Given the stock market's recent performance, it's not surprising that gasoline's falling prices are garnering very little attention. That doesn't make it any less relevant, however.
Since peaking in July, gas prices are off by 20 percent.
Falling gas prices are an important positive for the U.S. economy because less money spent at the pump means that more money is saved per household for everyday items including food and other staples.
In addition, consumer spending makes up two-thirds of the economy.
Therefore, falling gas prices may lessen the impact of a forecasted recession. Because Americans are notoriously poor savers, the extra cash-on-hand is likely to get spent which will, in turn, push the economy forward through the upcoming holiday shopping season.
So, just as inflation can bad for mortgage rates, so can recession. And while recession won't always cause mortgage rates to rise, right now, it's one of the factors driving rates higher. Falling gas prices may help keep that scenario at bay.
Buyers are returning to the housing market.
Each month, The National Association of REALTORS® tracks homes under contract to sell, but whose closing has not yet happened. It calls them "pending sales" and publishes a monthly report to quantify them.
The Pending Home Sales report is important because it's meant to predict future home sales activity. History shows that 80 percent of homes under contract will "close" within 60 days, and most of the rest will close within 120 days.
If Pending Home Sales are up, it's believed, actual home sales will be up, too.
In August, Pending Home Sales jumped 7 percent from the month prior, returning to levels not seen in over a year.
The report's strength suggests that buyers are returning to the housing market, continuing the trend that started in March. This is tremendously good news for sellers because more buyers on the hunt means more demand for homes which, in turn, leads sale prices higher.
The Pending Homes Sales report is not a perfect predictor, however. For one, it's not measuring an actual sale -- just the expectation of one. In addition, it only accounts for "used" homes, ignoring new construction.
But that aside, the strong uptick in August tells us that home buyers are re-engaging at a quickening pace and finding that "now" is a good time to buy real estate. When buyer demand rises, the real estate market as a whole isn't usually that far behind.
(Image courtesy: The Wall Street Journal Online)
The Federal Reserve made an "emergency rate cut" this morning, dropping the Fed Funds Rate by one half-percent to 1.500 percent.
The move is meant to stimulate the U.S. economy.
When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy.
On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.
But, as it relates to Americans in general, the rate cut spurred two immediate changes.
First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent today, too. That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.
The second change is that mortgage rates are rising today.
The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds. Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning.
As always, mortgage markets and mortgage rates remain on edge. Therefore, rates are subject to change. And quickly. If you see a rate and payment you like, be ready to commit to it because it likely won't last long.
(Image courtesy: USA Today)
Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004.
Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer. As stocks sold off, mortgage markets rallied to the benefit of home buyers and mortgage rates shoppers everywhere.
Conforming mortgages rates improved yesterday.
Most interesting here is that rates improved for the same reason that the stock market fell. Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday. In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt.
The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.
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Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left.
All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out. This is why mortgage rates fell Monday.
But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared. Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher.
And if stocks recover as quickly as they tanked, expect mortgage rates to spike badly.
(Image courtesy: USA Today)
Congress approved the $700 billion "Bailout Bill" Friday, answering the question that dogged mortgage markets all week long:
Will they or won't they pass it?
The uncertainty prior to the vote created huge market swings that ultimately sent the Dow Jones Industrial Average to its worst week since the 2001 terrorist attacks, while causing similar damage in the mortgage markets.
Mortgage rates worsened for the third straight week last week.
However, if we take the congressional vote out of the picture and look strictly at last week's data, we would have expected mortgage rates to fall instead of rise.
For example, the economy shed another 159,000 jobs, bringing the 2008 total to 760,000 lost jobs. This reduces the likelihood of inflation and is normally good for mortgage rates. In addition, the U.S. dollar had its strongest week ever against the Euro. This usually attracts buyers to the mortgage bond market, driving down rates.
And third, Fannie Mae eliminated one of its mandatory loan fees. This improves mortgage bond pricing for borrowers, ultimately leading to lower rates.
But, mortgage rates rose didn't fall last week and that shows how deep the economic uncertainty really ran. And this week, with the bill now passed into law, we would expect the market to turn its attention back to fundamentals. But it can't.
Unfortunately, there's no new data for release this week so, in the absence of data, markets should take their cues from the following sources:
- The 8 scheduled Fed speakers, including Bernanke on Tuesday
- Wednesday's Pending Home Sales report
- Persistent rumors of a "surprise" Fed Funds Rate cut
Regardless of to what markets react, though, be prepared for them to react swiftly and for mortgage rates to dip and spike -- often in the same day.
