Posts

What do you think will happen to housing prices?

/in /by

Question of the week:  What do you think will happen to housing prices?

Answer: This is a question I, and anyone even tangentially involved in real estate, get asked all the time no matter the economic environment. When we are in abnormal economic times the question is comes up more frequently.

It is an obvious question, and one being asked by everyone, homeowners, potential homeowners, real estate agents, mortgage professionals, economists, media pundits. The answers vary from collapse to boom, depending on the how the answer is approached, and in the case of the media how many clicks they are trying to get for their advertisers.

Prices in any market are determined by the most basic economic equation of supply and demand. If there is more supply than demand prices will fall, if there is more demand than supply prices will increase—go to Amazon and check out the price of Lysol disinfectant spray. Oops, there is no price because the nation’s biggest retailer has none in stock. It is available Ebay, the leading secondary market in the country, at about $30 per can, plus shipping which pushes the cost to around $40.

The overwhelming majority of homes that are sold are in the secondary market—homes that are “pre-used” in developed neighborhoods as opposed to homes newly built. As such, the majority of real estate markets are very sensitive to supply and demand pricing.

Supply and demand are often influenced by outside factors, consider the plot device in the movie Trading Places. The main plot is the social experiment to ruin one successful man and make another man who is on the fringe of society economically and otherwise a big success. The device used bring the story to conclusion is the cost of frozen concentrate orange juice, more specifically future prices. The government is issuing a crop report for Florida oranges. If the crop is very good then there will be an abundance oranges and the price of orange juice will drop; if the crop is bad there will be a scarcity of oranges and the price of orange juice will climb.

Outside factors determine the quality and quantity of the Florida orange crop, primarily weather. Other factors can include labor, cost of fuel for harvesting oranges, distribution chain to get oranges to market, government regulations that determine if it is profitable to harvest oranges, are just a few.

Trading Places shows what happens when people act on poor information that would determine supply.

A factor that enters real estate markets that impacts the price formula is interest rates for mortgages as they help determine demand. Lower interest rates mean lower housing costs mean more families can afford to purchase homes, or families can afford higher priced homes. Higher rates mean the opposite, less affordability or able to purchase lower price homes.

A quick example for a family making $90,000 per year. We will assume that the mortgage payment will be 33% of their gross income. For mortgage qualifying we break all the numbers down to monthly instead of annual amounts.

This family’s income is $7500 per month, if they are to pay 33% of their income just for the monthly mortgage to purchase a home that is $2475 per month.

If the 30-year fixed rate 5% the total mortgage amount for a payment of $2475 per month is $461,000.

If the 30-year fixed rate is 4% the mortgage climbs to $518,400. At 3% the mortgage is $587,000.

Less than 20 months ago the 30-year fixed rate for high-balance conforming mortgages was at 5%, today it is at 3%. A family that purchased a home in late 2018 with a $461,000 mortgage can buy a home today that is worth at least $126,000 more (I say at least because we are leaving down payment out of the equation) with the same monthly mortgage payment.

That drives demand, drives it very fast.

Housing supply is also impacted by interest rates. As mentioned above, if rates are low current homeowners discover they can purchase a bigger home or a home in a better area. Another option is to refinance their existing home to save money every month on their housing costs, and/or reduce the term of their mortgage debt without significantly changing their monthly payment.

Currently, the coronavirus is an outside factor that is impacting the supply of homes coming to market. Many families who would had planned to sell their homes this Spring and Summer have decided to delay their plans to relocate because they do not want people coming through their homes who may be infected, as well, they do not wish to walk through other people’s homes as they search for their new home.

Leading into the pandemic housing supply was already low, many articles in February had data showing declining housing supply, which combined with dropping rates in early 2020 started a rise in home prices.

Now, five months into the pandemic, supply has constricted to two months or less in several markets and six months or less in most.

Low interest rates and limited supply have created more than supply in the housing markets. Rates are the primary factor, but rates are not the only factor driving families into the real estate market.

Surveys have shown that many families, after spending several months working, studying, living, at home since stay-at-home regulations went into effect in March are finding they want, and need, more room for their families. The pandemic has changed how we picture the use of our homes in the future. Instead of being a place the family is all together from after work to before work and on weekends, it is now a place where we are together 24/7 and it is hard to close a sale on  Zoom while your spouse is conducting a webinar on  Zoom, both of which are interfering with a child’s math test.

Conclusion to the short story made long, prices are climbing as new listings are bid on sight unseen (grammarians help me, sight or site?), multiple offers are being made and very often homes are selling over list price. Anecdotally, my clients looking to buy have experienced losing out on their offers due to multiple overbids in Lakewood, La Mirada, Corona, Mission Hills, and the Los Altos, Los Cerritos, Belmont Shore and Plaza areas of Long Beach in the past few months.

The question was not what is happening to prices, but what will happen to home prices?

In March and April, the media was full of articles stating that the pandemic would severely impact housing markets, in a negative way. At the time the CARES Act had passed enabling homeowners to obtain forbearances on their mortgage payments just by making the request. The common wisdom by the media was that this would lead to a spate of foreclosures in the future creating over-supply. Also contributing to harming the market would be the tremendous rise in unemployed workers creating an under-supply of buyers.

Now that the pandemic has aged several months there are several factors that I see that will result in most real estate markets not crashing nor seeing significant decline in prices (I equate 10% or more decline in prices as significant).

First, regarding the forbearance issue. Traditionally if a lender agrees to a forbearance the agreement with the borrower is that at the end of the forbearance period the borrower will make up the amount of payments that were deferred in a lump sum.  This policy would certainly create tremendous challenges for most families and result in the mortgage going into default. What I have seen is that most mortgage services have been extending the term of the mortgage for the number of months payments that are deferred. If you have a six-month deferment on a mortgage that was due to be paid off in April 2040 the forbearance agreement extends the loan so it will be paid off in October 2040. This lessens the economic hardship on the borrower to bring their deferred payments current in one payment.

Second, regarding foreclosures increasing nationwide. Many of those who predicted, or are predicting, a large increase in foreclosures are using the 2008 housing crash as the basis of knowledge and prediction.

The increase in home prices leading into the crash was fueled by cheap money, which we have now, but more importantly cheap underwriting. Fannie Mae and Freddie Mac underwriting guidelines enabled borrowers to purchase homes and/or refinance pulling out equity their homes with no money down, no income qualification, no asset verification and in many instances no appraisals. As a result, millions of families owned homes with loans that they could not afford and in which they had no equity. When they fell behind on their payments they had no ability to sell their home and pay off their mortgages (it costs between 7-8% to sell your home in most markets).

As the economy spiraled down it wiped out jobs that are the foundation of the housing markets, causing a hole in the demand side of the market. The result was over-supply as homeowners had homes for sale that required short-sales, or foreclosures being priced low by lenders to get rid of inventory. At the same time there was an under-supply of demand are supervisors, managers, high wage hourly workers and others were out of work and unable to qualify for mortgages.

Finally, with little to no money invested in their homes, many families found it easy to hand their keys to the bank and find a place to rent.

The profile for the overwhelming supply of homes sold since 2010 is buyers who not only qualified for their purchase mortgage with verifiable income, but likely qualified for a higher mortgage. The average down payment on a home purchase has been around 12%, closer to 6% for first-time buyers. Homeowners are staying in their homes longer, which combined with steady increases in prices, has resulted in equity growth.

Because of the interest rate environment, the past several years most homeowners have very low interest rates, and presuming their incomes have been increasing, even modestly, during their tenure of homeownership their monthly payment is more affordable today than it was a few years ago.

What does this all this mean? The initial equity at time of purchase, plus steady increase in prices while paying down mortgages means that if a family is in trouble and needs to sell their home they can do so and likely receive some equity from the sale. At worst, most would break even and avoid a foreclosure.

The lower rates make it somewhat easier for a family that has a job loss of one spouse, or a reduction in income, to retain their home and continue making payments.

Third, the majority of those who have lost their jobs due to the pandemic do not have the income to purchase homes. Looking at the jobs reports, as the employment numbers have dropped average weekly wages have increased. Why? Because the job losses are coming at the entry level wage jobs not the middle and upper level wage jobs. Conversely, when we have seen employment spikes after the economy opened up we saw the average weekly wages decline because those being hired are the entry level wage positions. We are seeing job losses creeping into higher wage jobs, the airlines for instance are laying off workers, most of whom earn more than minimum wages. Should job losses spread to industries not dependent on travel, entertainment, dining, we will see an impact on the supply of qualified buyers. At this time, however it appears that the areas of the economy most impacted remains industries largely dependent on consumers discretionary spending.

Fourth, the is such an imbalance now between demand and supply that it would take a major shift, a very major shift, in either supply increasing tremendously and/or demand declining tremendously for home prices to decline significantly.

