ARM or FRM…

With all the bad news surrounding interest rate increases lately (which is not exactly true, by the way), it’s no wonder buyers are sitting on the fences again. But what’s really going on?  And more importantly, what should buyers who want (or need) to buy now, do?

First, let’s discuss what’s really going on:

Two days ago I reported that the Freddie Mac weekly Primary Mortgage Market Survey (PMMS) from last week got it wrong because their survey did not contain Friday’s MBS gains, which actually caused a reduction in the average 30-yr fixed rate mortgage (FRM), rather than the 0.18% increase they reported. Thankfully the national media is on the ball, as usual, and today (that’s two days later for those of you keeping score) the media reported that interest rates are near two-week lows, rather than the two-year highs they just reported on Monday.

It’s not their fault, you say? They just report what they’re told? While that might be true, their inaccuracy in reporting has caused many potential home buyers to sit out the late-summer selling season – a big mistake in the fastest growing housing market on record (yes, faster than the boom of 2004-07). Meanwhile, home prices continue to increase at a double-digit pace. In some major markets, home prices were up by nearly 25%, according to this week’s Case-Shiller report.

Which leads us to the second question:

What should buyers who want (or need) to buy now, do? For the past two years, buyers have had the luxury of overpaying for a house because interest rates were below 4.00% – this allowed them to qualify for the payments on a higher balance loan. Now, with rates at a blistering (sarcasm intended) 4.50%, I hear Realtors telling buyers that their buying power has been reduced by about $50,000 – that’s about a 10% decrease, on average, since home prices in the B.A. average $521k, according to a recent report by the California Association of Realtors.

Let’s look at the other side of the coin though.

The Principal and Interest payment for an 80% loan-to-value mortgage on an average home of $521k, assuming last year’s interest rate of 3.875% would be around $1,960 per month. With the current rate around 4.50%, that payment would be around $2,110 – a difference of $150 per month, or $1,800 per year. As it turns out, that really is a reduction in buying power of about $54k; however, the income required to qualify for this new, higher interest rate is only about $400 per month higher than it would be for the lower rate.

The moral?

As a lender, if a buyer’s ratios are so tight that s/he cannot tolerate a $150 per month payment increase on a $417k loan, I’d be hesitant to approve the file in the first place. However, we are required by law to submit and/or approve all eligible borrowers, so if someone insists on pushing the limits, s/he is likely tolerant of higher-risk situations, and it would therefore be appropriate to recommend an adjustable rate mortgage (ARM), rather a FRM. Today’s ARM rates are all still below 4.00%, so the borrowing power argument becomes moot.

Realtors, get your buyers up to speed on what’s really going on in the market. If you don’t know, or if your lender doesn’t (really) know, find a better source of information. Buyers, ask questions – lots of questions. If your lender isn’t telling you all of this stuff, find a better lender.

For buyers and Realtors alike I say, if you’d just like to get a second opinion about what you’re being fed by the “experts” you’re working with, give me a call.

An Autumn Fall?

Although there is still nearly a month of Summer left in 2013, this Autumn may see mortgage rates fall, again.  For now, rates remain favorable, as they dropped last week and appear poised to go even lower this week.  However, volatility prevails as mortgage rates are changing at their most rapid rate in more than a decade.

Mortgage Rates : Still Higher Than 2012

Mortgage rates fell between Monday and Friday of last week, but if you only watch the news, which reported Freddie Mac’s weekly Primary Mortgage Market Survey (PMMS), you’d think rates actually went up.  The survey of 125 banks showed the average 30-year fixed rate mortgage rate rising to 4.58% last week, the highest 30-year fixed rate in more than 100 weeks of surveys. However, what the PMMS reported, and what the market actually did, shows just how quickly mortgage rates are moving – the survey missed all of Friday’s market gains, which dropped the average rate back to 4.40%.

Because the U.S. economy is growing, the Fed has said it may soon “taper” QE3 down to zero. There’s disagreement within the Fed, though, about when this taper should begin, and it’s among the reasons why mortgage rates have been so volatile since May. Some Fed members believe QE3 should end later this year, while others say it should stretch into 2014 (and beyond), and the debate is affecting mortgage rates because tapering QE3 would lead to reduced demand for U.S. mortgage bonds, which lowers the value of MBS holdings and leads to increased mortgage rates, further slowing (or eliminating) refinance applications, a vital component in the mortgage market.

