Last week's stock market jitters proved once again that the financial markets are not back to normal by any means.  So what is happening to interest rates?  Well, since we are in a global economy, what you pay per month for your house is affected by the government pensions being paid out in Greece.

 The short answer is that when we really are in an economic recovery, mortgage rates will rise; but for the short term, while things are shaky, we have these great low rates, with 30 year mortgages in the 4.75%- 4.875% range.  If someone is on the fence about buying a house; they shouldn't  expect rates to stay low forever.

 If you want the long answer to the relationship between Greece and our mortgage rates, see below:

 So here is the chain as I see it.  Greece, Spain, Portugal and several other countries pay out way more in government programs than they take in in taxes.  If I tried to spend more than I make, I would have a big credit card balance. Well, that's what Greece has ( except they call them Greek government bonds). Now in the recent past, they were able to get nice low rates, so even though their balance was growing, they could still handle the payments.  The market woke up one day and did the math and figured out that pretty soon Greece is going to run out of money. So now people won't buy Greek bonds unless they get 15% interest.  As the old bonds come due and need to be refinanced, their rates are going up to 15% as well.  If Greece was running out of money at 4%, you can only imagine the calamity that the higher payments are causing.

Now Greece is part of the European currency called the Euro, so a financial collapse of Greece would drag down the economies of Germany, Britain, France etc.  Europeans buy a lot of US Goods, so the possibility of a European recession is keeping US Stocks from growing.

So the question becomes, where does someone ( a person, government, large corporation) invest their money to get a good return, and also keep their money safe?

When the stock market is a little shaky, they often put it into bonds,because bonds have  a guaranteed payout.   People are running away from Greek bonds of course, but running to US Bonds.  One type of bond they are buying is the Mortgage Backed Security (MBS).  The demand for these MBSs is what determines our mortgage rates on a daily basis.

 So right now, the 30 year mortgage rates are under 5%.  Why is that?

Because, as we all know, lending rules have become very restrictive, so the only people who can get a mortgage these days are well qualified. As a result, the mortgages that make up these new MBSs are seemingly more secure than they were in the past.  If the new restrictions mean that people getting loans today are less likely to default on their payments, then these MBSs by nature are safer. 

 So you could look at it this way: we as lenders won't lend to you if your household budget looks like the Greek Government budget.

Therefore,  as long as the stock market remains somewhat risky, investors will keep buying MBSs and mortgage rates will remain low.   As soon as people perceive that the stock market is safe and offers good returns, investors will sell their MBSs and mortgage rates will rise.

I have encountered several clients who started construction of a home on their own nickle, expecting to get a construction loan to finish the last 10 -20 or 50%.  Only to find that most banks won't lend on a house if construction has already started.  I can't speak for the rest of the markets, but at least in our area of Eastern Washington, you have some choices.  You CAN get a construction loan to finish a house, or to buy a partially completed home.  We have several spec homes in our market that the builders walked away from; fortunately they were dried in, so they are in good shape.  Someone will be able to come along and buy those with a construction loan which will provide the funds to both aquire the house and pay a contractor (or the homowner) to finish it.  These type of deals are going to require at least 20%  down on the total cost.

So two main points: 1) If you want to start building with your own cash, make sure you know where the money to finish is going to come from, and 2) don't do this if you have messed up credit- I had to turn away a guy with $300k into his house because he trashed his credit over the last few years (ouch).  Construction costs are very low right now, I am currently working on construction loans for Winthrop, Okanogan County, Leavenworth, Chelan, Wenatchee, and Moses Lake, and all are seeing great prices, although some materials are starting to rise.  If you need a contractor in our area contact the Homebuilders Association for a referral.

With some great prices out there right now for vacation condos in Leavenworth and Chelan, a lot of people are entering the market.  With prices coming down, some people ask me if they should wait for them to drop further; I tell them, " When you can buy a condo you like for less than it costs to build, there can never be an oversupply at this price, because if this is the price, no one will build any new ones. So if you didn't catch the absolute bottom of the market, you sure got close"

After you see the great prices, before you make an offer, you better check on financing. A lot of lenders have backed away from doing loans on vacation condos, especially those which can be rented out part of the time.  Most condos loans I actually do are for people who started with a lender who said they could finance it as a conventional loan- only to have it get kicked out of underwriting.  We do both Fannie Mae condo loans as well as 'non-warrantable' condo loans, and here is the big difference (I'm not smarter than anyone on this, we just checked with Fannie Mae to see what they would take): It is the presence of BOTH a rental pool, AND a nightly rental desk that kicks most of the loans out of FNMA eleigibility.