Because of these factors I do not see a significant decline in home prices occurring in most markets. Across the Southern California region there may be pockets of decline, most likely the upper ends of the markets as jumbo mortgages are still in short supply, lack of foreign buyers and smaller pool of eligible buyers that always exist for this range of the market. For the rest of the price ranges, when we have widely available vaccinations for Covid-19, when the economy re-sets to its new normal, we will likely have the same or increased demand and a growth in supply as those families who have delayed selling their homes come to market. The increase in supply however, should be met by demand.

The outside factor that could alter my opinion, and the actual actions in the markets, is the length of the pandemic and how soon we are able to achieve the new normal with few, if any, segments of the economy being restricted due to the coronavirus.

Have a question? Ask me!

The big economic news this week was the data on 2nd quarter Gross Domestic falling at an annualized 32.9%, the largest single quarter drop since the government started tracking GDP following World War II. On a quarterly basis the decline was 9%, and was less than anticipated by Wall Street. Combined with a drop in the 1st quarter GDP, the decline puts the economy in a recession (defined by two consecutive quarters of declining GDP). The news had little to no impact on mortgage rates due to the expectation of a historic decline, and that there is little economic news at this point that can push rates much lower.

A bit of a bright spot in economic news was that consumer spending in June provided the second consecutive monthly increase, growing 5.6% from May’s spending. July may show another increase in spending, even with many states re-shutting businesses due to increases in infections. All eyes will be on August as the additional unemployment compensation of $600 per week that was part of the CARES Act expires today.

Rates for Friday July 24, 2020: Rates remain flat from last Friday, it appears we have reached our range for the current market as since the beginning of the month the conforming rate has drifted between 2.625-2.75%, while the high-balance has been between 3-3.125% for purchases with variables listed below.

The rate spread for cash-out, no point, higher loan-to-value and other factors for refinances still are historically higher than normal. Call for details and quotes as rates can vary significantly depending on the situation.

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

30 year conforming                                            2.625%   Flat

30 year high-balance conforming                   3.00%      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.

It appears Mollie’s suggestion to include the question of the week is very popular based on the feedback I received—such a good suggestion I wish she had made it several years ago!

The beginning of August is usually when families start getting ready to send their kids off to college—especially if their son or daughter is heading off to their freshman year. With many colleges and universities cancelling many, most or all in-class classes and moving to on-line, a lot of students who were part of the high class of 2020 are opting to take a “gap” year. With the high costs of attending college they are deciding that it is not worth the cost to sit in a dorm room watching classes on a screen, not being able to have social interactions to meet other students and benefit from the overall college experience. We have first hand knowledge of the colleges trying to sell that the education, even if on-line and not live in classrooms, is still worth the cost to attend, but it is apparent that the sell is hollow and almost desperate.

Next year will be interesting as there will be a good portion of the class of 2020 re-applying to schools while the class of 2021 will also be submitting applications—depending on the learning environment that will be available. This will make an already challenging process even more so. What will be the long-term impact on these young adults who have seen their high school and college years disrupted? How will it impact our labor markets, future leadership, and society and the economy as a whole? We will know in a decade or more as the sociologists and economists study this era and those involved.

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

Will rates go lower?

/in /by

Question of the week:  Will rates go lower?

Answer: {shakes Magic 8 Ball} I do not see rates being able to go much lower. There are several factors, but the primary one in my opinion is the cost of originating mortgages and the rate of return from the rates paid on the mortgages.

When looking at the flow of money through the mortgage process there are several slices taken out of a mortgage payment before it reaches the ultimate investor. For conventional loans, the loan servicer takes a small bite, then Fannie or Freddie take a bite and then the remaining amount of the interest is provided to the investor.

Who is the loan servicer? Commonly referred to as “the lender,” loan servicers are the entities that collect mortgage payments. Sometime the servicer is also the original lender, but very often it is a different company—and not always a bank. Mortgage servicing is a segment of the mortgage industry that is regulated and enables mortgage lenders to relieve themselves of the costs of a collections, or servicing, department by selling the servicing rights to the mortgages they fund.

Just as conventional mortgages are sold to Fannie Mae or Freddie Mac to provide liquidity, many mortgage lenders also sell the servicing of their mortgages to other companies. The servicing company then sets up the borrowers’ accounts and collects the monthly payment for principal and interest, and if the loan is so set up property taxes and insurance payments are collected as well.

The servicer then forwards the payments to Fannie or Freddie, and if collect the property taxes to county tax assessors and insurance premiums to insurance companies. If payments are not made the servicer has a collections department which will then proceed through the steps of attempting collection, working out a payment schedule with borrowers. If necessary, this department start the foreclosure process and see it through to conclusion—either foreclosure or all past due payments and charges paid in full by the borrower or from their sale of the property.

Servicing charges generally range from 0.25% to 0.50% of the loan remaining loan balance, so the longer the loan is serviced the less the servicer gets paid for the servicing as the principal drops.

Following the flow of the funds, as discussed through the years of the WR&MU, after lenders sell their loans to Fannie or Freddie, those entities package mortgages into big bundles called Mortgage Backed Securities (MBS) which are then sold to investors. You can purchase MBS through broker-dealers, depending on how much you can invest either into large pools, or purchase shares in mutual funds or ETFs that hold MBS in their portfolios.

Once the MBS are sold to investors the investors want to get paid, which they are as monthly principal and interest payments are made by borrowers to servicers who then pass funds along to Fannie or Freddie who then pass payments onto MBS investors. For this Fannie and Freddie take a slice of the payment as well, retaining a portion of the interest payment. I have been unable to find out how much this portion is, my assumption is that it is near 0.25% of the payment as well.

Let’s look at a $500,000 mortgage with a rate of 4% and a payment of $2387 per month. The payment is made and the servicer retains $104 of the payment and sends $2283 to Fannie Mae. Fannie retains $104 and sends $2179 to the investor. The principal part of the payment is $720, so the investor is collecting $1459 in interest. This reflects a return of 3.5%.

Now let’s look at the same mortgage with a rate of 3% and a payment of $2108 per month. The seller retains the same $104 and Fannie Mae its $104. Of the $2108 payment Fannie passes $1900 to the investor, of which $858 is principal, therefore the investor collects $1042 in interest. This is a return of 2.5%. 

How much demand will there be for 30-year investments with returns of 2.5% or lower?

As discussed in our May 1st WR&MU, mortgage servicers were on the brink of collapse in April after the CARES Act passed requiring servicers to grant forbearances to homeowners who requested them while still having to advance payments to Fannie and Freddie. This cash flow risk increases the return desired by everyone through the industry, which puts upward pressure on rates.

It is estimated that around 5 million homeowners across the nation are currently in forbearance, about 9% of outstanding mortgages. This has pulled billions of dollars per month out of cash-flow through the servicing industry, and to investors. What is next? These 5 million homeowners will be faced with a settlement statement from their servicers for a lump-sum amount that will be due when the forbearance period is over.

Most servicers will then proceed to contact borrowers to work out payment modifications that will pay down/off the outstanding balance that will be in addition to their contracted payment. Other servicers may, can, will, file notices of default and begin the process of foreclosing.

What will homeowners do? Will their income be sufficient to afford a higher mortgage payment for the next year or two? Will they have enough equity to sell their home to payoff the mortgage and back amounts due?

Whatever decisions are made, there are costs to servicers that are more expensive than normal mortgage payment collections. At a time when their receipts are down.

One more factor. Many of the mortgages being paid off in the current refinance cycle were made less than a year ago. It generally takes about one year for a loan servicer to recoup the acquisition costs. For all their mortgage clients that pay off in less than a year the company loses money.

As shown above, the very rough calculations on payments and the flow of funds from borrower to investor do not take into account many other variables such as purchasing the MBS at premium or discount. However, they show how investor return on investment is greatly impacted by payment collections.

As can also be seen, there is a tremendous amount of costs and decline in cash-flow for servicers that has them operating on razor thin margins with little room for more disruption.

As a result of these pressures, from investors to servicers, the mortgage markets should be at, or very near, the lowest rates can go and still have a functioning industry with smooth flow between investors, agencies, lenders, and borrowers of funds borrowed, funds loaned, payments made and payments collected.

Finally, there is very little left that the Federal Reserve, or the Federal government, can do to further reduce rates in the retail sector. Actions already taken by both the government and the Fed through the mortgage industry into disarray in March, when we saw mortgage rates spike around 1% in less than two weeks. There are no actions left they can take that would lead to lower rates.

As stated many times over the years, mortgage rates are not dependent on the Federal Reserve’s rates, but rather on investors and what they are willing to pay for Mortgage Backed Securities. As also mentioned through the years, in certain markets lenders keep rates higher than the MBS markets are willing to take to control their volume flow and also to mitigate their risk. With rates at their current levels both factors are in play as MBS investors are looking at extremely low returns and the mortgage industry is looking at reductions in payments, government policy enabling further reductions in payments. Not mentioned in the above is the very complex system of lenders hedging rate locks and pipelines being disrupted due to the Fed’s actions.

