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How Mortgage Rates Benefit From 3 Months Of Worsening Employment Data
For the third month in a row, the economy shed jobs, suggesting that the U.S. is in a recession.
March's monthly loss of 80,000 jobs is the largest since March 2003 and follows January and February's losses of 76,000 each.
The weak data is edging mortgage rates lower as we head into the weekend.
The connection between poor jobs data and today's falling mortgage rates is a little bit strained, but worth discussing. It all comes down to expectations.
Prior to today, there was an expectation that the Federal Reserve's recent rate cuts would over-ignite the economy sometime this Summer. The Fed has cut 3 percent from the benchmark rate since September 2007.
Meanwhile, consumer spending makes up two-thirds of the economy and people can't spend if they don't earn.
So, after today's report showing fewer workers (and falling confidence levels to boot), the largest component of the economy is expected to sag for a while.
This lack of spending should offset the cumulative impact of the Fed's rate cuts and lowers the expectation for runaway inflation later this year.
Now for the connection: If inflation causes mortgage rates to rise, it's the absence of inflation that causes them to fall.
And that's precisely what we're seeing today.
Posted on April 04, 2008
Good Morning America: TurboTax vs Accountants
To see which method gives tax filers the "biggest bang for the buck", ABC's Good Morning America recently compared three popular tax preparation services:
- TurboTax
- H & R Block
- Personal accountant
In declaring TurboTax the "winner", the 4-minute video glossed over several important tax-related items.
The first is that true tax planning cannot happen in a 3-hour stint in front of a computer. Tax planning a year-round activity.
The second is that all personal financial decisions should be evaluated for their tax implications. That can't happen without a personal accountant that knows your tax history and understands your financial goals.
The third is that filing income taxes is a personal event. The "winning" tax preparation method for the family on TV may not be what's best for your family.
If you'd like a referral to a trusted accountant, please ask me. Filing your taxes for cheap today does not mean it will be the lowest cost to you long-term.
Posted on April 03, 2008
Simple Real Estate Definitions: Discount Points
More commonly called "points", discount points are up-front fees charged by mortgage lenders in exchange for lower mortgage rates.
The cost of one point is one percent on the loan size and discount points appear on Line 802 of the HUD-1 Settlement Statement.
As a general guideline, each point paid lowers a mortgage lender's offered interest rate by 0.250%.
For example, a $200,000 home loan offered at 6.000% can be had for 5.750% if the borrower agrees to make an up-front payment of one point ($2,000).
In addition to lowering your interest rate, discount points (as well as other closing costs) may be tax-deductible, too. Therefore, be sure to provide any settlement statements from the previous calendar year to your accountant during Tax Season.
Posted on April 02, 2008
FHA Home Loans Emerge As A Cheap Alternative For Low-Credit Score Homeowners
FHA stands for Federal Housing Administration, a by-product of the National Housing Act of 1934 and now a sub-group within the U.S. Department of Housing and Urban Development (HUD).
The FHA is not a lender nor does it build homes.
The FHA exists to insure lenders against loss in the event that a homeowner defaults on a mortgage.
Mortgages backed by FHA are often called "FHA loans" even though it's somewhat of a misnomer. A more appropriate name would be "FHA-insured" loans because that better describes the FHA's function.
With the FHA's guarantee, mortgage lenders are enticed to make loans on which they would otherwise pass and the explicit backing from the government holds mortgage rates low for borrowers.
FHA loans are often used by borrowers with less-than-20-percent downpayments and, therefore, tend to require mortgage insurance payments.
For FHA loans above 80%, mortgage insurance rates are 0.50% annually (paid monthly) with an up-front payment of 1.5% against the loan size and due at closing.
Homeowners with 15-year fixed FHA loans, however, are exempt from the annual insurance payments.
For all homeowners, though, when the loan balance reaches 78 percent of the home's value, the annual MI is no longer required.
Mortgage rates for FHA loans are typically higher than comparable conforming mortgages but because of new, risk-based pricing from Fannie Mae and Freddie Mac, homeowners with credit scores under 680 are finding FHA a viable alternative.
And often with lower rates.
