selling the property, contact your tenant. If the tenant does want to, or cannot, buy the property then start the process of putting the home on the market.

 

From the tenant side, if rent control goes into effect your options down the road become somewhat restricted as there will likely be fewer units on the market for you to rent when the time comes and the rent you will be paying will likely be significantly higher. If you are in an area where rent control appears to be likely and you have been thinking about purchasing a home in the somewhat near future, say one to two years, then consider moving up that time frame. Call a mortgage professional (I would be an appropriate call…) to get pre-qualified and determine your purchasing power. I can also provide a ballpark price range for the home and if there is a near match and you like the home you have been renting then contact the landlord and make an offer. If the landlord does not want to sell then you know your price and we can hit the open market to see what is available.

 

If you are in a residential rental relationship, as landlord or tenant, and are considering severing that relationship by selling or buying please contact me and I can assist you with options and other professionals who can assist you.

 

Have a question? Ask me!

 

Not great but very good. That was the news this morning from the Commerce Department when it released its first estimate of GDP growth for the first quarter of 2018. The estimate showed economic growth of 2.3%, below the 2.9% growth for the final three months of 2017 but higher than the 2.0% estimate many expected. Part of the slower growth was a slowdown in durable goods purchases, namely vehicles, perhaps a hangover from the huge amount sold post hurricane season in Texas and Florida. By beating expectations the news is slightly mortgage rate unfriendly.

 

Costs going up. The cost of employing the average worker climbed the fastest in a decade in the first quarter, increasing 0.8%. Add to this extremely low unemployment, layoffs near a five decade low and some scarcity in qualified labor and the expectation is for wage inflation to start to impact prices for consumers. This is not friendly news for mortgage rates as higher costs and inflation lead to higher interest rates.

 

Rates for Friday April 27, 2018: The benchmark 10-year Treasury note broke through the 3% mark for the first time since December 2013, in doing so dragged other fixed rates on bonds and mortgages up as well. With very strong employment markets and solid economic growth, what looks like peace potentially breaking out on the Korean Peninsula, there is nothing currently on the horizon to cause rates to drop. We see rates climb again this week from last Friday and it is apparent we have broken out of the prior range; now the question is when will rates level out? We could see rates increase another one-quarter of one-percent before this happens.

 

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

30 year conforming                                            4.49%       Up 0.115%

30 year high-balance conforming                      4.75%        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.

 

Pretty remarkable footage of South Korean President Moon Jae-in and North Korean leader Kim Jong Un meeting at their border today and shaking hands. This is historic and appears to heading to being this generation’s version of the Berlin Wall being torn down. There is historic correlation between the Berlin Wall and the separation of Korea.

 

Korea had been ruled by the Japanese since the 1910’s when it invaded and occupied the county. North Korea and South Korea were created in 1945 as part of the treaties ending World War II, with the Japanese removed from the peninsula and Russia and the United States occupying the peninsula, Russia the northern part and the United States the southern part—the dividing line the infamous 38th parallel. This was the same manner in which Germany, and Berlin, were divided after the war with the exception that France and England joined in those divisions.

 

In 1950 the North Korean Army sent troops over the 38th parallel and the Korean War began. The armed conflict ended in 1953 when an armistice was signed by the representatives from the United Nations, North Korea and the People’s Republic of China. The armistice has been in effect these past 65 years but no peace treaty has ever been signed between the two countries, meaning they have continued to technically be at war.

 

The world watches and hopes that the Korean leaders are able to walk the path to peace and put an end to the tensions and potential for more armed conflict.

 

Have a great week,

 

Dennis

4-20-18: Why do you want me to put 21.2% down?

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Question of the week:  Why do you want me to put 21.2% down?

 

Answer: This question came from a new client last week who had been speaking with a representative of a major national lender about loan options for purchasing a new home and called me on the advice of her tax preparer.

 

She is a first-time buyer who was getting ready to write an offer on a condominium unit and began the call the way many do, “I was given your name by my tax person when I told her I was buying a condo. I’m writing an offer tonight, have spoken to my bank already and will be putting 20% down.”

 

After getting the necessary information for income, credit, funds for closing I asked about the property she wanted to purchase, price, if she was sure it was a condominium (a great question for next week) and the homeowners’ association fees.

 

After getting all the information I said, “Everything looks great, you definitely qualify, however instead of putting 20% down I think you should put a bit more down, $6,900 more to be precise, which is 21.2% down.”

 

This prompted our question of the week.

 

Because we look at the big picture and have over 30 years’ experience that allows us to quickly sort through options my suggestion was an automatic response.

 

The offer my client was going to make was for $575,000. If she put 20% down, $115,000, her loan amount would be $460,000. Following my advice putting down 21.2%, which would be $121,900, her loan amount will be $453,100.

 

Why is that important? Look at the rates for today below. The conforming rate today is 4.375%, the high-balance rate is 4.625%, one-quarter of one percent higher (0.25%). Usually, the difference between the two is one-eighth of one percent (0.125%), however the high-balance rate is always higher by 0.125% or higher.

 

What is the difference between a conforming loan and a high-balance loan? One dollar.

 

The maximum conforming loan amount is $453,100. This amount happens to be 78.8% of the $575,000 offer my client wanted to write. The payment on today’s conforming rate for $453,100 is $2262.26 per month. If the client put down 20% the loan amount would be $460,000, which would have a payment of $2365.04 per month. By putting down the extra $6900 she is saving $102.78 per month ($1233 per year).

