Mortgage Mania 31 – October 2009

October 6, 2009

After a bit of a hiatus, we’re back with our weekly proprietary comments on new developments in the mortgage world, and how they affect you.

S&P/Case-Shiller Home Price Index Shows Broad Improvement

Just released this morning, the S&P/Case-Shiller Home Price Index for July continues to show price improvement across the board, with San Francisco showing an index of 128 (that means the appreciation rate since January of 2000 is 28%) and pricing improvement on a consistent basis since early this year.

As we all know, many homeowners and homebuyers view this index as the authority on real estate values; as such, the latest results show continued evidence that the “bottom” was reached much earlier this year.

Combine this with some recent anecdotes:

  1. There were 95 offers on a property in San Jose that went for 30% over asking at approximately $550,000.
  2. Inventory continues to be way below average at about 4 months
  3. New construction on the Peninsula wasn’t overbuilt to the degree of San Francisco and San Jose,

Combine this with continuing low interest rates, and you have a recipe for a very active Fall market here on the Peninsula.

Conforming Rates Set to Go Higher—Are You Prepared?

My hope is that it’s now common knowledge now that it’s highly likely that conforming mortgages between $625,500 and $729,750 will see rates moving higher by the end of October, leaving those who are looking to purchase or refinance a home only about a month before the cost of borrowing begins to make a significant move higher.

While we all know that the Fed added another $400b ($1.2T now, that’s $1,200,000,000,000.00 WOW!) towards the effort to keep conforming and treasury rates lower through the first quarter of 2010, the concerns include:

  1. there is no confirmation that the conforming limit of $729,750 will be extended, especially since median prices are much lower than in 2008
  2. There is no confirmation that the tax credit will be extended beyond November 30, 2009; and if it is, who knows what modifications may be enacted
  3. If Bernanke and the consensus among economic experts is correct about the recession being over, combined with the confidence gained in the stock market (and as such companies), how much inflationary pressure will exist to push rates higher?

“Jumbo” Market Improving?

As we all know, non-conforming loans like “jumbo” mortgages (locally, mortgage loan amounts in excess of $729,750) have primarily been tied to savings rates, which has kept the rates down.  Further good news on this front is the fact that some of these mortgages are being sold in the secondary market and consumers are continuing to save about 4% of their income.  The real concern I have here is that rates may be pushed higher by the need for regional banks like Sunwest to shift their focus and money to commercial loans to protect themselves from commercial foreclosures.  Effective October 1, 2009, Sunwest will no longer engage in the wholesale mortgage lending business.  That written, with home prices stabilizing, the non-conforming market will only improve, and right now there are very attractive 5/1 programs in the low-4% range…

Highlights From Our Monthly Mortgage Market Presentation in September

Every third Wednesday of the month, we do a presentation on the latest in the mortgage market, and here are some highlights:

  1. Mortgage Loan Disclosure Act simplified; no transaction can close sooner than 7 business days and final documents may be signed provided three business days have passed since disclosure of final terms
  2. Fannie and Freddie cut debt-to-income allowances by 15.4% to 55% DTI%– rate buydowns more important than ever for buyers
  3. Housing numbers continue to show strength overall, and the $1.5-$4mm will rebound as clients’ qualifications improve and non-conforming money continues to flow
  4. Mortgage purchase applications continue their weekly rise, placing more pressure on rates
  5. Thank goodness the foreclosure moratorium was lifted this month, as the market is in dire need of inventory
  6. Insight on the “W” theory (no, I’m not talking about Bush)—will there be a second bottom?

Food for Thought: Spending $123B is better than $1.4T

Have you thought about whether throwing $1,400,000,000,000 to keep rates low is the most cost-effective method of stimulating the economy?

I have always been a proponent of tax credits versus manipulating rates mainly because the goal of stabilizing the housing sector to stimulate the economy starts with incenting people to buy homes.  Manipulating markets can be a fool’s game.  Let’s think about this concept for a minute.

If we gave every homebuyer $15,000 to buy every home on the market for the next year, it would STILL be cheaper than throwing $1,400,000,000,000 at rates.  No, really.   About 8.2 million homes are sold per year (new and used) in high-inventory markets.  If we gave every homebuyer $15,000 to buy the interest rate down and cover closing costs, that’s still only $123B, which would cover an entire year of real estate sales.

As such, it would take over 10 years to equal the $1.4T that we’re throwing at rates.  Plus, the average loan in the US is less than $200,000; so if interest rates are about 1% below market today, meaning that the conforming 30-year fixed should be 6%, and someone buys 6 points on the loan to get a rate of 4.5%, that means that it’s actually 10X MORE EFFICIENT by giving homebuyers $15k per purchase versus artificially manipulating rates.

I am oversimplifying a bit, as money is being used to buy treasuries, which is good for institutional borrowing rates, which is good economic stimulator, but I thought you may be interested in the quick math.

Thanks for reading

Written by Eric Trailer, Mortgage Banker, Absolute Mortgage Banking · Filed Under * Type of Content, Buyer, Buyer and seller tips, Buyers, Consumer, For buyers, Industry, Mortgage, Mortgages 

Comments

3 Responses to “Mortgage Mania 31 – October 2009”

  1. July SP/Case-Shiller Home Price Index Up — Real Estate Blocks on October 7th, 2009 8:10 am

    [...] 3 Oceans has the story, and a roundup of mortgage market news, including interest rates going up next month. [...]

  2. Jamie on October 8th, 2009 12:28 pm

    Hey, just wanted to point out that the case-shiller data is saying the “rate of price decline” is slowing, not that prices are actually going up or that we are at a pricing bottom.

    I find this post very misleading, and the fear mongering tone with regards to pushing people to act now is over the top.

    The fed is implying they will begin to raise rates SLOWLY at some point next year, so the rush to act now is your opinion alone.

    Lastly, while the 8k tax credit certainly improved sales this year, it’s been reported that 85% of those sales would have taken place anyway, so if the credit is raised to 15k on taxpayer dollars I will use it as proof that our country is run by lobbyists and not leaders.

  3. Eric Trailer on October 8th, 2009 9:36 pm

    Hey Jamie,
    If you can’t see the “V” trend in prices according to CS, then I have a great ophthalmologist to refer you to.
    Further, if you think that sticking with the FACTS as opposed to speculation is over the top, then that’s also very interesting. FACT:
    – prices are moving up
    – Fed is concerned about inflation, which is why they are signaling rate increases now
    – rates are artificially low and may remain there until the money runs out in February 2010– than what, Jamie?
    – inventory is required to balance market– less than 6 months is a sellers’ market,. we’re at 4 months
    Wow, you’re on Pluto thinking that now is NOT the time to act and that I am alone on this. Try researching the pending-sales figures which are at record levels.
    And finally, if you have difficulty with the math associated with artificially keeping rates low versus tax credits, then wow…

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