In other words, a mortgage rate quote from the morning is likely to be "expired" by the afternoon so if you see a rate and payment that you like, consider locking it. It likely won't last long.
In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.
Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses. The initial fee was a quarter-percent of the amount borrowed.
Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.
As of today, the fee is back to its starting point.
Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines. Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.
Today's change is among the few that are beneficial.
This morning, mortgage pricing is edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report. The good news is that price changes could have been worse.
Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates from rising as high as they might have otherwise risen today.
As household budgets get pinched and credit markets tighten, a growing number of Americans are making "hardship withdrawals" from their 401(k) plans.
One major fund group cites a 15 percent increase in activity from this time last year for various reasons including staving off foreclosure and medical emergency.
However, 401(k) loans should only be made with careful consideration.
On the positive side, 401(k) loans don't require a credit check. This is helpful feature for people deep in debt, and who may have missed a payment or two to their creditors. With no credit score requirement, a poor payment history won't disqualify a plan participant.
In addition, most 401(k) loans can be arranged with just a phone call and a small stack of paperwork. There's no "qualification process" like applying for a credit card or a mortgage. Money can be available, therefore, in as little as a day.
But there are negatives to 401(k) loans and the biggest one relates to taxation.
If you take a 401(k) loan and can't repay according to its terms, the IRS taxes the loan as ordinary income and slaps on a 10 percent penalty if you're under 59 1/2. That can be very costly for a lot of people.
But, even if you do repay the loan on time, it's still gets expensive. This is because 401(k) loan repayments are subject to double-taxation.
The first taxation occurs when the loan is repaid because the payback is made with post-tax paycheck dollars. A person in the 25% tax bracket, for example, would need a $1,333 paycheck to repay a $1,000 loan -- the missing $333 goes to taxes.
And the second taxation occurs at retirement when the funds are finally withdrawn. The IRS taxes that money as ordinary income.
Now, this isn't to say that taking a loan against your 401(k) is bad, it just may not be the best possible route for a person in trouble. Especially because of the costs. If you're planning to withdraw from your 401(k) for hardship, be sure to talk with a qualified financial professional first.
If you'd like a referral to a trusted professional, call or email me anytime.
Monday, after the House of Representatives defeated the Emergency Economic Stabilization Bill of 2008, the stock market fell in historic fashion.
The Dow Jones Industrial Average closed down 777.68 points, its largest one-day point loss ever.
By Tuesday, however, optimism had returned to Wall Street.
Assuming that the bill would pass in some form, investors poured back into the stock market, driving prices up. Again, in historic fashion -- Tuesday's gains were the third-largest on record.
The stock market activity is highly relevant to mortgage rates right now because when investors flee the stock market, they're often parking their money in bonds.
In general, that causes mortgage rates to fall.
But, by contrast, when investors regain their appetite for stocks, as they did Tuesday, they move back into the market, "unparking" their bond money. This causes mortgage rates to rise.
Both Monday's and Tuesday's dramatic action points to the speed at which market conditions can change, taking mortgage rates with them. Wall Street's back-and-forth mentality has been one of the reasons why mortgage rates have bounced so wildly since July.
We can't predict if rates will fall or rise going forward, but if the stock market is any sort of a clue, in whichever direction rates go, they're going to go there quickly.
Monday afternoon, the U.S. House of Representatives defeated the $700 billion "Bailout Bill", surprising Wall Street and the world.
The Dow Jones Industrial Average responded by falling 777.68 points -- its largest one-day loss in history and, this morning, every newspaper in America is covering the story as front page news.
Lost in the coverage, however, is how the "No" vote created a terrific opportunity for mortgage rate shoppers.
Yesterday, as money fled the tanking stock market, most of it ended up getting parked in the relative safety of government-backed bonds which includes, of course, the mortgage bonds. This rising demand for mortgage bonds caused rates to fall.
To investors, stock markets represent risk and bond markets represent safety. So, when market sentiment changes, as it did yesterday, Wall Street players often shift their dollars from one forum to the other. This is why yesterday's stock sell-off was good news for mortgage rate shoppers -- the added demand for "safe" securities drove down rates.
Conforming mortgage rates were lower by about an eighth-percent Monday.