 

Having inherited money from her recently deceased father she has the funds to put down the extra 1.2% without any financial harm, and with her income situation the extra $102.78 per month makes her a little more comfortable with the monthly housing payment.

 

To be fair most lenders would bring up this option to a client in a situation like this, however we find time and again options with small changes to the what the client may pay in closing or monthly payment or manipulating credit or other factors that can provide another option that may be more beneficial in the long run.

 

Several decades experience enables us to look at a transaction and present several different options to consider so our clients can determine which they feel is the best for them and their family. Experience matters!

 

(The client’s offer on the condo was not accepted, but she is probably writing another offer this weekend, keep your fingers crossed for her!)

 

Have a question? Ask me!

 

The most significant economic news this week was the retail sales report for March, which was very strong. American consumers spent 0.6% more in March than February with auto sales leading the charge. The news was a bit of surprise and put a bit of upward pressure on rates.

 

Rates for Friday April 20, 2018:  With a lack of economic news this week the increase in mortgage rates was a bit unexpected. Some of the increase can be attributed to investors pricing in a rate hike from the Fed in June, and some speculation of perhaps two more increases in the second half of the year instead of the anticipated one. With a lot of government debt hitting the markets this week, and two major foreign buyers of our debt (China and Japan) not real thrilled with the Trump tariffs, plus the Fed putting bonds and mortgages from its portfolio into the market rising rates should not be a surprise. With a lot of supply coming to market prices are going to drop, when prices drop interest rates go up. The conforming rate increases for the first time in eleven weeks and we see the high-balance rate hit its highest level since January 2014.

 

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

30 year conforming                                            4.125%       Up 0.125%

30 year high-balance conforming                      4.625%      Up 0.25%

 

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

 

 

I love the cool Spring weather we have been having and hope it lasts for a few more weeks. My weather sweet spot is low to mid-70’s with breezes, exactly what we have been having!

 

Have a great week,

 

Dennis

4-13-18: What is the IRS Form I have to sign with my mortgage application?

/in /by

 

 

Question of the week:  Why do some of the creditors on my credit report say, “Affected by Natural or Declared Disaster” when I live nowhere near a natural disaster that has occurred?

 

Answer: Because creditors were not all A+ students in geography class.

 

Last year saw many natural disasters across the country, from hurricanes in Texas and Florida to wildfires up and down the state of California. Many people were severely impacted by the disasters, some of the more fortunate only lost some days at work and had the financial burden of cleaning up after the disaster, however many lost their homes, cars, places of work and neighborhoods. While trying to recover from the disasters, dealing with the emotion of such tremendous loss they also had the reality of bills still due, negotiating with insurance companies to cover losses and added costs of where to stay and how to get there.

 

Understanding that financial disasters create tremendous financial burden on those in the impacted areas more and more credit companies are automatically putting into their reports to the three major credit bureaus that the debtor resides in a natural disaster area. The purpose of this statement is to let those reviewing the credit report for the possibility of extending credit will understand if there are any late payments on the account that the natural disaster could be responsible for the late payments. Essentially letting future creditors know there is likely a very good reason for the late payments that should be taken into account when extending credit.

 

So why are these notices popping up on credit reports for people who have not been affected by a natural disaster? Because the notices are put on credit reports using computer models and the computer models, from what we have seen, are using counties or regions when determining which accounts to label.

 

For instance, a couple in Long Beach, which has not been impacted by any natural disaster in decades, has a couple of accounts labelled with the natural disaster language. While Long Beach has not had a natural disaster declared, within the last twelve months there have been severe fires in both Los Angeles and Orange Counties; Long Beach is in LA County and borders Orange. It appears the creditor plugged in LA County as having a natural disaster and tagged all its accounts in the county, not realizing the size of the county and how geographically distant Long Beach is from any of the fires that occurred.

 

In Texas and Florida people are facing similar reporting, while they were not severely impacted by any of the storms they live near enough, or are in counties, declared natural disaster areas that they have had accounts tagged with the natural disaster warning.

 

Does this impact your credit? No, it does not. Does it impact your mortgage underwriting? As this reporting is relatively new on credit reports we have had some underwriters request appraisers note on the report if the property was impacted by a natural disaster.

 

At this point we have not seen any impact on credit scores, positively or negatively. Meaning if you have an account that has a 30-day late payment on the credit report and that same account is labelled “Affected by Natural or Declared Disaster,” we have not seen your credit score not impacted by the late payment—meaning your score is still depressed due to the late payment.

 

If this label is on some of  your accounts do not be concerned that it is in any way impacting your credit or ability to obtain a mortgage or other applied for credit such as an auto loan. It is merely a head’s up to other creditors that if you do have any late payments in the recent past there may be a very good reason why—if you in fact did live in a natural disaster area and were negatively impacted.

 

If you have any questions about your credit report please do not hesitate to contact me.

 

 

Have a question? Ask me!

 

A few reports this week that can impact rates. On Wednesday, the final revision to Gross Domestic Product for the 4th quarter of 2017 was released, and the revision was up 0.4% from the prior revisions. Strength in the increase was mainly attributed to consumer spending, which increased 4.0% from the 3rd quarter. The news was somewhat mortgage rate unfriendly as stronger economic data portends higher interest rates in the future.