Finally, (thank goodness thinks the reader…) long time readers know that rates are dependent on the economy and overall economic activity. As well, they know that 65-70% of our nation’s economy is consumer spending. With the country opening up at different speeds across the company, consumers are beginning to spend, people are going back to work, economic activity is slowly increasing.

As this continues there will be upward pressure on rates. Maybe not enough to cause rates to increase to pre-Covid levels, but enough to provide a floor below which rates will not drop.

Can rates go lower? Yes, but if they do it is my opinion that any drop will be incremental from where we are today.

I hope I am right as if they do drop significantly more (one-half percent or more) that will mean our economy is in really bad shape.

Have a question? Ask me!

The big number this week was 17.7%. That was the growth in retail sales in May from April. Sales in April dropped 14.7% from March, and the consensus was for sales growth of 8.5% as commercial establishments across the country opened up. Auto sales were a big part of the jump in sales, up 44%. That increase is only about a quarter of the increase in clothing stores sales, which were up a staggering 188%. As a benchmark, May 2020 retail sales were 6% below sales in May 2019 so there is a way to go for the retail industries to get back to pre-Covid activity. In normal times this news would spike interest rates, but these are not normal times as you know.

Rates for Friday June 19, 2020:  Thirty-year fixed rate mortgage rates are at their lowest since 1971, as discussed above will they go lower? Market indicators and projections are rates remain very close to today’s rates for the near future. We are still seeing large disconnect in the high-balance market from purchases and refinances. Call for details and quotes.

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

30 year conforming                                            2.875%   Flat

30 year high-balance conforming                  3.125%   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.

Monday, I went to my office for the second time in over 90 days, my last visit was very briefly, less than two hours around day 60 of being working from the home office. As I left for the office Monday morning I said to Leslie, “I think this is the first time in four weeks or more that I have long pants on.” I have no records or concrete proof, but it is likely the longest I went wearing only shorts since the last semester of my senior year in college (1984).

The work-at-home policies have killed the dry cleaning industry since no one dry cleans shorts, pajamas or sweats.

Have a great week,

Dennis

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

What is happening with rates and economy?

/in , /by

Question of the week:  What is happening with rates and economy?

Answer: There is a proverb that is attributed to being a Chinese curse, “may you live in interesting times.” I have always taken the saying to be a positive, I hope my and our lives are interesting.

But as we know, and are currently experiencing, interesting can define many feelings, events and actions. We are certainly in interesting times.

In times of concern and worry some unrelated event to what people are concerned about can become the impetus for actions and events. Last week there were some large daily gyrations in financial markets. From Monday March 3rd to Friday March 6th the Down Jones saw choppy trading daily as investors were concerned about the global impact of the COVID-19 virus. For the week the index was down just over 3%.

Then came the unrelated event last weekend when Saudi Arabia’s state-owned oil company pushed up production. The reason for the large production increase was the breakdown in talks with Russia that were intended to reach an agreement on oil prices. Saudi Arabia’s actions were met by the Russians also increasing production, and a price war began. The immediate result was a drop of over 20% in crude oil prices in the United States. Investors, already concerned over the global economic impact of the COVID-19 virus hit the big red SELL buttons on the morning of Monday March 9th.

Why did a price war between the Saudis and Russians cause U.S. investors to sell? The price of oil per barrel in the United States fell 40% what shale producers need to break even. Such a large drop in oil prices ripples through the economy, and while good for consumers at the pump and heating their homes, investors concerns were more related to economic production and output.

As well, oil and gas sectors make up over 10% of high-yield bond markets, which would be impacted by the price war. Nervous about the COVID-19 impact, investors dumped stocks and bonds, causing prices in both to drop and interest rates to increase.

On Monday the Dow opened about 7% lower than Friday’s close and while gyrating through the day closed with a very small decrease. Tuesday it appeared stability had come to the front as after a mid-day drop the Dow climbed almost 7% in the final hours of trading, and only fractionally lower than Friday’s close. Wednesday saw a slow sell-off. Yesterday, following President Trump’s Wednesday night address to the nation indicating actions that would be taken to try to stabilize markets and stimulate the economy, investors again began selling as soon as the markets opened, dropping the Dow 7%. As I write this the Down is up almost 6% for the day, and down 5.5% from Monday’s open. Like every day this week the trading is choppy with swings up and down, but so far the trend is up for the day with an hour left in trading.

Usually interest rates follow stock prices, when stock prices drop so do rates and vice-versa. Because the impetus for the initial shock trades in the markets on Monday was the oil sector, which is a major influence on fixed rate markets, this week rates have been acting counter to their historical relationship with stocks and as stock prices have dropped rates have increased.

In uncertain times investors put their money in bonds, and mortgages, and the result is lower rates. The uncertainty in direction of the markets each day, the historical disconnect in the stock-bond relationship and the unsatisfaction with the Trump Administration’s announcement on economic action, investors have shown a willingness to sell investments and hold cash.

What’s next? My crystal ball has proven to be cracked, chipped, cloudy and at time myopic over the years. That said here are some things I have been looking at and considering.

When the Fed meets next week, perhaps before but I believe they want to all be in the same room when the announcements are made, it will announce a large cut in its rates—by large I mean 0.75-1.00% (keeping in mind Fed rate changes are infrequent and usually in 0.25% increments). Following the rate cut announcement, I would not be surprised if the Fed announces a Quantitative Easement policy reminiscent of the QE policies enacted after the 2008 real estate market collapse.

The policy will result in the Fed committing to buy billions, tens of billions, of dollars of mortgages and possibly Treasury bills and bonds. This will be to give confidence to investors, stabilize the fixed rate asset markets and provide liquidity so lenders can lend.

The huge unknown for all of us is the impact of the closing of sporting and entertainment events, colleges, and now schools (Long Beach Unified School District is closing classes from Monday until April 20th—one of those weeks was scheduled Spring Break), on the overall economy. Consumer spending is certainly very high right now**, which is very high right now as worried consumers stock up on household items and food. That is very good for the economy, but the untold billions of losses due to cancelled events and the ripple through the economy from the lost wages of workers and sales of tickets, concessions, parking, t-shirts, etc is of great concern.

Economic data from March, and January and December, showed the economy had a continuing strong job market with low unemployment and growth in the number of new hires monthly, and barely any layoffs across most sectors. Consumers were spending a bit more each month than the last, while inflation remained extremely low.

Post-COVID-19 impact is the uncertainty that will keep investors cautious, the actions by the Fed and others will determine how cautious.

In regards to the economy, I have heard many expressing concern that we are going down the same path as 2008, which was also precipitated by a single event. In February 2007, New Century Financial in Irvine could not find a buyer for its sub-prime mortgages. At the time it was the second biggest subprime lender in the country. When it could not sell mortgages to investors it had liquidity problems and stopped lending, eventually filing bankruptcy. Wall Street would not purchase the mortgages due to concerns in the underlying financial strength of the borrowers. This led to closer investigation of other subprime mortgage company offerings, which in turn led to spreading concern of the underlying mortgages that funded the housing bubble.

Back to today, I see the only comparison to 2008 being an event that led to a large drop in equity markets. The biggest difference is the underlying economies. Leading into the Big Recession we had an economy that was fueled by a single sector, housing, that was financed with weak mortgages with borrowers who were deemed “qualified” without verification of income, assets and very often appraisals of real estate. A tremendous percentage of homeowners were highly leveraged and when real estate prices softened many were quickly upside down, which created downward price momentum and we know how that story ended, millions of foreclosures resulting in banks and financial institutions going under.

Our economy since the Great Recession ended in June 2009 has been growing and growing and growing at an unprecedented rate—not in the size of the economic growth but the number of months, quarters and years.

Over the past decade we have seen families purchasing homes with larger down payments, with mortgages they can afford and the ability to lower their monthly payments have interest rates have declined. The housing markets are stable backed by homeowners in homes with a lot of equity and debt they can afford.

Over the past decade we have seen employment growth across all sectors and wages and salaries growing faster than inflation, and most months faster than consumer spending. The result has been a steady growth not only in the economy fueled by personal consumption (65-70% of our economy), but also a steady growth in personal savings rates and retirement accounts. Families are borrowing less on credit cards and saving more of their wages.

When, not if, when the current crisis of the COVID-19 virus is finished, when we get back to “normal” in our activities and actions, we have an economy that has sound fundamentals. This should be reflected in a much quicker recovery in financial markets that in the past when there have been major corrections as investors remember and realize these fundamentals.

In the moment we look around and worry about how we and our families are impacted by major events. In this case the worry is about something unseen that spreads without knowledge or warning until the spread has occurred. The most severe impact appears to be limited to a few demographics, severe enough to justify cancelling large gatherings to protect those most likely to be affected. Hopefully, the actions taken by federal, state and local governments, as well as organizations, to try to limit contact in large congregations of people will quickly “flatten the curve,” as we have been told and this will pass quickly.