Now, today, mortgage rates are opening flat, suggesting that markets are in a Wait-and-See Mode. Wall Streets knows that the defeated bill will re-emerge later this week and, when it does, expect traders to respond accordingly.
If the new-look bill is viewed as favorable to U.S. businesses without harming taxpayers, expect stock markets to improve and mortgage rates to rise. If the bill fails to accomplish that goal, however, expect mortgage rates to improve.
Mortgage rates bounced around last week, ending up worse overall. It was the second straight week in which rates deteriorated. Sentiment was driven largely by the proposed Emergency Economic Stabilization Act of 2008 -- a.k.a. The $700 Billion Bailout.
The good news is that Congress drafted its bill Sunday evening and within the 110 pages, there is an important clause that should be good for mortgage rates.
On Page 40, it says, summarized:
- The U.S. Treasury gets $250 billion up-front
- It must ask the President to approve its next $100 billion
- And Congress must approve the remaining $350 billion
In other words, the U.S. Treasury checkbook is not "open". By limiting the Treasury's spending to $250 billion up-front, with the next $450 billion subject to third-party approval, some of the market's inflation concerns from last week should ease, providing downward pressure on mortgage rates in general.
But, that said, there's a few important data releases this week that could counter-effect these improvements.
First, on Monday, it's September's Personal Consumption Expenditures data. The report sounds fancy with a name like Personal Consumption Expenditures, but it's really just a Cost of Living measurement, adjusted for human behavior.
For example, if whole grain cereal gets too expensive, PCE assumes that Americans will substitute for another breakfast food. This is one reason why PCE is the Fed's preferred measure of inflation.
If PCE is higher-than-expected, it's considered to be a signal of inflation and mortgage rates should rise.
In addition, on Friday, the jobs report is released. It's widely expected that the September's job growth was negative (for the 9th straight month) and that unemployment remained in the 6.000 percent range.
Rates up or down, it's too hard to predict. Therefore, if you see a mortgage rate with a comfortable accompanying payment, consider locking it in.
With as fast as markets have moved this year, you can be pretty sure the rate -- whatever it is -- won't last for long.
(Image courtesy: The Wall Street Journal Online)
Thursday, federal regulators seized mortgage lender Washington Mutual. The Seattle-based thrift became the third "big name" lender to close its doors since July, joining IndyMac and Lehman Brothers.
In 2007, these 3 lenders represented about 10 percent of the mortgage market and their subsequent failures are confusing American homeowners.
The most prevalent question:
If my mortgage lender fails, are my payments still due?
And the answer is an unequivocal "yes". If a mortgage lender is seized, goes bankrupt, or is otherwise closed, it doesn't change the terms of the bank's mortgages whatsoever -- just maybe the mailing address.
This is because a mortgage (and its corresponding note) is a legal contract between the lender and the lendee, signed on the date of closing. It is binding and cannot be altered by either party. The only way to "end" the contract is to pay the loan in full.
This can happen in one of 3 ways:
- The home is sold and the mortgage is repaid
- The home is refinanced and the mortgage is repaid
- The home loan is paid down to $0 balance by the homeowner
So, when a mortgage company fails, its loans are paid-off in full and, therefore, all of the failed company's mortgage contracts remain in effect. Payments are still due.
When this happens, failed lenders will usually transfer their mortgage assets to a new lender's servicing department. This means that homeowners will write the same check for the same mortgage but to a different company.
To reduce confusion around transactions like this, the government puts two safeguards in place. First, it requires the former lender to send a 15-day advance notice of the change to the homeowner. And second, it requires the new lender to do the same.
In situations like this, the onus is ultimately on the homeowner to open and read his mail, and make changes accordingly. It's especially important for people who pay their bills online as opposed by paying them manually; you likely won't get notified if you're sending payments to the wrong place.
The August Existing Home Sales report was released Wednesday, showing a decline in the number of homes sold nationwide, and a reduction in the median sales price.
Not surprisingly, the media singled these two statistics out, playing them as a big negative.
They're not.
The decline in sales wasn't good, but it wasn't terrible, either -- sales were actually up in half of the regions around the country.
And, citing "median sales price" is somewhat pointless because median sales price only measures the price point at which half the homes sold for more, and half sold for less.
No, it's the third statistic in the report that deserves as much -- if not more -- attention that the previous two. According to yesterday's press release, the national home supply is decreasing.
This is terrific news for home sellers.