The other issue is the percentage of units that are investment properties Vs 1st/2nd homes.  And then the other new FNMA rule that stops most new condos is that FNMA won't buy a loan for a condo unless 90% of the units have been sold.

So what does this all mean?  For Leavenworth and Chelan, only a small number of projects can get Fannie Mae loans (I recently closed one at Kahler Glen). For all other condos, you will need to seek out a community bank that does Portfolio lending (lending their depositors money).  These rates can be higher, however 1) If it is a new project, the bank that financed the project is probably offering special financing. and 2) If you save $100,000 or more off of what they used to go for, but you have to pay a higher interest rate SO WHAT; you are saving a bundle overall.  Here is some quick math - you think you would like to pay 5% , but let's say the portfolio rate you find  is 7%.  If the loan amount with the new pricing is $200,000   you pay $1330 a month P/I. That unit used to sell for a $100K more. Even if you could have gotten the 5% you wanted, 5% on $300,000 is $1610 a month.  

These deals won't last forever, as there is no more supply coming on the market for a great while. Seek out a competent Realtor in the specific market you are looking at to help you.

This year, probably half of the construction loans I have done have been for owner-builders. This is the term we use for people who are building a home without a general contractor. In reality, the projects vary from individuals who never lift a hammer and just schedule all the subcontractors, to the people who are out there on the project themselves setting their own concrete forms and doing all their own framing and finish work. 

For those who are a little nervous about being completely in charge, there are now lots of consultants available, as well as companies who will build everything for you except for the parts you feel comfortable with. Oftentimes they will build the external shell of the house -framed inside with roof,siding, doors and windows. You can then split the rest between your own labor and subcontracting.  Basically, if you know which parts you want to do, you can find a builder who will take care of all the rest.

What I have been seeing is a nice drop in materials and labor prices this year, making these projects a great investment for the homeowners, as the cost savings equals additional equity in their homes.

If you are in the greater Wenatchee area, pick up a copy of the July issue of The Good Life magazine; a story inside features my clients the Flittons and the success they had with their owner-builder project in East Wenatchee.  I would love to link to the article, but the magazine is not online.

I currently have owner builder homes under construction in Winthrop, Omak, Chelan, East Wenatchee, Leavenworth, Cashmere and Crescent Bar, and just finished one in Wenatchee. 

If you are looking for a new home, with prices down for land, construction materials and labor, now would be a good time to check out the option of being your own contractor.

Here are a couple shots of some owner-builder projects currently underway.

I was at a meeting with Realtors from Western Washington, and they were amazed that we were still doing lot and land financing.  Actually in our market areas of Wenatchee, Chelan, Winthrop, and Leavenworth (plus surrounding Counties), there are actually several community lenders that will lend on land. Each bank has different programs and terms, so it is worth calling around to compare programs before making a decision.

I have seen some great deals out there; your dollar really goes a lot farther than it did a few years ago.

I cringe whenever people ask, "Are you still lending money?"; but I suppose it is a fair question these days. In my markets of Wenatchee, Leavenworth, Chelan, Winthrop and Okanogan County, most of the banks that used to do a lot of construction lending have severely cut back their programs.  Some of the things that other lenders have dropped but we still do are:

Owner-Builder Construction Loans

Lot Loans, Land Loans

Modular Home Loans (those delivered in sections)

Kit Home Construction Loans, or panelized home Loans  such as Lindal, Viceroy, etc.

Loans for homes where construction has already started

SIP Construction loans, or ICF construction loans

Many of my clients were planning to build a year or two ago, but everyone was too busy. It has turned out to be a huge blessing as prices are coming in much lower than they were in the past. 

Many people from the Puget Sound region eventually seek out a simpler life and move over here to Eastern Washington where there is no traffic, the pace is much slower and the sun shines.  Whether you want a small town, or wide open spaces; the low cost of building makes it a great time to make your escape.

Click here for some basics on Construction Lending

I lost out on a transaction with one of my clients the other day; but I think they made the right choice by not refinancing with me. 