 

While consumer spending led the way in 2017, so far in 2018 that has not been the case, causing expectations for GDP growth in the first quarter to be lower than it was in 2017. On Thursday data was released on Personal Income and Consumer Spending. The good news is that wages continue to increase, up 0.4% in February, matching January’s increase. And like January, consumer spending in February was up a lackluster 0.2%. Workers are earning more but spending less, so it is no surprise that the personal savings rate has increased to 3.4%. With the flat growth in consumer spending prices were up 1.8% from February 2017, still below the Fed’s 2% inflation rate target. The increase in earnings is negative for mortgage rates as it creates expectations for wage inflation, however workers putting more of their earnings into savings instead of spending is positive for mortgage rates. Since consumer spending is approximately 65-70% of GDP, a slow-down in spending could slow down GDP growth, keeping upward pressure on rates at bay.

 

Rates for Friday March 30, 2018:  A short week for markets as stock and commodity exchanges are closed today for Good Friday. Conforming rates continue to hold steady from Friday to Friday, seven weeks in a row now with the same rate. Lenders continue to bounce up and down on the high-balance conforming rates (loans from $463,451 to $679,650) and we are down 0.125% from last Friday. Markets continue to be volatile, and there is more turbulence ahead as indicated by the stock markets down in the first quarter of 2018 after nine consecutive positive quarters. My advice remains to lock through your escrow closing when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.375%      Down 0.125%

 

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

 

For parents on young ones I will give you this Easter tip learned from my mom, count the number of eggs you hide so you make sure they are all found. My mom learned this lesson when her young sons found an egg or two in the middle of August, in Tulsa, that had been rotting in the sun and heat since March. There was a special kind of scent and cleaning her boys after they found the putrid little bombs and did what boys do (throw at each other) taught to always make sure all the eggs were found on Easter…

 

Spring Break begins for our kids and many others, after this next week the next stop is summer. Seems like forever for the kids and tomorrow for the parents.

 

Have a great week,

 

Dennis

3-30-18: Credit report states impacted by natural disaster

/in /by

 

 

Question of the week:  Why do some of the creditors on my credit report say, “Affected by Natural or Declared Disaster” when I live nowhere near a natural disaster that has occurred?

 

Answer: Because creditors were not all A+ students in geography class.

 

Last year saw many natural disasters across the country, from hurricanes in Texas and Florida to wildfires up and down the state of California. Many people were severely impacted by the disasters, some of the more fortunate only lost some days at work and had the financial burden of cleaning up after the disaster, however many lost their homes, cars, places of work and neighborhoods. While trying to recover from the disasters, dealing with the emotion of such tremendous loss they also had the reality of bills still due, negotiating with insurance companies to cover losses and added costs of where to stay and how to get there.

 

Understanding that financial disasters create tremendous financial burden on those in the impacted areas more and more credit companies are automatically putting into their reports to the three major credit bureaus that the debtor resides in a natural disaster area. The purpose of this statement is to let those reviewing the credit report for the possibility of extending credit will understand if there are any late payments on the account that the natural disaster could be responsible for the late payments. Essentially letting future creditors know there is likely a very good reason for the late payments that should be taken into account when extending credit.

 

So why are these notices popping up on credit reports for people who have not been affected by a natural disaster? Because the notices are put on credit reports using computer models and the computer models, from what we have seen, are using counties or regions when determining which accounts to label.

 

For instance, a couple in Long Beach, which has not been impacted by any natural disaster in decades, has a couple of accounts labelled with the natural disaster language. While Long Beach has not had a natural disaster declared, within the last twelve months there have been severe fires in both Los Angeles and Orange Counties; Long Beach is in LA County and borders Orange. It appears the creditor plugged in LA County as having a natural disaster and tagged all its accounts in the county, not realizing the size of the county and how geographically distant Long Beach is from any of the fires that occurred.

 

In Texas and Florida people are facing similar reporting, while they were not severely impacted by any of the storms they live near enough, or are in counties, declared natural disaster areas that they have had accounts tagged with the natural disaster warning.

 

Does this impact your credit? No, it does not. Does it impact your mortgage underwriting? As this reporting is relatively new on credit reports we have had some underwriters request appraisers note on the report if the property was impacted by a natural disaster.

 

At this point we have not seen any impact on credit scores, positively or negatively. Meaning if you have an account that has a 30-day late payment on the credit report and that same account is labelled “Affected by Natural or Declared Disaster,” we have not seen your credit score not impacted by the late payment—meaning your score is still depressed due to the late payment.

 

If this label is on some of  your accounts do not be concerned that it is in any way impacting your credit or ability to obtain a mortgage or other applied for credit such as an auto loan. It is merely a head’s up to other creditors that if you do have any late payments in the recent past there may be a very good reason why—if you in fact did live in a natural disaster area and were negatively impacted.

 

If you have any questions about your credit report please do not hesitate to contact me.

 

 

Have a question? Ask me!

 

A few reports this week that can impact rates. On Wednesday, the final revision to Gross Domestic Product for the 4th quarter of 2017 was released, and the revision was up 0.4% from the prior revisions. Strength in the increase was mainly attributed to consumer spending, which increased 4.0% from the 3rd quarter. The news was somewhat mortgage rate unfriendly as stronger economic data portends higher interest rates in the future.