As for mortgage rates…they are up significantly from last week as lenders have jumped ahead of the markets to limit their exposure should rates continue to rise—which of course causes rates to rise, which causes lenders to…

As mentioned last week, before this week’s tumultuous markets, lenders were raising rates off and on to control their volume depending on their capacity. The result was intraday jumps and drops in rates from lender to lender and in the market as a whole. I expect this activity to continue as lenders cautiously eye the markets, their pipelines and their competitors to see when they can return to market based rate decisions and more stability in the markets.

It is my contention that in the not too distant future we will see the “V-curves” rebound somewhat sharper than normal; i.e. rates will come down faster than normal and equity markets rise faster than they normally do after a correction. Investors hate “dead money,” or cash, and want their money to work for them.  For this to happen they must invest in stocks, bonds and mortgages.

Have a question? Ask me!

Rates for Friday March 13 2020:  This week the rates at 9:00 a.m. have not been the rates at noon which aren’t the rates at 2:00. As mentioned above, the past few days lenders have been pushing rates to protect themselves. Carefully scouring across many lenders we see some lenders dip down to pick up some rate locks and business and then quickly raise their rates later in the day, and the opposite with others. The increase from last Friday for high-balance conforming is the largest one-week jump I think I have ever seen—going back to 1987—and shows the risk-avoidance lenders have to expose themselves until there is some certainty in the market. The conforming rate increase from last week is largest since March 2012 when it also increased three-eighths of one percent (0.375%).

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

30 year conforming                                            3.375%    Up 0.375%

30 year high-balance conforming                      4.00%       Up 0.875%

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.

**One or two mornings a month I stop by our local Ralph’s on the way home from my workout class to buy milk. I am there usually around 7:00 a.m. and there are a few other shoppers in the store, also grabbing milk or breakfast items, what appears to be lunch, or items for lunch-time gathering or office celebration. As well, there are a lot of workers stocking shelves with many of the aisles blocked with cartons and pallets.

This morning as I pulled into the parking lot, I wondered why there were so many cars in the parking lot. Entering the store, I saw as many shoppers I would on a Saturday morning. They had carts filled with canned goods, everyone had toilet paper (shelves were empty) and there were a few people with carts filled with cases of bottled water. People doing “regular” shopping of meats, fruits, vegetables and canned goods where as prevalent of the doomsday-shoppers who evidently feel our water supplies are going to be contaminated and an epidemic of dysentery.

Like investors creating self-fulfilling prophecies with their actions to buy or selling thinking markets will go up and down, and thereby causing that to happen, we are seeing consumers behave and react in the same way. I am looking forward to when we have some semblance of reason return to the group mindset and behaviors.

In the meantime, we will have two kids at home due to my older daughter’s university sending all the students home and my younger daughter being home due to LBUSD cancelling classes.

We live in interesting times.

Sorry for the rather lengthy WR&MU this week, a lot I wanted to try to convey in some detail to provide some understanding, I hope.

Have a great week,

Dennis

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

What should we offer?

/in /by

Question of the week:  What price should we offer?

 Answer: This is a question we cover every couple of years and my answer has been pretty consistent. Offer what you can afford and what the seller will accept.

It is in our nature to want to negotiate and get a “bargain.” Why buy a pair of Nike Air shoes at one store for $100 when you can get the same shoe online or at another store for $95? Convenience?

The auto industry is set up to haggle, negotiate and make car buyers feel good when they can brag that they knocked several thousand dollars of the sticker price. Nobody brags around the office water cooler, “hey the guy would have taken $400 but I paid $500!”

Amazon, eBay and other internet vendors have reinforced, actually strengthened our primal instincts at getting a deal. Everything is more commoditized today than in the past.

But should this urge to buy as low as possible be followed when you are purchasing your new home?

Let’s look at the cost-benefit of haggling with a seller.

You have been prepping to purchase a home for several months. We have met and gone through your financial information and I am ready to provide a pre-approval package to your real estate agent when you find the right home and decide to write an offer.

You look at several properties in different areas of different sized and amenities, all within a defined price range. You finally find the property you want. It checks all your boxes and as you walk through you can imaging your family living in the home. The price is right in your qualifying range.  You know you can make the payments and you have more than enough in your accounts for down payment and closing.

So, what do you offer when you find the house you want to buy? My advice is always, offer what it takes to buy the home you want.

“But what if the seller would take less?”

What if they won’t and accept someone else’s offer?

Let’s take a look at the math of a sale for the buyer and seller on a property listed for $625,000.

For the seller, the costs of the transaction are about 7-8% depending on the commission he agreed to pay the real estate agents when he listed his home for sale, let’s use the higher amount. If he sells for $625,000 his costs are $50,000, his proceeds therefore are $575,000. If he sells his home for $600,000 his costs are $48,000 and his proceeds are $552,000. He sells his home for $25,000 less than his asking price and his proceeds are $23,000 less than had he sold the home for $625,000.

For a buyer on a $625,000 sales price, if he were to put 20% down that would be $125,000, and the loan amount would be $500,000. If the interest rate is 3.75% on a 30 year fixed rate his monthly payment would be $2316 per month.

The buyer however wants to see if he can get the property for a bit less and offers the seller $600,000. The buyer’s down payment would be $120,000, just $5000 less than if the offer was $625,000. His monthly mortgage payment would be $2326 on his $480,000 mortgage, $93 less per month than the $625,000 transaction.

The seller is out $23,000 with the lower price, while the buyer is saving only $5000 in cash. The buyer is also paying $93 less per month, a little over $1100 per month. The question for the buyer, is it worth losing the home you want for $5000 out of pocket and an additional $93 per month?

What do you spend $90 per month on? If you stop by an internationally known coffee purveyor you every morning on your way to work you are spending about $90 per month. If you don’t brown bag your lunch every day you are spending more than $90 per month.

There is another aspect beyond the cash in or out of pocket in the above scenario. There is good will. What is good will worth?

It is not uncommon in a real estate transaction on a previously owned home for the home inspector to present a report to the buyer with a list of issues with the property, many minor and a few less than minor. It is also not uncommon for the buyer to ask the seller for a credit to cover the costs to correct some of the issues with the property that they buyer will fix after he owns the home.

If the seller gives a credit to the buyer in escrow it is usually applied to offset closing costs, and not to lower the price. This is to the advantage of the buyer. For the seller it does not matter that much if the credit applies to buyer costs or sales price; as we saw above a reduction in sales price takes a lot of money out of the seller’s proceeds, about the same as a straight credit will.

For the buyer, as we saw above, any change in sales price has a small impact on the amount of cash needed to close, but a credit for costs is a direct dollar for dollar savings. For example, the buyer is putting 20% down, and the seller has agreed to a $5000 credit in lieu of making repairs requested by the buyer, the buyer is saving $1000 in cash—to make repairs that are estimate at $5000. If the $5000 is credited to offset closing costs the buyer saves $5000 in cash.

Back to goodwill. If the buyer was able to negotiate the seller down several thousand dollars from the price the seller really wanted, and then comes to the seller for several more thousand dollars, what is the mindset of the seller?

Yes, you may be able to purchase the home you want for less than the seller is asking. But before making that lower offer, consider the risk of not getting the home you want and the difference in how the math impacts you on a cash and payment basis. More often than not you will likely find the risk of losing the home you want is more than the cost of obtaining it.

Have a question? Ask me!

It was an interesting week. It was interesting in many respects, but I am referring to the news and information that impacts mortgage rates. In regards to economic data the Consumer Price Index for November showed strong growth at 0.3% for the month and pushed the annual inflation rate from 1.8% to 2.1%, the highest in twelve months. While rising prices are typically a push for higher rates, this weeks announcement did not have a large impact because the annual rate is in the Fed’s desired inflation rate. The other major piece of economic data was that retail sales in November were well below expectations at 0.2% growth from October (which was revised up to a very good 0.4% growth). A major reason for the somewhat disappointing showing was the late Thanksgiving this year, likely pushing a lot of holiday shopping into December. Since the consumer is 65-70% of our economy lackluster retail sales can be a concern, most investors held off on reacting to the news until they see how December sales go.

While the economic data is interesting to data geeks like me, political news has had more of an impact this week. As one commentator put it, “the news this week has been swirling like a dust storm making it hard to see where investors are going.” Early in the week Congress and the White House agreed on a new economic treaty with Mexico and Canada that will replace NAFTA, which is positive news for the economy. Yesterday the White House announced that the U.S. has signed a trade agreement with China resolving some of the disputed trade policies and not too long ago China followed with its own announcement that an agreement has been reached. Behind this backdrop of cooperation between Capitol Hill and Pennsylvania Avenue is the ultimate in non-cooperation as the House Judiciary Committee has sent articles of impeachment to the House for a vote, where it almost certainly pass on straight party lines initiating a trial in the Senate.