Source
FHA Loan
Wikipedia, April 1, 2008
http://en.wikipedia.org/wiki/FHA_loan
Posted on April 01, 2008
Looking Back And Looking Ahead : March 31, 2008
Mortgage rates were up last week on weak housing data and a growing nervousness about mortgage bond quality.
Rates would have been up more if not for a tame inflation reading Friday.
The Personal Consumption Expenditures report fell Friday to 2.0% year-over-year, putting it back within the Federal Reserve's comfort zone of 1-2 percent.
PCE is the Fed's preferred inflation gauge and with inflation in check, Ben Bernanke & Co. can focus on other elements of the economy such as housing and employment.
Mortgage rates figure to be volatile (again) this week.
The first major event to strike markets is today's release of a 200-page, government-written plan outlining sweeping reforms for the financial industry.
If markets interpret the government's plan to be bad for bond markets, expect mortgage rates to rise as demand for bonds falls. Conversely, if the reforms are expected to benefit bonds, mortgage rates should fall.
Then, Wednesday, Fed Chairman Ben Bernanke testifies to Congress about the U.S. economy.
Expect the Fed Chief to stay on message, but mortgage rates will respond to his word choice and tone -- especially in remarks about large banks and their ability to survive the current market. Traders are already on edge and will take Bernanke's testimony very seriously.
And lastly, also moving markets this week is the March jobs report, due Friday.
Remember that job growth was negative in January and February so with a third negative month in March, the calls of recession will grow louder; the expectation is the economy shed 40,000 jobs last month. Whether a negative number will be good or bad for mortgage rates, though, will depend on the bond traders' mood come Friday morning.
Either way, though, if the actual jobs number deviates from the expected jobs number of 40,000, mortgage rates will swing wildly starting at market open Friday and continuing into the weekend.
(Image courtesy: The New York Times)
Posted on March 31, 2008
In 2008, Home Loans Are One Day Cheap And The Next Day Expensive
When mortgage rates change rapidly, it's a fiscal challenge to shop for a home and/or home loan.
Lately, mortgage rates have been especially volatile, mirroring the wild moves of the stock market.
Here's how up-and-down stock markets have been in 2008: Through last week, the S&P 500 Index changed more than 1 percent per day on 28 separate days.
This represents 52 percent of all trading days and is the most volatile measurement since 1938.
Mortgage financing is impacted by stock market changes because when money flows into stocks, it tends to come from bond markets. And, when money leaves stocks, it tends to "gets parked" in bond markets.
Because mortgage bonds set mortgage rates, you can understand how stock market volatility can make it difficult to predict what home loan payments might look like.
Volatility is expected to continue for the next several quarters so if you see a mortgage rate you like today, consider locking it right away -- it probably won't last long.
Source
U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says
Jeff Kearns
Bloomberg, March 20, 2008
http://www.bloomberg.com/apps/news?pid=20601213&sid=av840GLwE4UA&refer=home
Posted on March 28, 2008
Why "Median Sales Price" Reports Aren't Helpful For Housing Markets
Each month, the Commerce Department and the National Association of REALTORS release national housing data.
The former's release is called the New Residential Sales report and the latter's is called the Existing Home Sales report.
Both reports highlight the "median sales price", the point at which half of the homes in the U.S. sold for more, and half sold for less.
Last month, the median sales prices were as follows:
- Existing homes: Down 8.2 percent
- New homes: Down 2.7 percent
The very definition of "median", however, makes this data point useless for national housing statistics.
If a large amount of homes are sold in regions where home prices are traditionally high, the median sales price will trend higher.
If a large amount of homes are sold in regions where home prices are traditionally low, the median sales price will trend lower.
Again, all that the median sales price tells us is the price point at which half the homes in the country sold for more, and half sold for less.
Real estate is a local phenomenon and so grouping the entire country's supply of homes together makes little sense. A home in San Francisco has little to do with a home in Omaha.
To get a true gauge of your local market, talk to a real estate agent that knows the local market well. You'll not only get meaningful statistics about a neighborhood, but you'll get good insights, too.
Posted on March 27, 2008
The Small Statistic Within Consumer Confidence That Didn't Show Up On The News
Consumer Confidence fell to its lowest point in three years and anybody who watches the evening news can understand why.
