December 24, 2008

Merry Christmas, Happy Chanukah, and best wishes for a fun, joyous, and safe Holiday, whatever you celebrate!

 

Well, 30 Year Fixed mortgage rates managed to briefly hit a new floor of 4.5% (cost/points varied by the hour) over the last week, after the Fed's Open Market Committee Meeting and subsequent policy statement on December 16.  But, don't be fooled by the media - it wasn't the cut of .75% to the Fed Funds Target rate that caused that dip.  The overnight lending rate - which the Fed Funds Rate targets - was already trading around .125% before that move.  The Fed just brought their target rate down from 1% to where money was already in fact trading.

 

What caused the dip to mortgage rates was the Fed's reiteration that they will be buying Mortgage Backed Securities and other securitized debts like credit cards, student, and auto loans, in an effort to recreate that dried up market.  Mortgage rates have moved slightly higher over the last few days - mostly due to profit taking by the securities traders - but I expect them to stay in this low range for some time.

 

We're finally starting to see some focus on the demand side of the housing rebalancing equation, instead of an exclusive focus on stemming incoming supply.  I'll go into more detail on those moves in my next letter, where I'll outline my predictions for 2009.

 

For now, let's review how my thoughts for 2008 panned out.

1)  My "word for the year" was Stagflation.  I thought we'd go through a period of stagflation with increasing inflation and slowing economic growth.  My gut was pretty accurate, as we saw a steady increase in prices across the board, with a spike in July.  At the same time our economy began contracting.  We've now seen that pricing pressure reverse, but... our economy is continuing to slow down.  Next year's word is going to be stagdeflation, but...I'll cover that in my next letter.

 

2) I thought we'd enter a shallow recessionary period, buoyed by a weak US Dollar and increased exports.  I think I was wrong there.  We entered a shallow recessionary period, that's for sure.  Then we blew right past it.  Exports rose on a weak dollar, temporarily.  But...our economy is still receding and exports are lagging too.  At this point, I think it'll be the end of 2009 before we begin to recover.  And, that could even be optimistic.  We WILL recover, but...the recession will likely intensify some, before getting better.  More thoughts on that for my 2009 predictions.

 

3) Part A - Interest rates for conforming 30yr fixed loans will hover around 6% for most of the year - check.  I got that one right.  We saw 2 distinct, and short-lived dips to rates around 5% in Feb/March and September, respectively.  Other than that 6% was the norm for the year.  At least until the most recent dip to 4.5% last week - and subsequent lower trading range - which was created by the Fed's unprecedented move of buying Mortgage Backed Securities.   Part B - I was wrong on my Jumbo mortgage prediction.  I thought rates for those loans, because historically Jumbo borrowers have had stronger income and credit histories - would remain within a .5% to .75% range from conforming loans.  However, this market all but vanished.  New laws were passed revising loan limits - first higher to $729,000, then back down to $625,000 - and a new category of "Super Conforming" loans was created.  But none of that helped Jumbo loans.  The Jumbo mortgage market - now any loans over $625,000 - is still abysmal with rates about 2%-3% higher than those for conforming loans.  I do expect it to improve in 2009 though, and I'll explain why later.

 

4) Major financial institutions will crumble.  Dead on.  In fact, I didn't really see how bad and how far reaching that would be.  We know the losers.  It started with the likes of Countrywide, Bear Sterns and IndyMac but quickly spread to Lehman Brothers, Merrill Lynch, Wachovia, and many others.  In fact, whole business models of the giant Brokerages like Goldman Sachs changed.  They've become banking holding companies in order to qualify for Federal Aid as they fight for their survival.

 

5) FHA and other government backed loans will resurge as conventional financing tightens.   This too has proven accurate.  According to FHA's November, 2008 newsletter, FHA Endorsements (underwritten and insured loans) were running around 150,000 per month.  That's up from about 50,000 per month in previous years.  According to the Mortgage Bankers Association for October 2008, government insured loan applications comprised 32% of all loan applications, up from just 10.2% in Oct. 2007.  This is the highest level of government backed loans since February of 1991.  This trend is likely to continue for the foreseeable future.

 

6) The new President of the United States would be someone who'd not entered the race yet.  I was wrong.  But, Barack Obama wasn't nearly the front-runner he became during the year.  Hopefully, now that he's got the gig, he'll make good decisions and work to implement policies that will help - rather than hinder - our economic recovery.

 

So, I got 3.5 out of 6.  Not bad, for just another "educated guesser!"  That puts my predictions on par with many other analysts, most of whom do this sort of stuff for a living.  I'm just a loan guy who likes to read and think about our economy, where it's headed and what that means to the rest of us.

 

Best wishes to you and yours for a very Merry Christmas, and a happy and prosperous New Year!  As I like to say, with challenges and changes come new opportunities.  I hope you can make the best of them.

 

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 the rest of the week.  Cheers!  E

 

Conforming	Rates	Points	APR	Loan Amt	Payment
40 yr fixed mortgage	7.750%	1	7.990%	$300,000.00	$   2,030
30 yr fixed mortgage	4.750%	1	4.990%	$300,000.00	$   1,565
15 yr fixed mortgage	4.500%	1	4.700%	$300,000.00	$   2,295
3/1 ARM	5.625%	1	5.815%	$300,000.00	$   1,727
5/1 ARM	5.750%	1	5.960%	$300,000.00	$   1,751
5/1 ARM Int Only	5.875%	1	6.135%	$300,000.00	$   1,469
Jumbo (ask me about the new limit, per your zip code)
40yr fixed mortgage	n/a	1	#VALUE!	$550,000.00	#VALUE!
30 yr fixed mortgage	8.750%	1	9.010%	$550,000.00	$   4,327
15 yr fixed mortgage	8.500%	1	8.755%	$550,000.00	$   5,416
3/1 ARM	5.750%	1	5.930%	$550,000.00	$   3,210
5/1 ARM	6.250%	1	6.470%	$550,000.00	$   3,386
5/1 ARM Int Only	6.500%	1	6.750%	$550,000.00	$   2,979

Rates subject to change without notice.

These rates and statistics are for informational purposes only to give you a sense of market movement and my opinion as to why.  Although these rates exist today, based on certain qualifying characteristics, your scenario may allow for lower or higher interest rates.  Licensed by the CA Dept of Real Estate, #01760965.  Equal Opportunity Housing Lender.  If you'd like to be removed from this list, please reply with REMOVE in the subject line.  You can also use this link, mailto:egrathwol@priority1stmortgage.com and add REMOVE to the subject line.  To add someone who would appreciate this information, send me their email with SUBSCRIBE as subject.

 

 

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   Interest rates are a commodity, knowledge and service are not.  Working with me, you'll find the best insight, knowledge and service about real estate financing, and I will meet or beat any legitimate rate and fee structure.