As mentioned often in the WR&MU, investors do not like uncertainty and when this happens they tend to flee to safety—which means fixed rate returns of bonds and investments like mortgages. The trade agreement announcements, being good for the economy pushed on rates to climb. Even though expected the breaking news of the impeachment proceeding has caused investors to pull back and they are pushing rates back down a bit.

Ignored in all the data, news and commentary is that earlier this week Fed Chairman Jerome Powell announcing that the Fed is looking to do nothing with rates in 2020. This takes pressure of rates for each economic announcement and creates stability, which is good news for those planning on purchasing a new home in 2020.

Rates for Friday December 13, 2019: After a spike yesterday and a gentle decent so far today rates are the same for conforming as there were last Friday, and the conforming rate is the same for the ninth consecutive Friday; I cannot recall this ever happening. The high balance rate slipped back down this week, continuing its see-saw course of the last few weeks.

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    3.875%    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.

I think one of my favorite parts of Christmas is walking in the house at the end of the day, or coming downstairs in the morning, and smelling the freshness of pine from the tree in our front room. That may be a major subconscious allure to the mountains as the olfactory memory we have smelling the pine trees and creating the memory of Christmas time with family and home.

Have a great week,

Dennis

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

How does the impeachment process in Washington impact mortgage rates?

/in /by

Question of the week:  How does the impeachment process in Washington impact mortgage rates?

 Answer: Directly there should be no impact. Indirectly, as economists like to say, that depends…

On September 24, 2019 Speaker of the House Nancy Pelosi announced that six committees of the House of Representatives would begin formal impeachment inquiries of President Trump.

Long time readers of the WR&MU know that disruption, uncertainty and crisis that harm the economy effect investors, who react by “flight to safety;” in other words they will sell riskier investments, meaning stocks, and purchase relatively safe investments, meaning bonds and other fixed rate investments. An alternative to what are considered the safest investment available, bonds issued by the United States Treasury, are Mortgage Backed Securities (MBS), in other words residential mortgages.

As investors sell stocks prices in the stock market will drop. As investors purchase bonds and other fixed rate investments like MBS those prices will rise. For interest bearing investments like mortgages and bonds as the prices rise the rates drop.

Back to our question. If investors consider the impeachment process, and actual impeachment, a disruption that would impact the economy negatively they would flee to safety, selling stocks and buying bonds and mortgages.

For the past two and a half months investors have ignored what is happening in the hearings in various committee rooms in the Capitol. Since mid-September the Dow Jones has gone up about 1000 points, 3.7%, and mortgage rates are about the same this Friday as they were on September 27th—actually the conforming high-balance rate is a tick lower.

Politics impact investors decisions only as much as they feel they will disrupt or benefit the economy. Should President Trump be impeached what will be the significant impacts to the economy as a result in any change in policies that effect businesses and markets? That is the question investors answer as they place their bets in the equity and fixed rate markets. From their reaction so far it appears they believe that if Trump is impeached the policies and actions of the new Pence Administration in regards to business, trade, taxes and markets will not be much different.

While individual investors may have personal political bias when making donations and punching ballots, investors as a group however are concerned only with the politics that impact the bottom line. It appears that the charts on the business pages are paying no concern to the news on the front pages.

Have a question? Ask me!

Big news for those seeking mortgages. The Federal Housing Finance Agency announced the new loan limits for conforming (Fannie Mae and Freddie Mac) for 2020. The new limits are $510,400 for conforming loans and $765,600 for high-balance loans in eligible areas (Los Angeles and Orange Counties are eligible). The loan limits are based on median home prices nationwide, the fairly significant increases from 2019 reflect a strong increase in prices across the country.

Investors are not the only ones. It appears that businesses are not concerned about a potential change in administrations in Washington. The Labor Department today announced that the economy added 266,000 jobs in November, well beyond the expectation of 180,000. Part of the increase was due to 50,000 striking workers at GM went back to work, absent those numbers the new jobs created still exceeded expectations. The unemployment rate dipped back down to its 50 year low in November, to 3.5%, and the average hourly wage rose to annualized rate of 3.1%–well above the rate of inflation which is below 2%. Overall the news is mortgage rate unfriendly as more workers means more wages means more consumer spending means more economic growth. As seen above, if bad news pushes stocks and rates down, good news pushes stocks and rates up.

Rates for Friday December 6, 2019: The conforming rate has been the same every Friday since in increased from October 4th to October 11th. That is eight weeks in a row, the longest streak since February 9th to April 13th 2018 when the streak was nine weeks. The high-balance rate drifted up slightly from last Friday.

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                   3.875%    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.

It’s here. December filling our weekends with parades, parties, get togethers and music. This is the last month of the decade, a lot different than the first month of the decade when housing markets were still dropping in prices and our topics of discussion were foreclosures and short sales.

I hope you have a great month enjoying the opportunity to see family and friends and create wonderful memories with both.

Have a great week,

Dennis

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

What is a Home Warranty Plan?

/in /by

Question of the week:  What is a Home Warranty Plan?

Over the past few weeks I have had several questions regarding the various insurances involved in a real estate transaction. I have decided the best way to address the questions for the next several weeks to have a series on insurance in the Weekly Rate and Market Update, this series will cover home warranty, homeowners’, title, mortgage, and finally mortgage life/disability insurances.

Answer:  In Section 7, Part D, subsection 10 of the California Association of Realtors Residential Purchase Agreement and Joint Escrow Instructions (aka the Offer) the buyer has the option of checking whether, as part of the terms of the offer to purchase the property, the buyer or seller shall pay costs not to exceed a certain amount for a one-year home warranty plan. The section also contains a place for the buyer to indicate which company shall issue the plan and what additional coverage beyond “normal” the warranty may cover, such as air conditioning or pool equipment. If the buyer does not complete this section the next clause on the purchase agreement form is checked, which is an acknowledgement that the buyer is waiving the purchase of a home warranty plan.

As a side note, congratulations to the home warranty industry for have their product embedded into the contract used for almost every residential purchase in the state.

Back to our question, what is a home warranty plan? It is essentially an insurance policy that covers a lot of things a homeowners’ policy will not cover if something needs repair or replacement. Appliance, electrical and plumbing systems, if there is an issue and you have a home warranty plan, contact the carrier, let them know the issue and they will send someone out to repair or fix the issue.

From dripping sinks and clogged pipes, to burned out water heaters, to faulty central heating and air, if you have a home warranty plan in place the chances are you are covered for repair or replacement. Most plans will not cover roofs and leaks from above or below, nor flooring, walls or built-ins like cabinets.

The cost of the plan depends on the service call fee you choose for a professional to come out and either fix or replace the issue. This is like a co-pay for health insurance. The lower your co-payments per visit to a medical professional the higher your premium will be; the same for home warranty plans, the higher your service call fee the lower your annual, or monthly, fee will be for the plan.

It is important to note that you do not need to be purchasing a home to obtain a home warranty plan. Nor do most home warranty companies require a home inspection prior to issue a coverage plan. If you have lived in your home for two, five, fifteen years or longer you can obtain a home warranty plan that covers your appliances and systems.

It is important to note that the professionals who are dispatched to inspect and correct your issue are contracted to the home warranty company, you cannot choose a local plumber or electrician that you have worked with before to correct the issue and then bill the home warranty company.

Over the years I have had clients rave about having home warranty coverage and those who have had poor experiences due to the quality of the service professionals dispatched for issues needing fixing.

Before purchasing a plan I suggest you do some research. Contact your real estate professional and ask which companies that have generated positive or negative experiences with clients. Go on-line and research the various companies available and search for reviews—keeping in mind most people bothering to post reviews on-line tend to do so to vent about a negative experience. What are the prices, service call fees and coverages for the different plans from different companies, and what do you feel you need for your home?

One final note, home warranty plans are not just for owner-occupied homes, if you have a rental property there are coverages available to cover the wear and tear that occurs over time and use.

Next week we will discuss homeowners’ insurance and what it covers.

Have a question? Ask me!

Rate cut no surprise. On Wednesday, the Federal Reserve Open Market Committee (FOMC) voted to cut its benchmark interest rate by one-quarter of one percent (0.25%). This action was expected and had been priced into all the financial markets weeks ago. Most rate moves by the Fed are expected so it is the details of the meetings that are market movers as investors try to anticipate the Fed’s next move by what was news comes out of the FOMC meetings.

What we may have learned from the information released Wednesday is that the FOMC is divided. The vote to lower rates was not only not unanimous but had three dissenting votes; the first time in three years there have been three “no” votes for the committee. Two of the negative voters did so because they felt there should be no change in rates; the third voted “no” because he felt that the 0.25% rate cut was not enough and the cut should have been 0.50%. What does this mean for future actions by the Fed? Complicating the answer is that seven of the twelve members of the FOMC say they anticipate one more rate decrease this year. Since that would be a majority of the voting members the expectation is for one more rate cut. This meets expectations from earlier in the year, three rate cuts between August and December, and a future rate cut is pretty much priced into rates.