Each day, news programs barrage Americans with tales of economic woe and American Opinion is largely shaped by the media.
After enough time, the reporting becomes a self-fulfilling prophecy.
But, in the Consumer Confidence report, there was a choice piece of data that isn't getting reported by the news programs and it's a rather important piece.
Although fewer consumers expect to buy automobiles and appliances over the next six months, those with plans to buy homes is actually higher by 14 percent.
In other words, despite weakening confidence in the economy, an increasing number of Americans are planning to buy homes this season and next.
Consumers may be motivated to buy this year by a number of factors:
- Lower home prices nationwide
- Affordable mortgage rates
- Fear that mortgage products will require larger downpayment
Regardless, the media is choosing to ignore this part of the story. Instead, the news programs are focusing on the negatives -- just look at the headlines.
It's no wonder that confidence is down -- bad news is all the American Public tends to hear.
Posted on March 26, 2008
How Seasonal Factors Change Homeowner Vacancy Rates
Each quarter, the Census Bureau releases the Homeowner Vacancy Rate, a housing statistic the measures the percentage of homes for sale that are vacant.
A home listed for sale may be vacant for several reasons including:
- The home has been foreclosed and the owner has moved out
- The home seller moved into a new home and not sold his former home
- The home was a rental property and is being sold without a tenant
In Q4 2007, the Homeowner Vacancy Rate matched its all-time high of 2.8 percent.
The statistic can be misleading, however, because Homeowner Vacancy Rates appear to be seasonal and the fourth quarter is more prone to high figures.
As evidence: In 6 of the last 7 years, Q4 posted higher vacancy rates than for the preceding three quarters.
Vacancy rates may increase in the fall because homesellers without a "need" to sell tend to take their properties off the market during the Holiday Season. That leaves an over-weighting of empty homes for sale -- precisely what the Homeowner Vacancy Rate measures.
For an interactive version of the chart above, visit the Wall Street Journal Online.
Source
Housing Markets: A Vacant Look
The Wall Street Journal Online
March 21, 2008
http://online.wsj.com/public/resources/documents/retro-VACANCY08.html
Posted on March 25, 2008
Looking Back And Looking Ahead : March 24, 2008
Conforming mortgage rates edged slightly lower for the second week in a row.
Mortgage rates fell for two main reasons:
- The Federal Reserve offered fiscal support for troubled mortgage-backed securities
- A government group gave Fannie Mae and Freddie Mac permission to lend more of money to American homeowners
These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down.
This is the financial concept of Risk vs. Reward in action.
Expect mortgage rates to be in flux and highly volatile again this week, however.
Aside from housing and consumer confidence data, markets will respond to Friday's Personal Consumption Expenditures data. PCE is a "Cost of Living" index that the Federal Reserve watches very closely.
PCE is different from other Cost of Living indices because it accounts for "substitutes". For example, if beef is getting too expensive, PCE will substitute chicken -- much like a regular person would.
In this way, PCE better reflects the true cost of living for the average American.
PCE is expected to show 2 percent growth year-over-year. If the actual figure is higher, expect mortgage rates to rise on inflation concerns.
Posted on March 24, 2008
Since December 2007, mortgage lending guidelines have changed very quickly and often without notice.
Some of the more well-known changes include:
- Broad restrictions on stated income home loans
- Broad restrictions on 100 percent financing
- "Risk-based fees" for credit scores under 740
Some of the lesser-known restrictions relate to property type and occupancy status as well as debt-to-income levels and mortgage payment histories.
Because of the number of changes and their collective scope, home buyers should be prudent and get re-pre-approved for their home loan.
Even if you last spoke with your loan officer four weeks ago, it's important to know how market changes could ultimately impact your home loan approval.
The market really is that different. Talk to your loan officer about a re-pre-approval today.
Posted on March 20, 2008
Making English Out Of Fed-Speak (March 2008 Edition)
The Fed lowered the Fed Funds Rate by 0.750% to 2.250% yesterday.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.750% yesterday. Prime Rate is now to 5.250%.
Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
Mortgage rate shoppers didn't.
In the statement above -- as explained by The Wall Street Journal -- the Fed expresses a growing concern of inflation from rising commodity prices such as oil. In part, this caused the mortgage bond market to sell off immediately following the press release's issue.
