Real Estate Market News 2/8/11

Real Estate Market News 2/8/11

Interest rates are rising.  Today's rate quotes at Wells Fargo for 30 year conventional fixed rate is up to 5.25% from 4.75% just a few weeks ago.  This translates into an extra $30 per month on a $100,000 mortgage.  Over the life of the loan the increased interest rate results in an extra $10,800 in payments.  FHA 30 year fixed rates are at 5.125%, while the FHA 5 year ARM is at 3.625% up from 3.25%.  Rising interest rates will cause borrowing costs to go up but they may also decrease buyer demand for mortgages and result in real estate prices decreasing further.  Some are predicting that interest rates will remain below 5% for the next 3 years (www.equityvista.com).  Turmoil in Egypt may  play a role in which direction interest rates go in the short term.  


The number of loan modifications is declining as a result of less than expected success rates.  More than half of modified loans are expected to default within a year.  The failure of loan modifications is offset by increases in short sale and deed in lieu activity.  However, Fitch Ratings believes that there is still 4 years of inventory remaining before the real estate market returns to a balance.  Underwhelming loan modification results from efforts like HAMP and the problems with servicer's foreclosure procedures have contributed to the backlog of foreclosure inventory.  One of the issues facing loan modification is a lack of knowledge on the part of homeowners facing foreclosure according to an Inman News report.  The report calls on lenders to help educate borrowers about alternatives to foreclosure and to streamline short sale procedures.  


The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) have published a joint proposal to revise credit loss reporting standards.  The proposal suggests that earlier reporting of losses would help limit losses by allowing lenders to react sooner.  One of the issues regarding the current real estate market meltdown is that lenders realized that there were issues too late to effectively put policies in place to reduce losses.  The proposal focuses on replacing the incurred loss model in IAS 39 with an expected loss model for the credit impairment of financial assets.


Inman News reports that it is cheaper to buy than to rent in 72% of the 50 largest US cities.  Miami, FL and Las Vegas, NV came in as the best cities to buy with the lowest price to rent ratio while New York, NY was the best city to rent.  As foreclosures continue to depress prices, many renters are realizing the American dream of homeownership, while many former owners are becoming renters.  The combination of lower real estate prices along with still historically low interest rates has enabled many people to become homeowners despite stricter bank lending.