In its report, the National Association of REALTORS said that the nation's existing supply of homes for sale fell by 7 percent in August.
At the current pace of sales, that represents a 10.4-month supply, down from 10.9 months in July. With a reduced supply of homes for sale, all things equal, home prices would increase.
This is Supply and Demand in its most basic form.
Economists and experts have long noted that reducing the housing supply is one of the key elements to a sustainable housing recovery and we've seen several indications that this is happening, including builders not building as much.
Longer-term, this is good news for home sellers because a reduction in housing supply tends to lead to higher prices.
(Images courtesy: The Wall Street Journal Online)
Earlier this year -- and for the first time in its history -- the FHA changed its funding fees and mortgage insurance structure.
Effective October 1, 2008, it's repealing those changes.
Partly to keep FHA home loans affordable, and partly to comply with new laws, the FHA is rolling back its up-front fees and ongoing mortgage insurance requirements and replacing them with new ones.
The new up-front FHA fees are as follows:
- 1.750% : All purchase and "standard" refinances
- 1.500% : All "streamline" refinances
- 3.000% : All FHASecure programs for delinquent mortgagors
These fees are paid as a one-time cost at closing, and are calculated by multiplying the loan size by the fee. A $200,000 FHA purchase, for example, now carries a $3,500 one-time charge.
Ongoing mortgage insurance requirements have changed, too. These changes are based on the loan type and the amount of equity in the home.
- 15-year fixed with 90% borrowed or less: 0.000% annually
- 15-year fixed with more than 90% borrowed: 0.250% annually
- 30-year fixed with 95% borrowed or less: 0.500% annually
- 30-year fixed with more than 95% borrowed: 0.550% annually
Mortgage insurance premiums are calculated by multiplying the initial loan size by the annual premium. The same $200,000 FHA purchase outlined above, using a 95% 30-year fixed mortgage, would require a monthly mortgage payment add-on of $83.33 until the loan is paid in full.
FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA guidelines have remained relatively loose. FHA allows 3.500 percent downpayments on purchases, for example, and allows "cash out" refinances to 95 percent.
Fannie Mae and Freddie Mac do not.
Crude oil prices jumped $25 at one point Monday, ending the day up by 16 percent.
This is an unwelcome development for home buyers because the same market forces that pushed up oil prices had a similar impact on mortgage rates.
It all comes down to the U.S. dollar.
Because both crude oil and mortgage-backed bonds are denominated in dollars, the fate of both instruments has been closely tied to the greenback lately.
With respect to the mortgage market, when the dollar has been strengthening, rates have tended to fall. And, when the dollar has been weakening, mortgage rates have tended to rise.
Yesterday, the U.S. dollar had its worst one-day performance against the Euro in history so it only follows that conforming mortgage rates spiked. Across the board, they added about a quarter-percent.
Add this quarter percent to the run-up from last week and conforming mortgage rates are now close to 0.750% higher than where they were last Monday, further evidence that how quickly the market can move.
(Image courtesy: GasBuddy.com)
In a historic week for American Finance, mortgage rates rose considerably, reversing a 3-week trend through which rates had fallen.
The U.S. Treasury is the biggest reason why most conforming mortgage rates increased by a half-percent.
Hank Paulson's government group helped to restore investor confidence that had steadily eroded from concern to fear since July 2007, before succumbing to outright panic last week.
Wall Street nerves were so frayed that at one point Wednesday, yields on government bonds were actually in the negative; investors were paying the U.S. government to hold and protect their money in exchange for a guaranteed loss of investment.
After the Treasury's interventions, however, a sense of normalcy returned to Wall Street. Money poured back into stocks, siphoned from the bond market and that pushed rates higher.
This week, it's anybody's guess what will happen.
From a data perspective, it's light -- there's Existing Home Sales, New Home Sales, and not much else. From a policy perspective, however, the week is heavy:
- Congress is expected to authorize "hundreds of billions" for market support
- Ben Bernanke and Hank Paulson will testify before the Senate Banking Committee
- 7 members of the Fed are making public appearances
With so much rhetoric, it's difficult to predict how mortgage rates will perform this week. The stock market may be the best predictor of rates.
If stocks are up, risk-taking is back in vogue and the bond market should suffer, pushing mortgage rates higher. By contrast, if traders stay clear of stocks in search of safer investments, mortgage rates should fall.