Mortgage rates rose close to a quarter-percent yesterday.
The Federal Open Market Committee's statement leaves the possibility of future Fed Funds Rate cuts open. The FOMC's next scheduled meeting is a two-day affair April 29-30, 2008.
Source
Parsing the Fed Statement
The Wall Street Journal Online
March 18, 2008
http://online.wsj.com/internal/mdc/info-fedparse0803.html
Posted on March 19, 2008
Expect A Fed Funds Rate Cut This Afternoon
The Federal Open Market Committee meets today and will issue a press release in addition to cutting the Fed Funds Rate at 2:15 P.M. ET.
The verbiage of the press release will be as widely watched as the rate cut itself because markets are curious about how far the Federal Reserve will go to lessen the impact of an economic recession.
With every Fed Funds Rate cut, recession becomes less likely, but the other side of the equation is that the probability of long-term inflation grows.
Like recession, inflation can be bad for the economy, too.
The Fed Funds Rate now stands at 3.000% this morning and the FOMC is expected to lower it by 0.750% or more this afternoon.
Mortgage rates are rising today because cuts to the Fed Funds Rate weaken the U.S. dollar which, in turn, makes mortgage re-payments less valuable to investors.
Posted on March 18, 2008
Looking Back And Looking Ahead : March 17, 2008
Mortgage rates fell last week on growing evidence of a recession, but far fewer Americans were eligible to take advantage.
Mortgage lenders continue to reduce product menus and that is leaving homeowners with fewer mortgage financing options than before.
As an added hurdle, Fannie Mae and Freddie Mac recently added "risk-based" fees on all conforming home loans, subjecting mortgage applicants to higher mortgage rates based upon:
- Property Type
- Credit Score
- Loan-to-Value
So, even though mortgage rates moved lower last week, for many homeowners, the cost of homeownership did not.
This week, the biggest scheduled news is the Federal Open Market Committee's Tuesday meeting.
It's widely expected that the Federal Reserve will lower the Fed Funds Rate by 0.75%, lowering Prime Rate to 5.250%.
This is good news for Americans carrying revolving consumer debt because those credit types are often tied to Prime Rate. Two popular types of revolving consumer debt are:
- Home equity lines of credit
- Credit cards
Meanwhile, a cut in the Fed Funds Rate should push mortgage rates up because Fed Funds Rate cuts can lead to inflation.
Since September 2007 -- when the Fed started to cut its benchmark rate -- the Fed Funds Rate is down 2.250% but mortgage rates are slightly higher. This is a normal occurrence and should happen again this week.
Markets will be closed for Good Friday this week.
Posted on March 17, 2008
The Difference A Zip Code Can Make
There is no such thing as a "national real estate market".
Real estate is local.
We know this is true because even cities don't have their own real estate market.
This chart shows how home prices have diverged across adjacent zip codes over the last 12 months.
Some influencing factors:
- School systems
- Infrastructure
- Proximity
- Supply of homes
Stories about "The U.S. Real Estate Market" are irrelevant. In each city in America -- and on a street by street level -- real estate markets can be vastly different.
(Image courtesy: Wall Street Journal)
Posted on March 14, 2008
Mortgage Rates Fell But You May Have A Higher Rate To Pay
When mortgages began to sour last Fall, Fannie Mae and Freddie Mac instituted "loan-level pricing adjustments".
The concept is basic: For mortgage applicants with less-than-ideal credit profiles, mortgage pricing is adjusted to compensate for the added risks.
It's still a conforming loan, but with adjustments.
Effective March 6, though, Fannie and Freddie's definition of "high-risk" changed and the adjustments got much more expensive.
Some of the more impactful changes include:
- Regardless of credit score, cash out refinances above 75% loan-to-value are subject to price adjustments
- All LTVs greater than 60% are subject to price adjustments
- All 2-units will be adjusted by 0.500%, regardless of LTV
- All 3- and 4-units will be adjusted by 1.000%, regardless of LTV
If your mortgage application is a conforming loan destined for Fannie Mae or Freddie Mac, these adjustments may already be on your loan officer's rate sheets but be sure to ask.
