The Decade in Review
Question of the week: A look back at the ‘10’s decade from the lens of mortgages and the economy.
Answer: Last week we took at look back at 2019 for mortgages, housing and the economy. This week let’s take a look back to the beginning of the decade and compare it to the end of the decade.
We started the decade with the economy in the early stages of recovering from the Great Recession. While the recession ended in June 2009 (a recession is defined as two or more quarters of economic contraction, or negative Gross Domestic Product growth, a recovery starts when there is positive GDP growth after two or more months of negative GDP growth). Despite the economy starting to grow six months earlier, 2010 saw continued increases in unemployment and decline in housing prices for most of the country. The onset, depth and length of the recession were the result of a collapse in real estate markets across the economy that had been fueled by very easy to obtain mortgages.
One of the first results of the recession was the implementation of new policies for mortgages funded through Fannie Mae, Freddie Mac, using FHA or VA financing and eventually all lenders. As I said at the time, underwriting guidelines went back to the way they were when I started in the industry in 1987—you had to prove your income, verify your funds for down payment and closing costs were your own or source where they came from, and the property you were borrowing or refinancing had to have its value supported by an appraisal. While there has been some relaxing in underwriting guidelines over the past decade, most of the fundamentals remain the same for borrowers looking to obtain the least risky mortgages in regards to rates and terms.
Let’s look back at the data from 2010 and compare to today’s numbers and environment.
As we did last week, we will start with mortgages and interest rates. A big change in the mortgage market from 2010 is the maximum loan limits for Fannie Mae and Freddie Mac. In 2006 the conforming loan limit was raised to $417,000 and it stayed at this limit until 2017 when it was increased to $424,100; in 2020 the conforming loan limit will increase to $510,400. In 2008, to encourage home buying and enable more homeowners to refinance Fannie and Freddie added the “high-balance” loan limit for properties in high cost areas, such as Los Angeles and Orange Counties. This limit initiated at $729,750 for single family dwellings. In 2020 the new high-balance limit will be $765,600.
The decade started with the conforming mortgage rate at 5.125% (using the same parameters I use each Friday for rates in the WR&MU, purchase of a single family residence with 20% down and a borrower FICO score of 740). We end the decade with the conforming rate at 3.50%, and the conforming rate being at or below 4% for three-quarters of the year.
January 2010 saw the median priced home in the State of California selling for $284,600. Statewide the median home price bottomed out in February 2012 at $268,810. As mentioned last week the median home price in California in November 2010 was $589,770, 107% more than the at the beginning of the decade and 120% higher than the bottom in 2012.
More locally, as mentioned last week the median home prices in November 2019 for Los Angeles and Orange Counties were $594,840 and $822,000, like the state median, these prices were up significantly from January 2010. The LA County median price was $316,698 a decade ago, up 88% today from January 2010. Orange County’s median price was $527,477 in 2010 and has increased 56% from the median price to start the decade.
A very large factor in our economy this decade has been the actions of the Federal Reserve. To support the mortgage market, keeps rates low and push economic growth the Fed engaged in a few maneuvers. First and foremost it dropped its discount rate, used by banks to borrow money from each other, to near zero. This caused the Prime Rate, used by many lenders as their benchmark for consumer loans, to drop to 3.25% in December 2008 and remain at that level until December 2005. Today the Prime Rate is 4.75%, down from a post-recession high of 5.5% in August 2019.
Of much greater impact, and significance was the “Quantitative Easing” policies of the Fed. In November 2008 the Fed began purchasing Mortgage Backed Securities (MBS, these investment instruments are composed of bundles of millions of dollars of residential mortgages, mostly from Fannie Mae and Freddie Mac) and U.S. Treasury notes. By purchasing these investments the Fed kept money flowing through the debt markets enabling lenders to continue to make mortgages. The plan was to purchase $600 billion in mortgage debt (MBS) and $100 billion in other debt, mostly U.S. Treasury notes. By March of 2009 the Fed had accumulated $1.75 trillion, well beyond its initial target, and expanded the QE program, purchasing another $750 billion in MBS and $400 billion in Treasuries and other debt. By June 2010 the Fed’s balance sheet had grown from $870 billion in August 2007 to $2.1 trillion.