(Image courtesy: Wall Street Journal)
Getting a great, low mortgage rate is often a combination of luck and preparation.
Consider what happened in conforming mortgages this week:
- Monday, mortgage rates plunged to their lowest levels of the year
- Tuesday, they bounced back in full
- Wednesday, they clicked higher by a eighth-percent
- Thursday, they clicked higher by another eighth-percent
And so, here we on are Friday, four days after the best rates of the year, and the mortgage market barely resembles itself. Despite what the papers tell you, mortgage rates are not low anymore.
That's the luck element -- you can't plan for rates moving up and down.
But, if you missed Monday's plunge, and don't want to miss the next one, all you have to do is get prepared. Then, you're waiting for luck when it happens.
There are 4 basic steps to prepare for low rates and the key is to follow them before rates plunge, not during. That way, you're ready to pounce on low rates at the moment they present themselves.
The first step is to contact your loan officer.
If you don't have a loan officer, or your loan officer is no longer in the business, ask a friend for a referral. Do not call the 800-number on your mortgage statement -- you'll almost always get a better "offer" from a live person than from a call center representative.
Next, give your loan officer a complete mortgage application, including a "credit pull". Be honest and accurate and don't worry about the credit check harming your score -- the bureaus protect it for a period of 30 days.
Then, ask your loan officer what supporting documentation will be required to approve your eventual home loan. Whatever it is, gather it and send it in -- either by fax or email.
And lastly, be ready to act when your loan officer calls with the good news. If rates have dipped to lower-than-normal levels, it likely won't last long.
This preparation process is very similar to what home buyers do before making an offer on a home. Getting ready for a refinance is like getting pre-approved, but instead of waiting to pick out a home, it's waiting to pick out a rate.
So, to summarize:
- Contact your loan officer
- Give a complete application
- Gather and submit supporting documentation
- Be ready to act
Mortgage rates don't plunge often, but when they do, it's usually short-lived. If you're prepared for when it happens, you can lock in the best mortgage rate available at the best possible time.
It will be your lucky day and you will have been ready for it.
In August, home builders broke ground on the fewest number of homes since January 1991.
It was the 16th straight month in which Housing Starts declined.
But, although the press labels these statistics indicative of a recession, home sellers nationwide quietly applaud them.
With fewer new homes coming on the market, home sellers are finding that there's less competition for buyers, helping them to command higher prices for their homes.
It's Supply and Demand in its most basic form.
But that's not all that home buyers have to worry about. The most recent Existing Home Sales report showed an increase in sales nationwide, plus a reduction in the number of single-family homes for sale.
Again, Supply and Demand. Good for sellers, bad for buyers.
However, we should keep in mind that real estate is local. What we see in national and regional trends are not as important as what's happening in your town, your neighborhood, and your street. But, if we learn one thing from the chart above, it's this: builders are rational.
If homes won't sell, builders will stop building them. And, sooner or later, the market -- and home prices -- will catch up.
(Image courtesy: The Wall Street Journal)
For the third consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.
Of interest to mortgage rate shoppers, the FOMC led its press release with comments about the health of the financial and labor markets, calling them "strained" and "weakened", respectively. The relative weakness in both of these areas has contributed to low mortgage rates of late.
The FOMC also noted in its release that, although economic growth has slowed this year, the historically-low 2.000% Fed Funds Rate should foster "moderate economic growth" in the future.
In the wake of the announcement, Wall Street is rallying. Investors like what the Fed had to say and this is attracting money to the stock market at the expense of bonds.
Mortgage rates have given up all of Monday's gains, and then some.
Source
Parsing the Fed Statement
The Wall Street Journal Online
September 16, 2008
http://online.wsj.com/internal/mdc/info-fedparse0809.html
Yesterday, the stock market suffered its largest one-day point loss since September 17, 2001, and its sixth-largest point loss in history.
Not everyone got punished, however. Two groups of people, in particular, welcomed yesterday's losses:
- Home buyers out shopping for a mortgage
- Homeowners that snoozed through last week's mortgage rate drop
See, as the stock market dropped yesterday, investors anxiously moved their money away from risky investments like stocks and into the safe haven of government-backed debt.
This includes mortgage-backed debt, of course.
As traders poured into bonds, bond prices rose. They did so beginning at Market Open, all the way into Market Close. And, because mortgage rates move in the opposite direction of mortgage bonds prices, mortgage rates fell Monday. A lot.