If the adjustments are built-in yet, consider whether your should lock your mortgage rate right away.
So, even though mortgage rates fell Wednesday, new Loan-Level Pricing Adjustments pushed the underlying payment higher for a lot of Americans.
Posted on March 13, 2008
Go Beyond The Headlines: Unemployment Data
The Unemployment Rate fell to 4.8 percent in February.
This is 0.1% lower than from January and that's confusing to a lot of people; it's been highly publicized that U.S. companies shed 63,000 jobs last month.
Americans are losing jobs at the same time that the Unemployment Rate is falling. Seem strange?
Well, it's possible because the Unemployment Rate measures workers unemployed versus workers in the workforce.
The "jobs number", by contrast, measures active workers collecting actual paychecks.
So, when the government reported that Unemployment Rates fell in February, it happened because the "workforce" figure used to calculate the unemployment was 644,000 less than the workforce figure from January.
644,000 people have left the workforce entirely. This not only includes those retiring, but the government specifically excludes Americans from the workforce that:
- Hadn't looked for a job in the last 4 weeks, or
- Felt "discouraged" by their prospects and didn't look for a job at all
And that's why the Unemployment Rate fell in February even as companies were laying off workers -- the total workforce size was reduced by more than the total number of jobs lost.
On paper, it looks like the jobs market may be improving but after a closer look, the opposite may be true.
Similar to mortgage-related stories, there is always more to know than just the headline -- you have to dig deeper to find out what the news really means and how it applies to you.
(Image courtesy: Wall Street Journal)
Posted on March 12, 2008
How Gas Prices Are Impacting Mortgage Rates
Gasoline prices reached an all-time, inflation-adjusted high yesterday, averaging $3.23 per gallon nationwide.
According to GasBuddy.com, this represents a 25% increase in the last 12 months.
Higher gas prices are leaving Americans with fewer discretionary dollars to spend and that is playing a role in the U.S. economy's slowdown. It's one reason why mortgage rates have stayed low despite steady upside pressure from inflation.
High gas prices are also a reason why Thursday's Retail Sales data will be closely watched; markets will gain insight into whether Americans are cutting back on personal spending because of rising energy costs.
Retail Sales are expected to have risen by a slight 0.1%. If the actual number is lower, mortgage rates should fall on recession fears. If it's higher, rates should rise.
(Image courtesy: GasBuddy.com)
Posted on March 11, 2008
Looking Back And Looking Ahead : March 10, 2008
Between Tuesday and Thursday, mortgage rates rose as much as during any three-day period in recent memory before settling back a bit on Friday's jobs data.
Fourteen speeches from members of the Federal Reserve were partly to blame for the mortgage rate chaos, but several other factors played a part, too.
One of the biggest other factors last week was that multiple big-name investors were "margin-called".
Now, margin is a basic financial concept, but to do a good job explaining it requires a lot of numbers and math. So -- if you're curious -- visit Wikipedia for the complete run-down.
Or, just know that last week's margin calls forced the investors to sell ther mortgage bond holdings into a falling mortgage bond market. This accelerated the mortgage bond markets freefall for home buyers and rateshoppers alike.
The extra supply from the margin calls created a stronger push downward on mortgage bond prices than markets would have seen without the margin calls.
This, of course, caused mortgage rates to rise faster than they would have without the margin calls, too.
Only after February's weak job numbers were reported Friday did mortgage rates recover. Overall, rates were higher on the week and -- at one point Thursday -- touched their highest levels in several months.
This week will be fairly light on data and lacking of Federal Reserve speakers. Therefore, watch for momentum trading to take hold.
The two data points to watch this week are:
- Thursday's Retail Sales data
- Friday's Consumer Price Index
Both are reasonable gauges of inflation in the U.S. economy and both are expected to show slowing from their previous readings. Strength will be interpreted as inflationary and should cause mortgage rates to rise.
(Image courtesy: The New York Times)
Posted on March 10, 2008
How Picking Up The Telephone Can Reduce The National Foreclosure Rate
"Foreclosure" is the legal process by which a bank repossesses a home from a borrower and, according to RealtyTrac, 1 out of every 100 homes were in some stage of the foreclosure process in 2007.