As the Quantitative Easing ended the Fed, and others, were criticizing banks for not lending enough, banks countered that there were not enough credit-worthy borrowers. This led the Fed to start what became known as QE2. Starting in November 2010 and continuing to July 2011 the Fed purchased another $600 billion in MBS.
During this time the economy was growing, unemployment slowly began to level off and employers were slowing hiring instead of firing. Not fast enough for the Fed however. In September 2012 another Quantitative Easing process began. QE3 started with the Federal Reserve purchasing $40 billion per month of MBS, in December 2012 the Fed upped the amount to $85 billion per month, reduced the purchases of mortgages to $65 billion per month in July 2013 and stopped the policy in October 2014.
In 2017 the Fed began slowly selling off some of it assets to “normalize” its balance sheet. The selling stopped in august 2019 and the following month the Fed’s balance sheet hit a post-recession low of $3.8 trillion, today the Fed holds $4.2 trillion in mortgage, Treasury and other debt, almost four times the size in 2007.
This is significant moving forward because $4.2 trillion sitting in the Fed’s accounts is $4.2 trillion additional dollars in our economy, and enables the Fed to have even greater control over the economy than it has every had before. Keep in mind the Fed, ostensibly accountable to Congress, really isn’t and acts independently.
Some hard economic data numbers for the past decade for those who are data geeks like myself.
In 2007 the unemployment rate was 5.0% and inflation was a very robust 4.1%. Unemployment rose to 9.3% to start the 2010’s and was at 1.5%. In 2011 the nation experienced its twenty-sixth consecutive month of more jobs leaving the economy than being created.
Despite the recession ending in 2009, the year ended with GDP at 2.5%. By the end of 2010 the GDP was growing at 2.6%, through the 3rd quarter of 2019 GDP was growing at 2.1% on an annualized basis.
We are experiencing economic history as 2019 will be the eleventh straight year of economic growth, the longest period in history. Will 2020 see a recession and break the historic streak? As I mentioned in last week’s WR&MU I do not think a recession is in the cards for 2020 unless some catastrophic or unexpected event occurs.
We have come a long way since 2010, economic and emotionally as workers and consumers have gone from fear to economic optimism and stability. What will the next decade have for us?
Have a question? Ask me!
Rates for Friday December 27 2019: It’s over! After ten straight weeks of no change in the conforming mortgage rate from Friday to Friday we see a change from last week. Mostly because of the mid-week Christmas holiday and light trading the conforming rate has dropped from last week, the high balance rate is also down.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.50% Down 0.125%
30 year high-balance conforming 3.75% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Reading through some of my Weekly Rate & Market Updates from 2008, 2009 and 2010 I found myself experiencing some of the feelings I had back then. In the first week of October 2008 the stock market plummeted, it ended the day down 30% from the year before. Leslie, the girls and I were on vacation in Scottsdale and as I watched the numbers come in on the alerts I had set up on my phone my stomach was in knots and my head was light. That evening I told Leslie, “this is really bad. I don’t know what we are going home to, what our future will be for Stratis if this continues.”
We made it through, not without some pain. Stratis never laid off an employee, though we did go to four day work weeks with our staff. Thankfully, we have had, and continue to have, great staff—almost everyone who was with us in 2008 is still with us. Because our business model has always been to concentrate on long-term fixed mortgages and quality over quantity, we have been able to retain our excellent referral bases from past clients and professionals in the real estate and other industries.
It has been quite a decade and we thank everyone who has stuck with us and Stratis Financial through not only the past decade, but the one before that.
I hope everyone had a wonderful Christmas and/or Hanukah with plenty of good times with family and friends. Cheers to 2019, to the 2010’s and for the joy and prosperity 2020 and beyond will bring to each of us.
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