 

While consumer spending led the way in 2017, so far in 2018 that has not been the case, causing expectations for GDP growth in the first quarter to be lower than it was in 2017. On Thursday data was released on Personal Income and Consumer Spending. The good news is that wages continue to increase, up 0.4% in February, matching January’s increase. And like January, consumer spending in February was up a lackluster 0.2%. Workers are earning more but spending less, so it is no surprise that the personal savings rate has increased to 3.4%. With the flat growth in consumer spending prices were up 1.8% from February 2017, still below the Fed’s 2% inflation rate target. The increase in earnings is negative for mortgage rates as it creates expectations for wage inflation, however workers putting more of their earnings into savings instead of spending is positive for mortgage rates. Since consumer spending is approximately 65-70% of GDP, a slow-down in spending could slow down GDP growth, keeping upward pressure on rates at bay.

 

Rates for Friday March 30, 2018:  A short week for markets as stock and commodity exchanges are closed today for Good Friday. Conforming rates continue to hold steady from Friday to Friday, seven weeks in a row now with the same rate. Lenders continue to bounce up and down on the high-balance conforming rates (loans from $463,451 to $679,650) and we are down 0.125% from last Friday. Markets continue to be volatile, and there is more turbulence ahead as indicated by the stock markets down in the first quarter of 2018 after nine consecutive positive quarters. My advice remains to lock through your escrow closing when you can.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                      4.375%      Down 0.125%

 

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

 

For parents on young ones I will give you this Easter tip learned from my mom, count the number of eggs you hide so you make sure they are all found. My mom learned this lesson when her young sons found an egg or two in the middle of August, in Tulsa, that had been rotting in the sun and heat since March. There was a special kind of scent and cleaning her boys after they found the putrid little bombs and did what boys do (throw at each other) taught to always make sure all the eggs were found on Easter…

 

Spring Break begins for our kids and many others, after this next week the next stop is summer. Seems like forever for the kids and tomorrow for the parents.

 

Have a great week,

 

Dennis

3-16-18: What is the difference between Fannie Mae and Freddie Mac?

/in /by

 

 

Question of the week: What is the difference between Fannie Mae and Freddie Mac?

 

Answer: Before we look at the differences between Fannie and Freddie a quick recap as to what they are. Fannie and Freddie are currently owned by the United States government and regulated by the Federal Housing Finance Agency. When you hear or read about “conforming” or “conventional” mortgages, know the reference is to Fannie and Freddie mortgages.

 

Here is how they work. When your conventional mortgage funds the lender will bundle your mortgage with tens of millions of dollars of other mortgages and sell them to Fannie Mae or Freddie Mac. They will then create a bigger bundle, think hundred million, and sell Mortgage Backed Securities (MBS) to investors. So your home loan in Cypress, California becomes an investment for the Shreveport Municipal Employees Pension Fund.

 

Side note: investors purchase MBS as an alternative to US Treasury bonds or other long term fixed rate investments. When investors are buying MBS rates go down, when they are selling, or not buying, rates go up.

 

When investors purchase the MBS of conventional mortgages they do so with the understanding that all the mortgages in their investment have been underwritten and funded under the guidelines of either Fannie or Freddie, depending which on whose mortgages they are buying.

 

To review, your mortgage is underwritten to either Fannie Mae or Freddie Mac underwriting guidelines, after it is funded by the lender it is sold to whichever entity whose guidelines were used to approve the loan, it is then sold as part of a larger package of mortgages to investors.

 

The differences between Fannie and Freddie comes down to their underwriting guidelines. For decades Freddie was known for somewhat looser underwriting standards, in the past few years Fannie has altered several of its guidelines to align with the Freddie guidelines.

 

There differences between the guidelines between the two are not many but useful to know when certain situations arise. For instance for income qualifying Freddie may only require one year tax returns in situations where Fannie may require two years. Certain property requirements are easier for loans going to Freddie as well—for instance we recently had an issue with a property that had a shared private road, Fannie Mae has some challenging requirements regarding maintaining that road whereas Freddie Mac does not have any requirements. Certain instances of how credit and debt are considered, use of co-signers and funds can also vary between the Fannie and Freddie guidelines.

 

If we go into all the differences your eyes will roll back in your head, actually after a few you will quit reading, but there are enough differences that somewhat frequently we will determine to use fund a loan using Freddie guidelines instead of Fannie, or vice-versa, because we need to in order to get the loan approved and funded.

 

Have a question? Ask me!

 

Prices and sales dominated economic news this week. Inflation was subdued in February, the Consumer Price Index rose 0.2% from January and was up 2.2% from last February; strip out volatile food and energy prices, which is what the Fed does when gauging inflation, and prices were up 1.8% from 2017 which is below the Fed’s target 2.0% inflation rate. Wholesale prices were also benign with the Producer Price Index also up 0.2% for the month and 2.5% for the core rate (less food and energy). The price data does not support the Fed looking to alter its stated course of three rate increases of 0.25% this year. Also not support more aggressive rate increases was the retail sales report. Retail sales dipped 0.1% in February from January, a bit counter to expectations with strong job growth and rising wages; an interesting aspect of the report was that nonstore sales jumped 1% from January.

