Your Interest Rate Update

December 22, 2009 

Merry Christmas and Happy New Year!

As we wrap up - Get it? Wrap up? - another year, let's have some fun and see how my 2009 predictions panned out.  I'll save you some time, if you don't want to read the whole letter.  I got 2.5 of six right, by my count.  Not bad, for an educated guesser...

But, my first and most important prediction - where mortgage rates would hover - was spot-on.

Prediction 1:  I said "Mortgage rates will hover around the 5% range for 30yr fixed conforming loans (those under $417,000) for most of the year.  Yes, this is a change from my thoughts prior to Thanksgiving, before the Fed formally announced they'd purchase Mortgage Backed Securities (MBS) and other securitized debt." 

In fact, 30yr fixed rates for conforming loans held that line very well all year long at 5%.  We saw three distinct moves to lower rates, bottoming at 4.625%, and two dramatic spikes in rates where they touched 5.5%.  Nevertheless, it's an amazing thing in itself that I'm saying "rates spiked to 5.5%."  I'll share my thoughts on the rate outlook for 2010 when I make my best guesses for the year in January.

Prediction 2: The Housing Market:  I wrote, "I've felt like a bottom is forming in California for much of 2008.  I still feel that way.  I'm going to call a bottom some time in late 2009 (and that might slip into early 2010)."

It's too early to say for sure, but it looks as if we are indeed forming a bottom, if not even coming up slightly.  So far in the cycle, California home values have dipped between 30% to 60%, depending on where you live.  According to the California Association of Realtors, the median home price dropped by "just" 3.2%, from $307,210 in October 2008, to $297,500 in October of 2009.  And, there was a slight increase from Sept. '09 to Oct. ‘09.   If you're curious about your area, MDA DataQuick, a real estate information service, has an interesting city and county year to year comparison that you can see at http://www.dqnews.com/Charts/Monthly-Charts/CA-City-Charts/ZIPCAR.aspx. 

So, hopefully, having dropped 30%-60% we've seen most - if not all - of the home price correction.  But, there are scenarios that could see us sliding a bit further.  Although I don't think they're too likely, I'll touch on them in my 2010 forecast.

Prediction 3:  Word of the Year: I thought we'd hear about stagdeflation, and quantitative easing in the main stream.  What the hell was I doing writing about "words of the year?"  I guess the economic and scrabble dork took over.  Quantitative easing is printing money.  We're hearing a lot about it in the context of our deficit, funding it by selling treasuries and our Fed's balance sheet growing, but...nobody says quantitative easing except economists.  Stagdeflation?  That could come around if we see our economy slow again, GDP pulls back and deflationary pressure continue, but... hopefully that's been averted.  Although...third quarter GDP was just revised down again to a 2.2% print, down from 3.5% at the initial reading and 2.8% from the first revision.

Prediction 4:  I may have missed the mark on this one.  I worried that the fiscal stimulus from Congress, steered by the White House, would be a lot more contentious and yield much murkier results than it has so far.  But, we can definitely see that programs like Cash for Clunkers and the Homebuyer Tax Credits have spurred activity in the auto and housing sectors.  And, we saw GDP growth in the third quarter, which was predominantly driven by that fiscal stimulus.  However, it's not like there's no debate.  That debate is just more focused on whether the costs will be worth the results; whether the results will be fleeting or can lead to sustained private sector growth, rather than the complete boondoggle I'd worried about.  Not to say that they haven't wasted some arrows, or missed some targets...

Prediction 5:  Principal mortgage balance reductions aren't as prevalent as I thought they would be by now.  They're happening, but, only in a very small percentage of outstanding loans, although some lenders and servicers are being pretty aggressive within their portfolios.  Ocwen Financial, for example had used principal balance reduction on about 20% of their loan modifications through Q1 2009.  And, as of their press release on December 10, Ocwen had converted 74% of their loan modifications under the Home Affordable Modification Program (HAMP) from temporary to permanent status.  And, they boast one of the lowest re-default rates in the industry, too.  The bummer is that they only service about 2% of all HAMP eligible loans.  But, it's possible more lenders will begin following their model.

Prediction 6: The Commercial Real Estate collapse.  It's happening.  I've felt the pain personally.  But the meltdown is not moving as quickly as I'd thought.  I think 2010 will see a lot more carnage on this front than 2009.

So, all said and done, I hit the first two - specific to the niche in which I work - pretty squarely.  I'm giving myself another ½-point for touching on components and maybe being a little early on the other three. 

I wonder what 2010 will deliver?  I'll toss out my thoughts on that after the New Year.

In the mean time, as always, call or email if you or anyone you know has questions about financing residential or commercial real estate.  Here are your rates for this week.  Happy Holidays!  E

Eric Grathwol

Loan Officer 

Priority 1st Mortgage

3300 Douglas Blvd. Ste. 270

Roseville, CA 95661

direct: 916-223-4235

office: 866-771-9000

fax: 916-771-9099

www.priority1stmortgage.com

egrathwol@priority1stmortgage.com