Rates for Friday September 20, 2019: This was another volatile week for mortgage rates as the Mortgage Backed Securities (MBS) prices fluctuated quite a bit every day—especially on Wednesday following the Fed announcement. Over all for the we end up very close to where we were last Friday despite a spike in rates on Monday that slowly disappeared through the week. The charts show that MBS prices may be approaching an interim high (higher prices mean lower rates), which portends a possible up tick in rates again in the next few days. The market is volatile, my advice is do not float your rate, lock it when you can through your escrow period.

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

30 year conforming                                            3.625%     Flat

30 year high-balance conforming                    4.00%       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.

My personal note this week is a challenge. On the one hand I acknowledge our oldest turned twenty yesterday—I guess that makes sense since Leslie and I just celebrated our 25th, but while I recognize her as being 20 I still see the little girl and probably always will.

On the other hand, after I finish writing the WR&MU this week and post it to my webpage, Facebook and LinkedIn I will be attending a funeral for an incredible woman who has done so much for our community, mostly behind the scenes and without wanting much attention for what she has done. The everyday role models are the ones that I want for my daughters. Not the Oprahs, or Michelles, or Taylors, but the strong women who live and work in our community who take the time from themselves and their families to help others. That was Connie who will be mourned and celebrated later today. She was always smiling, and raising her hand to say, “I can help with that.” And she did help, a lot. So many people in our community are just that much better off because Connie rose her hand, and they never know this is the case or her name.

The wonder, beauty and experience of life is the juxtapositions of joy and heartache amongst other emotions and experiences.

Call or visit someone you haven’t seen or spoken to in a while, say hello and say thank you for being them and letting you be you.

Have a great week,

Dennis

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

Did I miss it; did I miss the bottom for rates?

/in , /by

Question of the week:  Did I miss it; did I miss the rates bottom?

Answer:  Maybe.

As you will see below rates this week went up the most in one week since the week ending October 5, 2018. When rates climbed at the end of last September they ended up peaking for about a month before we had a long slide down (down every Friday for five of six weeks).

Rate increases this sudden and this high are rare but they do happen. Why? Usually rates jump up on very positive economic news, political news, or a geopolitical event. This week the trigger for the rate jump appears to be the nice-nice talk between China and the United States on tariffs and trade agreements. This made investors positive about American businesses and removal of a drag on the economy and they left the safety of bonds and mortgages and bought equities, i.e. stocks in corporations.

Further pushing rates higher was today’s news that August was a very strong month for consumer spending as retail sales climbed 0.4% with a very large 1.8% increase in vehicle purchases. Consumer spending is 65-70% of our economy and if the cash registers continue to ring at a growing pace the economy will grow as well.

Also in the reports today was that hourly earnings are up 3.2% year over year, well above inflation which provides support for continued consumer spending.

All this good news in negative for lower rates for several reasons, primarily they show an economy that would be further away from the recession many pundits and media outlets have been used to fill the airwaves, interwebs and newsprint. Secondly, the potential of the trade war with China cooling down adds more support to pushing out any possible recession even further.

Currently the mortgage markets have priced in a rate cut of 0.25% by the Federal Reserve when it Open Market Committee meets, what is uncertain is whether there will be more rate cuts later this year. The economic and political news is making further cuts somewhat more unlikely—which investors have also been reacting to as some have been making decisions based on at least one further cut after next week.

If, for some reason the Fed does not cut its benchmark rate next week be prepared for another spike in rates.

So, did you miss the bottom? For the short term it appears that it is likely you did. For the medium term the answer is unknown as the current spike could be a sell-off to protect profits, in which case they will slowly move back to bonds when they feel equity markets are peaking, or near peaking.

All that said, even if you missed the bottom rates are really, really good. The current rates are where they were in July, which were near multi-year lows. If you have been considering making a purchase or refinance for the bottom of the market, you may want to consider doing so from the perspective of rates bouncing off what may have been the bottom.

Have a question? Ask me!

Typically this section of the WR&MU covers what is happening in the economy that impacts rates, today that was the first section!

Rates for Friday September 1, 2019: We will see over the next week or two if the spike in rates is a blip or a trend. I suggest not floating your rate and locking when you are able to avoid further rate loss should rates bump up more.

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

30 year conforming                                            3.625%     Up 0.25%

30 year high-balance conforming                     4.00%       Up 0.375%

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

Thank you to everyone who sent happy anniversary issues to us last week. We had a great time scheduling nothing to do every day and knocking that important item off our to-do lists!

Have a great week,

Dennis

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

What can I do about my credit?

/in /by

Question of the week:  What can I do about my credit?

Answer:  This is a question that has been asked several times over the past month or so as we have received more inquiries from clients looking to purchase a new property or refinance one they currently own and have some issues on their credit report.

Credit report “issues” can vary from having derogatory reporting to credit scores. If you have negative credit issues many of them can be rectified, depending on severity. Let’s look at various credit issues and what you may be able to do to improve your credit.

The interest rate you are offered on credit, be it for credit cards, auto loans or a home mortgage, is impacted by your credit score. The lower your score the higher the interest rate; and you may be declined credit if your score is below a certain level. There are five elements that have the biggest impact on your credit score: payment history, credit utilization, length of credit history, new credit and the mix of your credit. Some of the elements you may be able to work on to improve your credit score, other items you will have little to no ability to influence.

The most important element by a long shot is your payment history. The more recent a late, or derogatory, payment is reported the larger the impact on your credit score. As well, the more serious the delinquency the larger the impact. For instance, a 30 day late on a credit card from December 2012 will have a lower impact than a 90 day late on a house payment from June 2019. Depending on the severity of the derogatory reporting, you may be able to have the reporting creditor agree to change the way the account is being reported.

While a 30 day late payment on a credit card is the most benign of derogatory payments they are also some of the hardest to have removed from your credit report, especially if the account is with a major bank. Typically to have late payments removed you will need to provide proof that you were not more than 30 (or 60, 90…) days late on your payment. This will entail providing a series of bank statements or cancelled checks to show your payment history and no payment being late. If you have an excellent history with the creditor and have on 30 day late they may (key word “may”) agree to remove the reporting of the late payment to retain you as a customer.

If you have late payments on a mortgage you will have to show that you have made your payments on time from before and after the late payment reported. While it does not happen often it is not that rare that borrowers who have been making on time payments and have had their servicing transferred to a new lender may be reported late due to misapplication of payments by the new lender or issue with the previous lender transferring records. It may take some patience and time, but if you have had a derogatory reporting on your mortgage for which you have made on time payments provide the records showing you have made the payments and the lender(s) accepted them. In May our Question of the Week was what you should do if your mortgage servicing has been transferred.

If you have collection accounts on your credit report, depending on their status they may be able to be removed and therefore have any negative impact removed as well. Collection companies purchase delinquent accounts at a discount and begin charging fees and interest on the obligation. Some collection companies will work with clients and agree to remove the accounts. Typically, if the account has been paid off already the collection company will not agree to remove the account—they have already received their money and you have no leverage. If you owe a balance the collection company may agree to provide you with a letter stating that no money is owed and the reporting of a collection was made in error. If you have an account that is reported in collection my advice is to contact the collection company, always being very friendly and nice as most of customer service people get yelled at and abused most of the time, and apologize for having the balance, ask how much is owed, and then ask if it is possible for you to obtain a letter saying nothing is owed and the account is reporting in error if you pay off the balance today. They may say yes and they may say no. If they say no, tell them thank you, ask if they can send you a written itemized bill and that you will work on paying the debt. Wait a day or two and call back. If there are not notes in your file and you receive another customer service representative, s/he may be in a more generous mood to your request and work with you.

Whether they agree to remove the reporting or not, if you have an outstanding collection account the impact on your report is more than a paid collection. The paid collection will stay on your report for seven years, so it is worth it to contact accounts that have been paid every six months or so to see if they will agree to remove the account from your credit bureau reports. If they do agree to do so ask if you can get a letter to the effect and send it to the credit bureaus yourself in case they do not follow up with the bureaus.

If you have a county, state or federal tax lien or judgment on your report the chances of you getting it removed are extremely slim. On the taxes the only way to get them removed is for the taxing entity to acknowledge to you that your taxes were paid as agreed and not in default, and they have to contact the credit bureaus directly. Like a collection account, unpaid tax liens on your report are more harmful than liens recorded against you but reporting paid. These recorded liens will report on your report for seven years.

Note that it takes a while for most tax agencies to file a lien against you. If you owe back taxes and are notified it is best to negotiate a payment agreement and begin payments. Most tax agencies will not file a lien as long as you are making timely payments towards paying off the obiligation.