 

Proceed with caution is the advice for the coming week. On Wednesday the Federal Open Market Committee will announce its decision on whether the Federal Funds rate is being increased. The overwhelming consensus is the Fed will bump the rate 0.25% at its meeting, the first of three expected for the year. This rate increase is already priced into the mortgage markets so if there is a 0.25% increase there should be no impact on mortgage rates. Key word in that sentence? “Should.” If the expected rate increase is what is announced, investors will then read with great interest the statement accompanying the rate announcement. Is there any statement regarding following labor markets more closely, concern or attention to wage inflation, changes in expectations for economic growth? Investors will be parsing the statement to see if there is a hint, or a hint of a hint, that the Fed may have four rate increases this year instead of the expected three, or that one or more of the hikes could be 0.5% instead of 0.25% their reaction will be to sell of bonds and Mortgage Backed Securities and we will see rates jump up on Wednesday afternoon.

 

Rates for Friday March 16, 2018: Conforming rates hold steady for another Friday and we see high-balance rates (loans between $453,101 and $679,650) dip after three flat weeks.

 

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

30 year conforming                                            4.25%       Flat

30 year high-balance conforming                       4.375%      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.

 

Arghhh. Why  did I change my bracket at the last second and put in Arizona to make the Final Four instead of Virginia? Because I over-thought it. It’s a mistake I try to avoid in business and working with clients—don’t over think, the solution is right there just implement it—but when it comes to trying to predict sporting events I tend to over-think which is good for my friendly competitors but frustrates me.

 

A great weekend to be a bar owner with St. Patrick’s Day falling on a Saturday night. I am going to assume the take in the collection plates on Sunday morning will be a directly reciprocal to the take in the tills of the drinking establishments on Saturday night. According to Wallethub.com beer consumption tomorrow will be 152.5% greater than usual, and Guinness sales will be 819% higher. I tend to enjoy Guinness throughout the year, why restrict such a fine beverage to only one day? Not only will purveyors of Guinness benefit from the Irish holiday, but so will cabbage sellers and transporters as the cruciferous vegetable sees a 70% increase in shipments the week of the green.

 

Have a fun, and safe, St. Patrick’s Day,

 

Dennis Cleary Smith (now you know what the “C” is for!)

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

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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

3-2-18: What is the cost of waiting?

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

 

Answer: Last week we discussed if we are in a housing bubble and if I thought it could pop and send real estate prices, at least in Southern California, tumbling again. The follow up to that question is, what is the cost of waiting if you feel the market will decline in the future and are waiting “buy the dip” when you feel that occurs.

 

This is something I analyze about once a year and it is time to revisit the topic. Past performance is no indication of future performance, but can give us a look at the costs associated with waiting to purchase should prices and/or rates continue to go up.

 

In January 2017, the median price of a home in Los Angeles County was $509,130; in January 2018 the median price was $564,100.  The 30-year fixed rate I quote every Friday was the same on the last Friday of January 2017 as it was on the last Friday of January 2018 at 4% (after dipping as low as 3.625% in late summer early fall) to the cost of money was constant.

 

Assuming 20% down what was the cost to those who waited to purchase in January 2018 instead of purchasing the year before? Here we see the difference in down payment and monthly mortgage payment between purchasing the median home in January 2017 verus January 2018:

 

PRICE  LOAN AMOUNT RATE  PAYMENT MONTHLY  DOWN PAYMENT
 $       509,130  $     407,304 4.000%  $      1,945  $        101,826
 $       564,100  $     451,280 4.000%  $      2,154  $        112,820
 DIFFERENCE  $         209  $          10,994

 

 

As you can see, waiting one year—even with no change in rates, increased your down payment by 10% and your monthly payment by 10%. In the first year of home ownership the cost of waiting from 2017 to 2018 cost about $13,500—and the cost will increase about $2500 per year. (Note the actual cost is higher since you will have higher property taxes with the higher purchase price.)

 

From a qualifying standpoint, if your monthly payment for the mortgage (not including taxes, insurance, homeowners association if applicable) cannot exceed 30% of your monthly income then from January 2017 to 2018 you would need to make about $8400 more per month to qualify.

 

To recap, by waiting from last year to this a home buyer in Los Angeles County needed to earn over $8400 to qualify for the loan, spend almost $11,000 more in down payment and have mortgage payment that is $2500 more per year.

 

Let’s play what if….What if you are ready to buy today but decide to wait for prices and/or rates to dip back down? And what if during this waiting period prices and/or rates go up? Here is a chart showing price increases of about 5% from today’s median price and rates going up to where I, and others, think we may be by the end of 2018:

 

PRICE  DOWN PAYMENT  LOAN AMOUNT**  PAYMENT 4.375%  PAYMENT 4.50%   PAYMENT 4.625%  PAYMENT 4.75%
 $  560,000  $  112,000  $      448,000  $        2,237  $          2,270  $        2,303  $          2,337
 $  585,000  $  117,000  $      468,000  $        2,337  $          2,371  $        2,406  $          2,441
 $  615,000  $  123,000  $      492,000  $        2,456  $          2,493  $        2,530  $          2,567
 $  645,000  $  129,000  $      516,000  $        2,576  $          2,615  $        2,653  $          2,692

 

Digging into this a little bit, if prices do not go down but rates do you can payment increases of about $33 per month. If the rate stays the same but the prices increase you can see payments go up over $100 per month for every 5% increase in price, and the amount of money needed for down payment will increase as well. Should rates and prices continue to climb the amount of money needed to for down payment and monthly payment increase exponentially.