Today, the Federal Open Market Committee meets, adjourning from its scheduled conference at 2:15 P.M. ET. In the Fed's press release, among other things, markets expect Ben Bernanke & Co. to address the financial system's stability -- or lack thereof -- that helped to fuel Monday's selling action.
If markets find the Fed sympathetic, expect stock markets to rally, and mortgage rates to rise.
In a week overdone with market-altering news, conforming mortgage rates shed a quarter-percent overall last week. It was the third straight week in which rates improved.
The biggest story, by far, was the government's takeover of Fannie Mae and Freddie Mac.
The two quasi-government agencies were nationalized into bona fide government agencies, converted mortgage-backed debt into risk-free, government debt.
Instantly, conforming mortgage rates fell.
But, once the news settled in, mortgage markets returned to normal and, like in weeks prior, rates mirrored the path of the U.S. dollar.
Early in the week, the dollar was helped by economic trouble in Europe and optimism about the U.S. economy. Currency traders flocked to the dollar, helping to push mortgage rates down for Americans.
But, as the week continued, dollar enthusiasm waned and mortgage rates increased. Then, Friday afternoon, the dollar -- and mortgage rates -- got shellshocked by a combination of news contributed to the dollar's worst one-day decline in six months:
This week, without much economic data to digest. Wall Street's attention will be focused on Tuesday's Federal Open Market Committee meeting. Ben Bernanke & Co. are widely expected to hold the Fed Funds Rate at 2.000 percent.
But, it won't be what the Fed does to the Fed Funds Rate that will be so important Tuesday. It will be what the Fed says.
If the Fed shows worry over medium- or long-term inflation in the economy, mortgage rates should rise because inflation is the enemy of the mortgage market. Sometimes, even an off-hand reference to inflation can make that happen. By contrast, if the Fed shows little concern for inflation, it may cause mortgage rates to fall.
The FOMC adjourns and issues its press release at 2:15 P.M. ET Tuesday.
(Image courtesy: The Wall Street Journal)
On all principal + interest home loans, the first few years of payments include a lot more money going to interest than to principal.
This is because mortgage repayment schedules are front-loaded with interest, meaning large-volume principal reduction won't occur until late in the mortgage's lifecycle.
Comparing products at a 6% mortgage rate, did you know that after 15 years:
- A 15-year mortgage will be paid in full
- A 20-year mortgage will have 41.21% of its loan balance remaining
- A 30-year mortgage will have 73.19% of its loan balance remaining
Of course, this doesn't mean that 15-year mortgages are better than their 20-year or 30-year brethren. It just means that 15-year mortgages pay off faster.
Yet, there are reasons for homeowners to avoid 15-year mortgages.
For example, versus 20-year or 30-year products, 15-year mortgages require the highest monthly payment because the payback period is compressed to a shorter time frame. In addition, mortgage interest tax deductions to which most homeowners are entitled are reduced on a 15-year product.
So, just because the 15-year pays off quickly doesn't mean that it's best for everyone.
Conforming mortgages are limited by loan size, based on "typical" housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits.
The current conforming limit on a single-unit property is $417,000.
Earlier this year, as part of the Economic Stimulus Act of 2008, Congress authorized conforming loan limits increase in "high-cost" areas around the country. In Los Angeles County, for example, a mortgage can be as large as $729,750 and still be considered "conforming".
But beginning in 2009, those increases roll-back. Effective January 1, conforming mortgage in high-cost areas will be limited to $625,500.
Changes to conforming loan limits impact everyone with a stake in real estate, even if their neighborhoods are not considered "high-cost". This is because conforming mortgages offer the widest selection of home loan products, and often at the lowest rates. The widespread availability of conforming mortgages helps to support home sales nationwide ands provide ample refinancing options for homeowners that need it.
Starting with the New Year, fewer people will be eligible.
To lookup the conforming loan limits in your neighborhood, visit the HUD Web site. If you have specific questions related to your home or an upcoming purchase, contact me directly anytime.
In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.
The first part of the guideline change limits the number of properties owned by any one person.
Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.
The former guidelines allowed for 10.
There is a loophole, however. Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation. This holds even if the real estate investor is the sole owner of said corporation.
Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit. Investors often take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.
The second part of the guideline change cannot be so easily avoided. Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.