Civil judgments, such as from small claims court, will either show an amount owed or that the obligation has been satisfied. If you lost a civil judgment and have paid it off it is very important that you receive a  notice that the plaintiff has file a “satisfaction of judgment” with the court. Once  you make the payment for the amount owed make sure you get a copy of the satisfaction of judgment and communicate to the court the judgment has been paid. If you do not receive a satisfaction of judgment contact the court and show them you have paid off the amount owed so they can either get the plaintiff to file the satisfaction or the court can file one showing no debt is owed.

The next most impactful element on your credit score is “credit utilization,” i.e. how much you owe. Not only is this the total amount of credit you owe but what kind of credit you owe and how much do you owe in relation to how much you can borrow. For many borrowers with scores that are lower than what is needed to either be eligible for a mortgage program, or what is needed for the next best interest rate, paying down or off some credit accounts can improve their score.

If you have a credit card with a $10,000 credit limit and owe $9500, this will have a negative impact on your credit score. If you are able to pay down the balance to $7000 your score will improve. What we do with many clients with high balances on revolving credit accounts to run a report and asking “what if?” What if different balances are lower and by how much, how will the score improve? What if an account were paid in full? Sometimes when we run these reports the scoring model suggests a new account be opened with a certain limit and a small balance is put on the account.

Credit utilization is much more fluid than payment history in how it impacts credit scores. We have tools to use with our clients that can show how much credit scores can be raised if certain actions occur.

I have found over the years than many people with some credit challenges are reluctant to address them, sort of like those who are hesitant to go to the doctor when they have a pain or probable medical condition—they are worried about what they will learn. However, until you have the condition looked at a remedy cannot be provided; and just because you do not have the condition looked at does not mean it will go away.

The sooner you have any credit issues addressed the sooner you are getting closer to having them resolved. Some issues can be corrected in a short period of time, and others make take quite a while. I have had several clients over the years with significant credit issues. We put together a plan and the clients followed the plan we agreed upon and after, in a few cases, a few years they were finally able to purchase a home. Had they done nothing they would have had to wait five, six or more years to purchase a home.

Finally, before you say, “I want to wait to buy a home until my credit score is higher,” let’s take a look at your credit report and score and see what rate and cost a mortgage will be with your current score, what the time and cost will be to increase your score, and what your rate and cost would be with that higher score. For many clients the cost in monthly payments is not as significant as they think to purchase a home today with their current score as opposed to spending time and money to try to raise their score for an incrementally better rate.

If you think you have credit issues and this thought is preventing you from exploring the opportunity to purchase a new home please contact me so that we can assess your credit situation and options for purchasing a new home. Rates are very low, waiting to increase your score may end up costing you more if rates go higher by the time your score has improved than if you were to purchase today with the score you have.

Have a question? Ask me!

What’s next? That is the question investors and business owners are looking for the Fed to answer. Last year the Fed policy was to raise rates two to three times in 2019 after raising rates four times in 2018. This was because the Fed was concerned about the economy growing too fast as indicated by every tightening labor markets, consumer spending and inflation hovering around its 2% target. The first quarter came and went with no rate increases and at the end of the second quarter the minutes from the Federal Open Market Committee (FOMC—the gang that determines the Fed’s interest rate charged to member banks) indicated many wanted to lower rates a few times through the remainder of the year. Earlier this month the Fed lowered its benchmark rate by 0.25% (one-quarter of one percent) because of concerns that the economy was not growing fast enough and concerns there might be a recession in the offing. This minutes from the meeting where rates were lowered were released, and comments from Fed Chair Jerome Powell indicated that the rate drop in early August was a “mid-cycle adjustment” and not part of a long-term policy.

Investors, business owners, elected officials, almost everyone, who makes long term decisions with money do not like uncertainty. Uncertainty makes planning difficult, close to impossible. Uncertainty leads to short term decisions and rapid and multiple changes of direction. Uncertainty leads to bad decisions and bad results. The Fed with its words and actions have created uncertainty in our markets and in the economy. As I have stated several times over the past few months, it appears the Fed has been acting on “what-ifs,” “mays,” “coulds” and “perhaps.” Our economy has been growing since 2010 at annual rates of 1.6% to 2.9%, to slow for some and worrisome that it may grow too fast for others. There is nothing wrong with this long, slow and sustained growth for nine years, likely ten. The Fed needs to sit on its hands and ignore the calls to “do something” in reaction to the news of the minute and instead look at the economic data that has accumulated.

Rates for Friday August 23, 2019: Rates bounced this week off last week’s multi-year low. Mostly in reaction to the Fed speak as well as the news cycle that we are heading into recession in 2020. With a rebound today in the mortgage markets we have paired some of the losses.

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

30 year conforming                                            3.5%     Up 0.125%

30 year high-balance conforming                    3.75%    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.

Our home is slowly returning back to the “new normal” established last year when our eldest went off to Boston to get some learnin’ in bio-engineerin’. She flew off East early this morning putting us almost on normal footing—which will occur next week when Long Beach Unified opens its doors for students and our youngest begins her senior year at Poly High (Go Jackrabbits). I consider the school year “normal” as there is a set routine daily and I am a person who thrives on routine. Summer and holiday schedules throw me for a loop.

Not sure what I will do in a year when they are both away at college and there is no set routine of a school bell to meet every week day from September to June; the schedule we have followed for fourteen years.

Have a great week,

Dennis

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

What is Escrow?

/in /by

Question of the week:  What is escrow?

Answer:  We have a lot of first time buyers entering the real estate market, which means a lot of people unfamiliar with the terminology and different services in the industry. This question was asked to me this week by a young couple purchasing their first home. They have heard, “when you open escrow, when you close escrow,” but what is this “escrow” they will be opening and closing? 

Dictionary.com defines escrow as “a contract, deed, bond, or other written agreement deposited with a third person, by whom it is to be delivered to the grantee or promisee on the fulfillment of some condition.” 

By this definition escrow is a third person with whom a contract is deposited.  For a contract to be valid it needs two parties, so part of the contract must be that both parties agree who will be the escrow, the holder of their contract.

In real estate, escrow is a third party that buyer and seller, or in the case of a refinance the borrower and the lender, use to transact funds from one party to the next; escrow is also referred to as the settlement agent.  Given instructions agreed to by both parties, the escrow holder agrees to accept funds from the buyer, and the buyer’s lender if necessary, and then after paying costs for other services involved in the transaction, deliver the funds to the seller once all promises are fulfilled in exchange for a grant deed from the seller that is delivered to the buyer.

Escrow is neutral and has no agency contract with the buyer or seller, its agency is with the transaction.  A simpler way to look at this is that the Smiths are selling their home to the Joneses.  The Smiths are represented by Mary as their real estate agent and the Joneses are represented by Joe as their real estate agent.  Once an agreement to price and terms is made an escrow account is opened with Sally at the escrow company, at that point Sally is the agent of the transaction representing the agreement the Smiths and the Joneses made.

If the Joneses wish to make a change to the agreement, say have $3000 credited to them to off-set some repair costs discovered during their home inspection, they notify Sally at the escrow company.  Sally cannot just change the terms of the transaction, she first must get consent from the Smiths for the credit.  Once both parties agree to any changes then Sally can amend the transaction.

Escrow plays a vital role in real estate transactions.  Large sums of money flow through escrow companies on a daily basis for purchase and refinance transactions.  Escrow is not only charged with making sure the initial instructions are followed but also that neither party is able to change the transaction without the consent of the other.  At closing, escrow is responsible for disbursing funds to all the parties and services involved in the transaction, refunding overages to buyers or borrowers, pay fees to termite, title, home warranty, lender and themselves, payoff any liens currently on the property such as the seller’s mortgage or tax obligation and transmit the net proceeds to the seller.  After the closing escrow provides a very detailed accounting of all funds received and disbursed to all parties.

Escrow companies and officers in California can be independent of any other affiliation or may be part of a title company or owned and operated by a real estate brokerage.  If the escrow company for a purchase transaction is owned by the real estate broker representing the buyer or seller this must be disclosed to all parties.

Agents and lenders cannot require that a particular escrow company be used on any transaction; buyers and sellers have the opportunity to request a specific company if they choose, though it is customary in our marketplace the seller, or the seller’s agent, is given the choice of this service.

A good escrow officer and company is like a good umpire in a baseball game, you don’t always know how good they are until you get a bad one; thankfully the latter are very few and far between these days.

For the first-time buyers, all buyers, opening escrow is great news as it means your offer to purchase your new home was accepted. Closing escrow is even greater news as it means you now own your new home!

Have a question? Ask me!

No worries here. The Consumer Price Index for July showed that prices for consumers rose 0.3% for all goods and services and also for the “core” rate (gas and food are stripped out). For the past twelve months, the CPI is up 1.8%, which could be labelled a very benign inflation number. If price growth continues to decline there will be more support for the Fed to lower rates, however the last several CPI releases have shown a pretty steady rate of price growth just below 2%. The news is mortgage rate neutral.