 

I have ** Loan Amount because as the loan amount increases there is a very good chance that you could move from the conforming rate to the high-balance rate—further exacerbating the monthly cost for the mortgage.

 

There are always a lot of what-ifs when we consider the future and try to predict anything, especially markets. However, there are a lot of factors that would support the chart immediately above, from economic growth to homeowners not selling as frequently as they have in past markets which leads to inventory scarcity.  All the data I see supports that if you are ready to purchase a new home now you should not wait as the downside of higher costs and payments is more likely, in my opinion, than any potential upside to lower costs and payments dependent on prices and/or rates receding enough to make the wait worthwhile.

 

Using those who waited through 2017 as an example, those who were ready in January 2017 that are still waiting have seen not only prices but also rates increase through February, making that wait even more costly.

 

Are you ready to buy? Call me to discuss your options and abilities in today’s market, or find out what needs to be done so you are ready to buy sooner rather than later.

 

Have a question? Ask me!

 

We have a new Fed head, Jerome Powell steps into the chair, previously occupied for the past four years by Janet Yellen. On Tuesday Powell had his first public testimony and told Congress he sees a strengthening economy but did not go so far as to answer directly questions from members of Congress if this means he sees four rate hikes this year instead of the previously assumed three rate hikes. Naturally his not saying, “there will not be four hikes” caused investors to sell on bonds and mortgages pushing rates up.

 

The second adjustment to Gross Domestic Product for the last quarter of 2017 was released and saw a slight revision downward, from 2.6% growth to 2.5%. This had minimal impact on rates. There was no impact on rates with this data.

 

There was some positive economic news this week for workers. In February, personal income rose a very strong 0.4%, the second such monthly increase in a row. Higher wages are great, but what was really strong was the 0.9% increase in disposable income due to the tax cuts hitting paychecks with the reduction in automatic withholdings. With prices up only 1.7% for the year workers are seeing their dollars stretch a bit further.

 

Rates for Friday March 2, 2018: Markets continue to be fairly volatile inter- and intraday depending on the news—either economic or political. When there is this type of volatility it usually suggests there is a breakout, either up or down, approaching. We have a rarity with mortgage rates for 2018 as the conforming rate has remained unchanged for three Fridays in a row, the last time that happened was in mid-December to early January (when we went eleven weeks in a row with no week-to-week change). We always like stability—however I am cautious as to how long we will enjoy it. Lock your rate when you can.

 

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.

 

The Academy Awards are this weekend and I cannot recall the last time I saw so few of the Best Picture nominees—many are on our list to see but we have not had the opportunity to see them. Leslie and our youngest daughter are big fans of the award show, I am not so excited so will no doubt be watching something on Netflix while they are cheering or jeering through the show.

 

Nice to have some rain today, stay safe on the roads!

 

Have a great week,

 

Dennis

2-23-18: Do you think we are in a real estate price bubble that is coming to an end soon?

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Question of the week: Do you think we are in a real estate price bubble that is coming to an end soon?

 

Answer: This question, or some variation, has been asked by several different people in several different settings in the past few weeks. From clients, to real estate professionals, to friends, to attorneys and accounts asking in my office, on the phone, at dinner and in networking meetings, everyone wants to know, will housing markets drop precipitously in the near future?

 

My short answer: No. No, I do  not think we are in a real estate price bubble that is ending soon.

 

My long answer: why I feel this way.

 

One underlying facet to the question is everyone’s experience from the 2007-8 market crash, and the expectation that it will be duplicated because we have experienced a very large increase in real estate prices in the past 5-6 years, similar to the home price increases in the early 2000’s.

 

Comparing our current market to the market at the beginning of the century is not comparing similar actions and motivations of the buyers in the markets.

 

The pre-recession housing bubble was created by several factors. First, was the ease of financing. Following the lead of hard money, then soft money, lenders, Fannie and Freddie were purchasing mortgages from lenders that required no verification of income or assets and in many instances required no appraisal. Further, they were buying loans that were secured by homes with no equity—borrowers were also obtaining second mortgages, usually HELOCs, that took their total loan to value to 100% of the property value.  This easy money enabled many people to purchase homes, or refinance current homes and pull out equity, well above the prices and mortgages they would normally be able to qualify for, which often resulted in borrowers choosing adjustable rate mortgages for lower payments.

 

Second, were the motivations for much of the purchasing activity. Prices go up based on purchases not on refinances, the closed sales become comparable sales used for the next sales in a neighborhood. As prices rose many people felt that had to buy right away or miss out, not just on buying a piece of property but also on the money that could be made as the market went up. The shift in purpose that we saw was people buying investments they would live in instead of buying homes. They were motivated by trying to capitalize on a market, which resulting in highly leveraged and risky purchases, with the intention of selling or somehow cashing out—which was done with refinancing, pulling out equity and using this equity for consumption of goods and services.

 

Third, once the market softened homeowners who were highly leveraged, in mortgages they could not afford once they adjusted, and had little to no money in their home from their savings, found it easier to walk away or sell at a loss than homeowners who purchased in conventional markets.

 

Today, there is a healthy foundation to the housing market. Changes in underwriting policies have ensured that borrowers have the income to debt ratios and credit history to afford their mortgages. When purchasing they have down payment into the property, i.e. “skin in the game.” One more solid piece of this foundation, the overwhelming majority of homeowners who have mortgages that are long term low fixed rates.