- Loan-to-value less than 75 percent : 1.75% loan fee
- Loan-to-value 75.01-80.00 percent : 3.00% loan fee
- Loan-to-value 80.01-90.00 percent : 3.75% loan fee
These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess. Currently, those fees amount to a half-percent at minimum for real estate investors.
Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time". If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.
If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term. And consider moving your existing properties into a corporate structure first.
When comparing two investments with equal risk, a rational person will choose the investment with a higher rate of return.
This behavior is called Risk Aversion and is a basic tenet of personal investing.
An off-shoot of Risk Aversion is that a rational person will only invest in an instrument of greater risk if the returns are greater, too.
The chart at right illustrates this concept, comparing return rates on two investments:
- U.S. Government bonds
- Mortgage-backed bonds
The difference in investment return rates is sometimes called a "spread" and the historical spread between government debt and mortgage debt is somewhere near 1.5 percent.
However, notice how the spread started to grow starting in July 2007.
July 2007 marked the "official" start of the Credit Crunch and as mortgage delinquencies grew nationwide, so did the market's perceived risk of investing in them.
By the start of this month, the spread had nearly doubled.
But that all changed Sunday. When the government announced its takeover of Fannie Mae and Freddie Mac, it put the same "risk-free guarantee" on mortgage debt that has helped keep U.S. government debt so cheap to finance and the spread immediately shrunk.
This is one reason why mortgage rates fell Monday and why they should continue to stay low over the near-term. With the U.S. government backing the mortgage market, there's no room for the risk premium that helped keep rates high this past year.
It doesn't mean more people will qualify for conforming home loans, but for the ones that do, financing should be cheaper.
Mortgage markets improved last week on Hurricane Gustav's less-than-expected damages and a strengthening U.S. dollar.
Even factoring in Friday's 0.125 percent run-up on most mortgage products, rates improved overall.
It's the second straight week in which mortgage rates improved.
But for all the news that we could dissect from last week, it should be the news from this week that proves most interesting.
This is because on Sunday, the U.S. government assumed control of Fannie Mae and Freddie Mac.
So far, the papers have done a terrific job talking about the political perspective of the takeover, and the economic perspective of the takeover, but very few have addressed the key news for homeowners -- mortgage rates are plummeting.
Mortgage rates are improved this morning because of Fannie Mae and Freddie Mac's collective role in the U.S. mortgage market.
- They guarantee about half of the nation's $12.1 trillion in mortgages
- They purchased and securitized four-fifths of the nation's home loans as recently as six months ago
See, earlier this year, Wall Street punished Fannie Mae and Freddie Mac for their weak balance sheets and increasing number of mortgage delinquencies. This led to Wall Street to raise the borrowing costs for the two firms across the board which, in turn, led to higher mortgage rates for Americans.
But today, with their balance sheets backed by the U.S. government, Fannie and Freddie are now viewed as "safe" by the eyes of Wall Street. Their borrowing costs have been lowered, therefore, and mortgage rates are falling in response.
This week is light on economic data but it shouldn't really matter. Mortgage rates should close the week lower than where they started for the four-fifths of the country that uses Fannie or Freddie's conventional mortgages.
For everyone else, keep an eye on the U.S. dollar. Its strength continues to have positive consequences on the mortgage markets.
(Image courtesy: The New York Times)
On the first Friday of every month, the government releases its Non-Farm Payrolls report.
More commonly called the "jobs report", the two-page analysis examines the nooks and crannies of the U.S. economy to see which industries are hiring and which are firing.
The August jobs report was released this morning and it shows that the U.S. economy shed 81,000 jobs in August.
This marks the eighth straight month in which payrolls declined and puts the annual job loss total at 605,000. The Unemployment Rate jumped to 6.1% -- its highest level in 5 years.
For American workers, this is bad news. But, for American home buyers, the news couldn't be better.
Mortgage rates are improved this morning on weak jobs data.
If this seems counter-intuitive, remember that earlier this year, lingering concerns about inflation in the U.S. economy caused mortgage rates to rise to their highest levels in more than 5 years.
Lately, however, those fears are subsiding and as today's jobs report shows worse-than-expected weakness, it's one more reason for markets to put inflation concerns to rest. With fewer Americans working, there are fewer dollars are available to propel the economy forward, after all.
So, today's jobs data is good for mortgage rates because it reduces inflationary pressures on the economy and as inflation levels fall, mortgage rates tend to do the same.