What me worry? Says the American economy after the Commerce Department released retail sales data for July. July saw the largest one month increase in retail sales in four months at 0.7% above June’s sales. Taking out car and gasoline sales for the month and sales increased 0.9% for the month, with on-line sales jumping a staggering 2.8% from June—likely boosted (shoved up?) by Amazon’s Prime Day and its competitors also pushing their own deals available. Evidently the trade dispute with China is not preventing consumers from buying products, nor is it increasing the prices paid for those products. Overall the news should be negative for lower interest rates as consumer spending is 65-70% of our economy and strong retail sales should portend economic growth and higher rates.

Rates for Friday August 16, 2019: Look at the pretty charts! Chart makers who track stocks and bonds had a fun week as they created what looked like silhouettes of mountain ranges with peaks and valleys. As I write this the Dow is down about 0.875% for the week and the S&P is down 3.67% since Monday’s open. In between we say a large peak on Tuesday and a deep valley on Thursday. All the while the rate on the 10-year Treasury dropped into mid-week before bouncing a bit today. Why all the activity? Concerns about a recession and European economies caused investors to sell of their equity holdings and purchase bonds and fixed rate investments—engaging in flight to safety (as discussed in the July 26th WR&MU). As discussed above, the concerns appear to be unfounded, however the result of the recession concerns is a dip in rates this week from last Friday, and the conforming rate at its lowest since the week ending December 9, 2016. Can they go lower?

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

30 year conforming                                            3.375%     Down 0.125%

30 year high-balance conforming                   3.625%     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.

Long time readers of the WR&MU know that this is the space I use to comment on personal events in me and my family’s life—for some I know this is the only part you read! (As an aside, my dad was very old school and could not understand why I always wrote this final segment—when I informed him it was probably the most read section, “Oh, then you should probably keep it.” Good advice.) This week these section is for parents of new adults.

Do you have a son or daughter who recently turned 18, or any children you still provide for over 18? Then please read on. Last year when our oldest daughter, then 18, flew off to Boston for college, before she left I had her sign two copies of a HIPAA Release Form (link below). Because she is an adult, no medical provider can provide either my wife or I any medical information about her. Should she have an accident or emergency and we are contacted that an event has occurred, federal law prohibits the medical provider from releasing any details.

With she and us each having signed copies of the HIPAA release form that we can provide the medical provider authorizing them to communicate with Leslie and I, they will be able to provide us with details of her condition, etc. We also have an electronic copy that we can quickly send to a healthcare facility across the country to expedite the information collection.

If you have any children 18 or older I encourage you to have them complete the form linked below and provide you with an original or copy. As well, if they are in college and/or living with roommates, encourage them to inform their roommate(s) of the form and where it is located (and to have them complete one for their parents). Privacy laws are very important to protect us, the HIPAA laws however can be detrimental for parents who need information and be able to be pro-active in their adult children’s healthcare.

Here is a link to the HIPPA Release Form we use. I hope none of us ever need to use it.

Have a great week,

Dennis

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

What has the biggest impact on mortgage rates?

/in /by

Question of the week:  What has the biggest impact on mortgage rates?

Answer:  News.

Political news, geo-political news and economic news impacts interest rates.

Mortgage rates are the result of investors either buying or selling fixed rate financial instruments—i.e. bonds and investments that behave like bonds such as long-term mortgages, which are bundled and sold as Mortgage Backed Securities (MBS). Interest rates move inversely to the price of the bond, or MBS. If more investors are selling MBS then prices will drop, which will push mortgage rates up; if more investors are purchasing MBS then prices will rise, which will push mortgage rates down.

What determines whether investors will be buying or selling? Extrapolation, anticipation, historical behavior, expectation and speculation. If you knew that a certain piece of news would benefit DCSmith Industries creating more sales and revenue, you would buy stock with the expectation the value of the stock would rise, increasing your investment. If after you own the stock there is some news expected to come out, or that has just come out, that would be detrimental to DCSmith Industries harming revenue you would sell the stock to retain your gains.

Investors do exactly that, except for fixed rate investments the information processed to anticipate whether prices should go up or down on bonds and MBS is different than the information processed to forecast future prices for individual companies. News is the currency of investors when it comes to fixed rate investment. And good news is bad and bad news is good when it comes to higher or lower rates.

Generally speaking, investors have two choices. They can trade equities (stocks in individual companies) or fixed rate instruments—bonds, mortgages. Historically, if equity markets are rising in price, fixed rate investments are dropping in price because investors sell their fixed rate investments to purchase the equities. The opposite is also true, if investors are selling equities they will generally take the sale proceeds and purchase fixed rate investments.

Good news creates a positive economic environment that boosts growth, and therefore sales and revenue of companies. With the expectations that the growth will create more value for private companies, with higher dividends and stock prices, investors will increase purchase of equities causing prices to increase.

This activity will reduce the demand for bond and MBS, causing prices to drop and rates to increase. Further influencing the lower demand for these investments is that strong economic growth historically has led to central banks, like the Federal Reserve, will increase their rates to slow growth and keep inflation in control. If they know this is the reaction of the central bank when economies are showing strong growth, investors will react by being even more reticent to buy or continue to hold bonds since their prices should drop, reducing their profits or creating losses. If they anticipate prices dropping further, why should they buy?

At some point the rates of return on the long-term fixed investments become high enough, therefore the prices low enough, that investors will start to return to these investments, slowing rate increases and potentially reversing the trend.

Bad news has the reverse effect. Individual company stocks and equity markets in generally are typically a lot more volatile than fixed rate investments. This creates a situation where prices in equity markets can swing wildly day-to-day, or even within one day, as we have seen several times in recent history. Extremely bad news, such as the outbreak of armed conflict, will create an environment known as “flight to quality.” “Quality” is synonymous with “fixed rate investments.” If you purchase an investment that will pay you 4% of the purchase price every year for ten, fifteen, thirty years, you know exactly what you will be receiving for your investment—there is almost no risk if it is backed by the United States Treasury. This is known as a quality investment. Conversely, purchasing stock in an individual company has risks, no matter the history or strength of the company. Think of major U.S. corporations that seemingly would never go out of business or see its value drop considerably, Blockbuster and Kodak did not adapt to technology and investors who held onto their stock lost a lot of money; Pan Am and Eastern were very strong world-wide brands that are no longer a brand of any kind except historical;  Woolworths, Arthur Anderson, Lehman Brothers…all these companies at one point, and for a long period of time, were leaders in their fields and industries but investors in these companies lost their investments—or most of them. Such is the risk to individual companies to bad economies, bad events and bad behavior by corporate leaders.

Because of the inherent risk in equities, when bad news occurs, or appears about to occur, we see the behavior of “flight to quality” with bond prices climbing and rates dropping.

Every week, in the section below this in the WR&MU I provide important news that impacts mortgage rates. If news is good, I comment the news is bad, or not good, for lower rates; if the news is not so good it should lead to lower rates. Historically, this has been the relationship between news and events and interest rates.

Historically is the key word as for the past several years our historical models and behavior have not always applied to the news, events and data that should put either upward or downward pressure on rates. As a result, despite the longest post-recession economic recovery in our nation’s history, rates are still significantly lower than they were pre-recession, and lower than several times during the recovery.

Just remember, if you are getting ready to borrow money for your new home, or to refinance your current one, bad news is good for you as it should lead to lower rates, and good news is bad. Selfishly, you are somewhat hopeful for some sort of bad news just before you lock your interest rate.

This explanation of what impacts mortgage rates and their rise or fall has been very general, there are many, many other issues, but I hope the generalization has been helpful.

Have a question? Ask me!

Good news or bad news? The first estimate of Gross Domestic Product growth for the second quarter of 2019 showed the economy grew at an annual pace of 2.1%. This growth was one-percent lower than the first quarter’s growth, but a bit higher than most economists predicted. Is the slowing growth good or bad news? On the one hand, it is good news as the quarter showed the spending by consumers in one quarter since 2017. On the other hand, it is not good news as holding down total economic growth was slowing in business growth as manufacturers and exporters invested less in fixed capital (buildings, tools, etc) as they took a wait-and-see approach to new investments as the trade talks and tension with China and other nations created uncertainty. Consumer spending is approximately 65-70% of our GDP, and the strong showing should have reflected growth of at least 3%; however the strong decline in business investment counter-acted the consumer—and appears to be the primary reason the Fed is looking to increase interest rates.

Rates for Friday July 26, 2019: The GDP news had little impact on rates today and we are flat for the third Friday in a row. If the Fed does raise interest rates next week, the increase is pretty much already priced into mortgage rates and the announcement should have little impact on rates.

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

30 year conforming                                            3.75%     Flat

30 year high-balance conforming                   4.00%     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.

Our summer heat has finally arrived in Southern California, which means our pool is finally not too cold for me to take the occasional dip. I am no fan of cold water, which I consider to be anything below about 72-3 degrees. The “you’ll get used to it” line has never held true for me!

Stay cool, stay hydrated and make sure you have plentiful and fresh water for you pets.

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