In one market you had speculative purchasing, made with little to no down payments, financed with non-qualifying mortgages, many of which were non-fixed rate products. In the other market you have buyers purchasing homes for the long term, purchasing with down payments and financed with long term fixed rate mortgages with low interest rates.

 

If/when there is a turn in the housing market and we see prices flatten, or even dip, there will not be the resulting sharp drop in prices across regions because of the solid foundation that has been built with qualified, well-motivated homeowners. Bubbles pop and created market downfalls not because of a slight correction, but because that correction snowballs as owners panic and sell their product, thereby creating significant over-supply and exponential price declines. With families owning homes they can afford to retain and having purchased with their hard earned savings, a dip in the market will not create a panic-selling environment for any significant portion of the market to create a crash.

 

The most significant threats I see to housing in California, particularly along the coastal markets (which I define as any county that touches the Pacific) are cash for purchasing homes and interest rates. Both of these factors can limit buyers ability to qualify as home prices climb.

 

At some point prices will flatten, and possibly decline, I do not see this happening in the near future, but when this occurs it will not be long lived nor a deep decline in housing prices across several markets in the region, state or nation.

 

Have a question? Ask me!

 

Overreaction? On Wednesday the minutes were released from the January Federal Open Market Committee (FOMC), the group at the Federal Reserve that determines the federal funds rate. Almost immediately after the minutes were released, well immediately after investors had time to read them and then take action in the market, rates jumped as investors sold off bonds and mortgages. Why? Because the Fed has adjusted its economic outlook since its December meeting, forecasting stronger economic growth than previously thought and achieving the 2% inflation target sooner than previously thought. The minutes also showed that the FOMC members still feel that the economic outlook supports further “gradual increases” in the federal funds rate. Many investors trying to read the tea-leaves felt the Fed maintaining its stance was instead a signal that it will raise rates more than previously estimated (three times this year). This created a sell-off that became more pronounced as the day progressed spiking rates.

 

Rates for Friday February 23, 2018: After Wednesday’s big sell off investors returned to market with cooler heads on Thursday and Friday as investors bought back into the bond markets and over the two days scratched back almost all the losses. We see a slight bump in high-balance rates, but conforming holds on for the second straight Friday with no change. As we have been saying for over a month, rates are volatile so lock when you can.

 

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%      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.

Busy weekend for the Smith household as we host about 20 fifteen and sixteen year old’s for our daughter’s Sweet Sixteen party. Hopefully the weather cooperates and is not too chilly since we are setting up for an outdoor formal event. It is fun watching our little ones become young adults and see their friends grow and mature right alongside them. Sunday will be having family over for another celebration, and then perhaps a nap!

 

Have a great week,

 

Dennis

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

/in /by

 

 

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

 

 

 

 

2-2-18: What is “tiered” pricing

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Question of the week: What is “tiered” pricing?

 

Answer:  There are several axioms in economics, the two most well-known are that supply and demand determine prices and that the greater the risk the greater the return. Both of these axioms determine your mortgage interest rate. Rates in general are determined by supply and demand for mortgages as investments, your rate in particular is further determined by risk. When pricing your mortgage we put several factors into the pricing software and it filters through those factors and returns with the price for your particular circumstance.

 

Tiered pricing is used by lenders to adjust for risk, the riskier a loan the higher the rate. What creates risk in a mortgage? Several factors create risk; the most important ones are occupancy, loan to value and credit history as represented by credit score.

 

Tiered pricing comes into play in two different ways. First, the tiers added to a loan price for some of the factors mentioned above, these “add-ons” are standard pricing adjustments on conforming loans from Fannie Mae and Freddie Mac or if a jumbo loan from whomever the investor may be.

 

Let’s take an extreme example. A borrower obtaining a $400,000 loan for the purchase of a condominium as investment with 20% down and a 711 FICO score will have different pricing than someone obtaining a $400,000 loan for the purchase of a condo as their primary residence with 30% down and a FICO score of 798.

 

Taking a look at our non-owner occupied transaction with a condo as the property type. The following add-ons occur to the price of the loan (one point is equivalent to 1% of the loan amount, in this case one point is $4000):

 

Investment property = 3.75 points

Credit Score = 1.25 points

Condominium = 0.75 points

Total add-ons = 5.75 points

 

What if the borrower put down 30% and purchased a condo but for owner occupancy? Because of the change in risk the add-ons, or tiers, change:

 

Credit score = 0.500 points (as opposed to 1.25%)

No add for being a condo

No add for investment

Total add-ons = 0.500 points

 

What if the borrower put down 30% purchased the condo for their primary residence and had a 799 credit score? Essentially there are no add-ons and the price of the loan would be the same if the borrower were purchasing a detached single family home.

 

As you can see in the first scenario with 20% down the cost to the investor is $21,000 more in the cost of the loan than the second scenario where the borrower will have 30% down and live in the property. (5.75 points = $23,000 less 0.50 points or $2,000).