This figure is astounding because foreclosure is expensive to both homeowners and banks. Both parties have an interest in avoiding foreclosure but the process has to start with the homeowner -- banks are just too big to start it themselves.
Every mortgage statement has a 1-800 phone number on it. If you're about to fall behind on your mortgage payments, make a phone call first. When you call the toll-free number, a customer service representative talk about your repayment options, or help you design a work-out plan to get your mortgage back to current.
Banks know that more than 80 percent of all foreclosures result from one of the following:
- Job loss/reduction in salary
- Medical issues
- Divorce
- Death
These are life events that draw compassion from banks. They understand that bad things can happen to people.
However, the other 20 percent of foreclosures are the result of an inability to sell, an unwillingness to pay, and budget mismanagement. These reasons are not as acceptable to the banks.
But when a homeowner fails to forewarn his lender of a missed payment, the lender assumes the worst. It puts the homeowner in the 20 percent category. This makes a work-out plan much less likely and can quickly lead to foreclosure and a loss of the home.
Lenders want to avoid foreclosure as much as homeowners do. If you're a homeowner and you're facing trouble with your mortgage payment, give your lender a call in advance and try to work it out.
If you never call, you can't possibly get help.
(Image courtesy: Countrywide Financial)
Posted on March 07, 2008
The Right Question: "How Much Do I Want To Spend On Housing Each Month?"
One of the most popular questions that home buyers ask real estate and mortgage professionals is "How much home can I afford?"
It's a normal question to ask, but it's not the most effective way to plan your finances.
Banks will almost always approve you for a home loan in excess of your household budget.
The more appropriate question is: "How much do I want to spend on housing each month?"
By focusing on a home's payment instead of its list price, home buyers exert more control over their short- and long-term financial goals. List price is only one piece of the monthly payment puzzle.
The cost of owning a home month-after-month is the sum of multiple expenses:
- The mortgage payment
- The real estate taxes on the property
- The condo/management fees to an association (if applicable)
- The cost of homeowner's insurance
- The cost of mortgage insurance (if applicable)
In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget. A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.
This is why "How much do I want to spend on housing each month?" is a better starting point than "How much home can I afford?".
Home affordability comes from more than just the list price.
Posted on March 06, 2008
Recession or Inflation? Even Fed Members Don't Know For Sure.
With Friday's jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.
Four Fed speakers Tuesday did little to quell the debate:
- 9:00 A.M.: Fed Chairman Bernanke stayed on message that foreclosures and falling home values are dragging down the economy.
- 10:00 A.M.: Fed Vice Chairman Kohn said that banks will "face challenges" but will not fail en masse.
- 1:00 P.M.: Federal Reserve Governor Mishkin said that deflation is more concerning to him than inflation
- 1:00 P.M.: Dallas Fed President Fisher said fighting inflation is more important than fighting recession.
Four speeches, four different perspectives.
The speakers' mixed messages confused market participants and, as a result, mortgage rates varied wildly from hour to hour.
The confusion was so great that several mortgage lenders had to shut down their rate lock desks on three separate occasions Tuesday to re-price rates to the "new" market.
That's a highly unusual occurrence and the market's volatility underscored the uneasiness exiting in mortgage markets lately. Without a clear picture of where the economy is headed, investors are left to guess (and they're not very sure of themselves).
Friday's job report may add some clarity, but until Friday comes, consider locking a mortgage rate if you see one you like -- it probably won't stick around for very long.
Posted on March 05, 2008
What High Oil Prices Mean To Mortgage Rates
After briefly exceeding its all-time high, oil closed Monday at $102.45.
Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.
When consumers have to spend more money for the same amount of product, it's called "inflation".
Another way to look at inflation is like an erosion in the value of a dollar.
The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars. If those dollars are losing their value, the rates tied to those debts have to increase to "cancel out" the erosion.
This is why mortgage rates spiked Monday. As oil prices rose, the fear of inflation grew larger.
Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices. As oil prices rise, mortgage rates should, too. As oil prices fall, mortgage rates should follow.
(Image courtesy: New York Times)
Posted on March 04, 2008
Looking Back And Looking Ahead : March 3, 2008
Mortgage rates edged lower last week but it was another wild ride. Market players continue to deal with competing economic forecasts.