Why Mortgage Rates Might Fall This Week

Mortgage rates typically move on one of two key factors: market sentiment and market data – think emotion versus facts.  This week, there is a f air amount of economic data due for release and rates are expected to move on this market data (facts), which can make it easier to predict Best-Execution rates than when rates move on market sentiment (emotion).  Because of this, banks are speculatively pricing ahead of the data, and borrower’s should expect to see a few opportunities to lock their rate at lower levels than in week’s past.

Each sign of economic strength pushes mortgage rates higher, while each sign of weakness pushes them lower – and this is exactly how MBS markets are supposed to behave. However, because of QE3 and its sheer size ($85 Billion per month), the stakes are much bigger and the results are more far-reaching, making it hard to predict where the lowest rate will “be”. Here’s a review of this week’s most important economic events. In general, any event which “beats” a Wall Street estimate will result in mortgage rates moving higher. Events which fall short will result in mortgage rates moving down.

  • Monday : Durable Goods; Dallas Fed Manufacturing Survey
  • Tuesday : Case-Shiller Index; Consumer Confidence; Richmond Fed Manufacturing Index
  • Wednesday : Pending Home Sales Index
  • Thursday : Jobless Claims; Q2 GDP;
  • Friday : Chicago PMI; Personal Income & Outlays; Consumer Sentiment

In addition, there are a handful of Fed speakers scheduled for this week including San Francisco Federal Reserve Bank President John Williams (Tuesday); Richmond Federal Reserve Bank President Jeffrey Lacker (Thursday); St Louis Federal Reserve Bank President James Bullard (Thursday); and Bullard again on Friday.

Each Fed speaker has an opportunity to shift rates — just listen for the talk of QE3.

Making Progress

report_highlights_hpi_2013_06_june_top

Last Week in Review Last week, research firm CoreLogic reported that home prices across the U.S. rose by nearly 12 percent from June 2012 to June 2013. By comparison, home prices only rose 3.76 percent from June 2011 to June 2012. In addition, research and analytics firm Clear Capital said that prices rose 9.3 percent [...]

Continue reading...

Looking for a Sign

The markets were certainly looking for a sign from the Fed meeting minutes that were released last week, regarding when the Fed may begin tapering its Bond purchase program known as Quantitative Easing. Read on to learn what the Fed revealed, and other key news from last week. The minutes from the Fed’s June meeting [...]

Continue reading...

Going Up?

The average U.S. rate on the 30-year fixed mortgage this week is back to 4.51 percent – the same as it was two weeks ago, and a tie for the two-year high for rates. Mortgage buyer Freddie Mac said Thursday that the average on the 30-year loan jumped from 4.29 percent the previous week. Just two [...]

Continue reading...

Light and Glory

“Yet, through all the Gloom, I can see the Rays of ravishing Light and Glory.” Those words that John Adams wrote to his wife, Abigail, seem appropriate as the employment picture brightens with the latest Jobs Report. Non-farm payrolls surged by 195,000 in June, well above the 166,000 expected, while the data for April and May [...]

Continue reading...

Feeling Groovy

And I don’t mean the song by Simon and Garfunkel. Consumers are certainly feeling more confident these days, as positive economic news tumbles in. But what does this mean for home loan rates? Read on for details. Consumer Confidence, which measures how optimistic or pessimistic consumers are with respect to the economy in the near [...]

Continue reading...

New-Home Sales Rise, Case-Shiller Index Jumps

Economic data was plentiful today – first up was a reading on the rise in home prices across the nation. The Case-Shiller 20-City Home Price Index saw its largest monthly gain on record rising by 2.5% from March to April. Since April of 2012, prices rose by 12.1%, the fastest annual pace since 2006. San [...]

Continue reading...

Free Fallin’

Mortgage Bonds continued to fall last week as the Fed met and more volatility followed. After last week’s meeting of the Federal Open Market Committee (FOMC), the Fed released its Policy Statement, noting that the downside risks to the outlook for the economy and labor market have diminished. Especially important: There was no mention of tapering [...]

Continue reading...

5 Marketing Lessons From Lady Gaga

Article by Dave Kerpen, found on LinkedIn.com, dated May 2, 2013 You may love Lady Gaga. You may hate her. But no matter what, it’s hard not to respect what she’s done as an artist. With 23 million albums sold, five Grammy Awards, and Forbes’ distinction as one of the world’s most powerful celebrities, at age 27, Lady [...]

Continue reading...