(Image courtesy: USA Today, The Wall Street Journal)
A home inspection is a complete, top-to-bottom, visual check-up of the structure and systems of a house.
It is meant to be an objective determination of a home's condition.
A home inspection usually takes 3-6 hours to complete, depending on the size of the home.
During the inspection process, the inspector will examine all of the following components of a home:
- Home exterior including doors, decks, and vegetation
- Heating and cooling systems for leaks and efficiency
- Electrical systems for safety and soundness of design
- Plumbing systems for venting, distribution, and drainage
In addition, the inspector will review the roofing system, the home's interior, and several other parts of the property.
A home inspection may be ordered by a home owner or by a home buyer.
For a home owner, an inspection can detail a home's shortcomings and provide a roadmap for repairs. This can help a person prepare his home for sale because "major issues" can be addressed in advance of listing.
For a home buyer, a home inspection physically reviews a home under contract, identifying structural flaws that may impact the home's desirability. This is essential for the negotiation process because no home is "perfect" -- even new ones!
A home inspection highlights potential long-term trouble spots and the likelihood for expensive home repairs. This is why real estate professionals often recommend inspecting a home immediately after signing a purchase contract.
To find a qualified home inspector in your area, ask your real estate agent for a referral, or visit the American Society of Home Inspectors Web site.
Source
American Society of Home Inspectors
Frequently Asked Questions on Home Inspections
http://www.homeinspector.org
(Image courtesy: Anderson Home Inspections)
Mortgage rates are hugely important to household budgets.
Lower mortgage rates free up household cash for spending and long- and short-term saving.
Higher mortgage rates, of course, do the opposite.
Unfortunately, it's impossible to predict the future of mortgage rates with any bit of certainty. This is because there are countless influences on mortgage markets, ranging from the obvious to the obscure.
Some obvious influences include:
- The strength of the U.S. dollar
- The rate of inflation in the U.S. economy
- The relative performance of the U.S. housing market
And some of the obscure influences include policy decisions by the Bank of Canada, or political unrest in Nigeria.
But despite the challenge of making accurate mortgage rate predictions, we shouldn't stop looking at trends for clues. The graph at top shows one such trend.
Starting in January, as oil prices rose, mortgage rates followed them higher. Then, as oil started its descent in mid-July, mortgage rates began to fall, too.
The relationship between oil prices and mortgage rates is not one-to-one and, most likely, the similarities are there because both oil prices and mortgage rates are pegged to the ever-stronger U.S. dollar.
As the dollar gets stronger, it's pushing oil prices and mortgage rates down, and improving household cash flow for home buyers and other people in want of a new home loan.
(Image courtesy: The New York Times)
For the first time in 4 weeks, mortgage rates closing a week lower than where they opened it
Markets shrugged off uncertainty about Hurricane Gustav and chose to rally on the backs of strong economic data.
Overall, rates were down by about 0.125 percent, or $96 per year per $100,000 borrowed.
Markets were influenced by a handful of positive news last week -- two pieces of housing data gave markets reason to celebrate, as did an upbeat consumer confidence survey.
In addition, equally-important-but-less-well-known data from last week points to similar conclusions -- the U.S. economy may be on more solid footing than many people had believed.
This week, markets re-open Tuesday after being closed for Labor Day. Early in the week, there isn't much data for markets to digest so expect oil markets to take center stage.
First, markets will gauge the damage that Hurricane Gustav caused to oil and natural gas pipelines that dot the Gulf of Mexico shorelines. Then, it will project the damages based on the projected paths of the next storms, Hanna and Ike.
Typically, more damages means higher oil prices and that can lead to higher mortgage rates long-term.
By Friday, though, markets will shift attention to the jobs report.
American businesses have shed jobs in each of the last 8 months, and August is expected to show the same. The jobs report's influence on mortgage rates can be enormous so expect big rate swings Friday, either up or down.
(Images courtesy: The Wall Street Journal Online)
As we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.
Today could be a difficult day to shop for mortgage rates. Expect volatility.
This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.
There has to be a buyer and a seller at a specific price to make a deal.
With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers. This can cause mortgage prices rise or fall faster than on a "normal" day, directly leading to mortgage rate volatility.
For a light-volume trading day, there is a lot of information for markets to digest, including:
By themselves, each of these points can move markets. Together, however -- and aided by Labor Day -- they can move markets a lot.
Mortgage bond pricing is fluid, changing every minute of every day. Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.