When the economy shows signs of brightness -- like it did Monday and Tuesday -- mortgage rates tend to rise.
This is because markets are currently equating growth with inflation and inflation pressures mortgage rates higher.
But when the economy shows signs of darkness -- like it did Wednesday, Thursday and Friday -- mortgage rates tend to fall. The sudden absence of inflation reverses the upward pressure and mortgage rates adjust downward.
The major reversal last week started with Federal Reserve Chairman Ben Bernanke's testimony to Congress.
The chairman made three important points, and repeated them throughout his two-day affair.
- Inflation is not dead
- More economic stimulus will create more inflationary pressures long-term
- Short-term economic weakness is more concerning that long-term inflation
Chairman Bernanke implied that the Federal Open Market Committee will stimulate the economy as needed at its next meeting, March 18.
Markets are anticipating another half-point drop in the Fed Funds Rate.
This week, there are 14 separate speeches being made by various members of the Federal Reserve.
Markets will react any deviations in these remarks as they relate to Bernanke's testimony. Mortgage rates will move accordingly. Fewer worries of recession will prop mortgage rates up; Fewer worries of inflation will pull rates down.
Also hitting the wires this week is February's jobs report.
This is a major market mover because employment is closely tied to spending which is closely tied to economic growth.
Posted on March 03, 2008
Making Your Home Sell Faster With Psychology
When selling a home, understanding a little bit about home buyer psychology can help you move your home more quickly.
After all, what people perceive helps define how they act.
A recent article from RealEstateJournal.com listed techniques home sellers can use to attract more offers from buyers.
The tips included:
- Number Play: $299,999 seems far less expensive than $300,000
- Connotation: Precise numbers indicate value; Round numbers indicate prestige
- Simpicity: If you drop the price, make the math easy for the buyer so the savings are obvious
Curiously absent from the piece, however, is the #1 home selling tip that every good real estate agent knows:
To sell your home quickly, price it right.
A "good buy" speaks for itself -- no psychology required.
Posted on February 29, 2008
As The Fed Funds Rate Falls, 30-Year Fixed Mortgages Rise
Federal Reserve Chairman Ben Bernanke testified to Congress Wednesday, alluded to further rate cuts to support an ailing U.S. economy.
Already, the Federal Reserve has lowered the Fed Funds Rate by 2.250% since September 2007.
The graph at right comes from the Wall Street Journal and it highlights a very important correlation between the Fed Funds Rate and mortgage rates.
The correlation is that there is no correlation.
Since the Fed began cutting rates five months ago, mortgage rates on 30-year fixed mortgages are higher, as are jumbo mortgage rates. ARMs, however, are lower.
Especially noteworthy is how 30-year fixed rates started to spike as the Fed cut rates through January. Another half-point cut in March could have a similar impact.
Posted on February 28, 2008
How Is Housing Doing? It Depends Who You Ask.
Yesterday, the Office of Federal Housing Enterprise Oversight released its fourth-quarter housing data.
The OFHEO report color-coded each state according to its annual price changes. The states shown in red lost value, and everyone else gained. Overall, the OFHEO measured a 0.8% national increase.
Also hitting the wires yesterday was the Case-Shiller Home Price Index.
This report focuses on the 20 largest metropolitan statistical areas in the United States and painted a much more grim outlook for housing. According to Case-Shiller, prices declined 8.9% nationally.
Both reports are imperfect but one notable difference is that the OFHEO report measures all 291 MSAs in the United States and its data showed that two-thirds of them appreciated last year.
Once again, this just reminds us: real estate is a local phenomenon. Every market is unique with its own price trends, independent from the rest of the country.
Posted on February 27, 2008
Real Estate Term: Earnest Money
When a buyer and seller reach agreement on a home sale, the buyer typically puts a small amount of money into a trust account.
This up-front deposit is more commonly known as "earnest money".
A sales contract's earnest money requirement will vary from contract to contract. It can be as high as 10 percent of the purchase price and could be as low as $500; earnest money is a negotiable item between buyers and sellers.