I had financed a spec home for them near Lake Chelan which has not sold. I was in the process of refinancing it into an investment property on a 30 year fixed loan.  These days Fannie Mae adds all kinds of extra fees for investment properties, and less than perfect FICO scores etc.  They weren't taking any cash out, and the loan is less than 60% of the current appraised value, but it was still going to cost them about $10,000 in fees to get a 6% loan.

The owner called me and said that a freind was looking for a good investment that was safer than the stock market and returned better than CDs, so she asked if she could pay off my client's mortgage and have my client pay her 6% interest. 

So the friend gets a safe 6% return on her investment, which beats the stock market by about 50%, and my client gets her new loan without the Fannie Mae loan fees.

Of course, I'm out a nice commission on a $417,000 loan, but I couldn't argue with the logic, and encouraged my client to take advantage of a great opportunity.

When people are lining up for 0% interest on 3 month Treasuries, a mortgage on a trusted friend's property, at a safe loan-to-value, looks pretty good.

One fallout from the current market is the increase in homes being sold As-Is. Either a builder was unable to finish, or maybe the house went back to the bank in less than perfect condition.  Either way, you end up with Sellers who don't want to put more cash into the house, they just want to sell it. While there are many more in other parts of the country, we in Wenatchee and all over Eastern Washington are seeing more and more of these.

These are huge opportunities; you will see homes for $150,000 that with $30,000 worth of work would be worth $250,000.  Instant equity!

Even though these are great deals, most people walk away because they think they need to be a contractor with all the money in cash.    You think you can't get a loan, because most lenders won't let you finance a house 'As-Is'.  But there is a solution; you can simply buy the house as as part of a construction loan.  When we do a regular construction loan, we are simply adding materials and labor to bare piece of ground; in this case we are just adding materials and labor to some level of existing structure.

Down payments can vary, but once again, I would suggest seeking out a smaller community bank for this type of program.

There are a lot of negatives in the market, one of these distressed properties can be a happy start with lots of equity for someone.

The subtitle of this message should be the paraphrase of Mark Twain: Bank Liquidity-"The reports of my death have been greatly exaggerated."  

The media coverage of the financial and Real Estate news has created a lot of confusion amongst the general public.  I have had Realtors tell me that some clients think that all financing for homes has dried up. I have had others shocked when I tell them their client can still get zero down 30 year fixed financing on a home.

I can only speak of what is happening in Washington State and specifically my market area which includes Wenatchee, Leavenworth, Chelan, and Winthrop and the surrounding counties.   First a note on bank liquidity; smaller banks which are not publicly traded have not had their stock pummeled, and consequently still have plenty of money to lend.  Please remember, banks have to lend money- that is where we get our revenues to pay interest on your CDs and keep the lights on, so we are still moving ahead.  Fortunately, we didn't write a bunch of bad loans, so we aren't saddled with a bunch of foreclosures either.

As far as 100% financing or zero down, whatever you want to call it, that still exists for first time homebuyers and Veterans.  The program is called HouseKey and is administered by the Washington State Housing Finance Commission. They have done tens of thousands of these loans, and we in our office have done dozens of these every year for at least the last five years.

Now that housing prices have come back down to the affordable range, all we need to remove is the negative news that keeps potential homeowners on the sidelines.

I am not one that likes to make negative predictions, but the recent financial news leads me to conclude that mortgage rates will be going up.  For those who are ready to buy or refinance, I believe now is a good time to lock in your interest rate.

If you want the long version, read on:

Normally a drop in the stock market leads to lower mortgage rates. This is because investors get worried about the future returns from their stocks, and decide instead to put part of their money into guaranteed returns of bonds, including Mortgage Backed Securities. With supply and demand, the price of the bonds goes up- which results in lower interest rates.

In the last few days, In order to finance all their new acquisitions and bailout programs, the government has flooded the market with new bond sales; this has resulted in lower prices for the bonds- which means higher interest rates are being paid.

So now that the Government bonds are providing the funding for the stock market, it gets really confusing.  A drop in the stock  market no longer equates to a drop in interest rates. 

So, as I had stated before the bailout, with all the funding that the government is going to need, bond rates are likely to continue up. And, when the stock market hits bottom and turns around and rallies, rates will really go up. 

 I have often given opinions about the direction of mortgage rates, with the disclaimer that I don't own a crystal ball, but I need to add my second disclaimer: When I got my degree in Finance, we only studied Free Markets, so I am now totally beyond my area of expertise.