 

Surely an investor is not going to pay $23,000 more in loan fees out of pocket. This is where the second part of tiered pricing comes in. When speaking about mortgages there is a trade off between the cost you can pay and the rate you can pay. Observe:

 

 

 

 

 

The teeter-totter above has the price of the loan on one side and the interest rate on the other side. If you want a lower rate then you will pay a higher price for the loan, if you want a lower price then you pay a higher rate for the loan. In our example above, the investor could get a rate of 4.25% and pay the 5.75 points for the loan, or could get an interest rate of 5.25% and pay only one point for the loan. His payment is higher by $242 per month ($1967 at 4.25% vs. $2209 at 5.25%) if he takes the higher rate, but he saves $19,000 in points.

 

The same scenario on a smaller scale occurs when you are purchasing your home. The you can reduce your cash to close by taking a higher interest rate, the rule of thumb is usually 0.125% in interest rate will reduce your costs by approximately one-half point (0.500%).

 

Using the $400,000 loan example for a primary residence, today our conforming rate for owner occupied purchase with 20% down and 740 credit score at cost of 1.25 points is 4.125%. The payment is $1939 per month and the loan cost is $5000. However, if you take a rate of 4.25% the cost will be 0.75 points, your payment goes up to $1968 ($29 per month) but your cost goes to $3000, a savings of $2000 in cash to close. If you took the lower rate and put the $29 saved per month in a coffee can it would take you almost six years to save the $2000 you would have saved at the time of your transaction had you taken the higher rate. Of course if you did take the higher rate after six years your total cost to purchase the home would be higher by $29 per month.

 

The question you need to answer is do you need the $2000 more today than you need $29 each month in the future?

 

What is tiered pricing? On one-hand it determines the price of your loan based on certain risk factors. On the other hand it allows you to trade more or less cash to close your transaction with a lower or higher monthly payment.

 

Confused? If so please do not hesitate to contact me to discuss your situation and rate options available for your purchase or refinance transaction.

 

Have a question? Ask me!

 

A couple of very important economic data releases this week. On Monday the Bureau of Economic Analysis released personal income, saving and spending data for December as well as the price index. There a bit of good and a bit of not so good in the report, with the good outweighing the not so good in impact on mortgage rates. Incomes increased a solid 0.4% in December against a price increase of only 0.1% (0.2% if food and energy taken out). The increase in income is very positive for economic growth and puts upward pressure on rates. Also putting pressure on rates to go up was a 0.4% increase in consumer spending following a revised 0.8% increase in spending in November from October. As consumer spending is approximately 65-70% of our economy increases point to stronger economic growth. The price index change is lower than expected at this stage of economic growth and a bit of downer in the report, and positive for rates. However, of greater concern was a drop in consumer saving to 2.4%, the lowest rate in thirteen years. While greater consumer spending is helpful for the economy, it is not very helpful if the increase is based on consumers dipping significantly into their savings for their purchases. Overall the report results are not positive for lower mortgage rates.

 

On Wednesday the Fed Open Market Committee—the group that determines what rates the Fed will charge member banks—announced no rate increase in January. This was entirely expected by everyone who follows the Fed and rates so no surprise mean no impact on rates. In the announcement the Fed indicated it feels inflation will increase to 2% at some point this year and stabilize at that level. “Solid” was how the FOMC described employment and business spending.  The announcement gave no reason to expect the Fed will not continue with its plan to raise rates three times in 2018, and the expectation is for a 0.25% increase in each hike. Should inflation and employment heat up further we could see a fourth hike added this year, or perhaps one of the hikes being 0.50% instead of 0.25%.

 

Strong, solid, very positive, all describe the employment report released this morning by the Labor Department. Non-farm payrolls increased 200,000 in January, following a revised 160,000 increase in December. The unemployment level remains at 4.1% and the participation rate is level at 62.7%. Average hourly earnings were another sign of strength in employment showing a 0.3% increase for the month and up 2.9% from January 2017. With the price index increasing 1.7% the gap between hourly pay increases and higher prices being over 1% is certainly good news for workers as their paychecks go further this year than last. The soft spot in the report is a decline in the average workweek from 34.5 hours to 34.3 hours. This is the first decline in sometime for the average workweek so it could be a one-off due to winter weather that impacted most of the country in January, we will see what next month’s report has to report to see if this is a negative and concerning trend. Overall the strength of new hires and higher wages are very positive and negative for mortgage rates.

 

Rates for Friday February 2, 2018: Conforming rates increase for the second week in a row and third time in four weeks and high-balance rates are up for the fourth Friday in a row. The positive economic news and growing momentum will continue to put upward pressure on rates. Lock in your rate when you can remains the advice from this mortgage expert.

 

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

30 year conforming                                            4.1215%       Up 0.125

30 year high-balance conforming                       4.375%        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.

Two weeks ago I wrote in this space how excited I was that the Philadelphia Eagles were playing in the NFC Championship. That excitement is more than doubled as they play in the Super Bowl on Sunday. This is their third trip to the Super Bowl and they are looking to win it for the first time (losing 27-10 to the Raiders in Super Bowl XV following 1980 season and 24-21 in Super Bowl XXXIX to Tom Brady and the Patriots following the 2004 season). The last time the Eagles won a championship was in 1960, so the fans could be described as long-suffering.

 

As is my hope with all big games, and little ones, my hope is that it is well played and determined not by one team playing poorly and making mistakes but by one team playing exceptionally well and deserving the victory. My bigger hope is that victorious team has millions of fans signing their fight song well into Sunday night. The same song that has been my ringtone for the past several weeks.

 

Fly Eagles Fly!

 

Dennis