Some factors that can influence earnest money amounts include:
- Market conditions: Stronger markets often call for more earnest money
- Buyer economics: First-time buyers often give less earnest money
- Seller psychology: Skeptical sellers often ask for more earnest money
No matter how large or how small, however, earnest money is supposed to give the seller a sign of good faith that the buyer wants to purchase the home.
To this end, earnest money can be forfeited if the buyer later "backs out" of the deal, or breaches the terms of the purchase agreement. Breaching, however, is infrequent.
This is because most purchase contracts are written with buyer-focused "outs" called "contingencies".
A typical contingency is that the seller must provide a clean title policy to the buyer, or that the buyer must secure financing prior to given date, or that the home must pass a satisfactory inspection.
If any of these contingencies cannot be met, the purchase agreement is voided and earnest money returned to the buyer.
When contingencies are met, however, earnest money becomes a deposit and is applied directly to the buyer's bottom line at settlement. If the buyer is expected to have $50,0000 for the closing, for example, the true bottom line is $50,000 minus the earnest money deposit.
Earnest money customs vary from state to state, city to city, and even locale to locale. Be sure to ask your real estate agent and/or real estate attorney for professional counsel before signing purchase contracts.
The earnest money you save may be your own.
Posted on February 26, 2008
Looking Back And Looking Ahead : February 25, 2008
It's a big week for mortgage markets (again) and that should cause rates to fluctuate wildly (again).
The volatility we've seen since December has not been for the faint of heart. Even this past Friday, as mortgage rates were poised to end the week lower, a late-afternoon stock market rally reversed it.
In the last 45 minutes of trading, the Dow Jones Industrial Average swung 225 points. Mortgage rates rose, too, peeving Americans who planned to go house-hunting over the weekend.
This week, mortgage rates will take direction from a handful of economic reports including the Federal Reserve's preferred inflation marker -- the Personal Consumption Expenditures report. PCE is a Cost of Living index.
The biggest story, though, is Fed Chairman Ben Bernanke's Wednesday testimony to Congress.
While he's not expected to say "the economy is in a recession", or "the economy is doing just fine", markets expect Bernanke to give guidance about how far the Fed would cut the Fed Funds Rate to stimulate the economy.
The Fed Chairman won't say outright, "The Federal Reserve intends to lower the Fed Funds Rate to 1.000%". Therefore, it will be the guessing of how low the Fed will go that should cause markets to buck.
But remember: Cuts to the Fed Funds Rate do not necessarily lead to lower mortgage rates. To the contrary: Since the Fed started cutting the Fed Funds Rate in 2008, mortgage rates have moved higher. As they cut, though, ARM interest rates should become more attractive versus fixed-rate mortgage rates.
This is because additional cuts the Fed Funds Rate will fan inflation fires longer-term and inflation erodes the value of long-term mortgage bonds.
(Image courtesy: West Linn Tidings)
Posted on February 25, 2008
Spreadsheet Formulas: Calculating Home Payments
For a lot of homebuyers, calculating a prospective mortgage payment is an online experience. For example, a search on Google for "mortgage calculator" returns 39 million options.
Some people, however, prefer to plan on their local hard drive using spreadsheets. For these people, the hardest part is often figuring out what formulas to use.
Interest Only Payments
Home loans with interest only payments are much more simple to calculate than amortizing loans.
Using the graphic at right as a guide, enter your loan size and your interest rate into two separate spreadsheet cells.
Then, create a third cell and input the following formula that calculates the "Monthly Payment". The formula is:
= (Loan Size) * (Interest Rate) / 12
Principal + Interest Payments
For a home loan with (principal + interest) payments, the formula is a little bit more complicated than with an interest only home loan.
Using the graphic at right as a guide, enter your loan size, your interest rate and the duration of your home loan into three separate spreadsheet cells.
Then, create a fourth cell and input the following formula that calculates the "Monthly Payment". The formula is:
= - PMT(Interest Rate/12, Loan Term in Months, Loan Size)
For additional spreadsheet formulas and more in-depth reporting, explore your software's "Help" feature to see what you can find.
Posted on February 22, 2008
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About the Author
Richard De La Madrid
President
West Coast Financial Group
(800) 753-1627
Richard De La Madrid has served in both the Real Estate and Mortgage industry for the past 15 years. Working for some of the biggest companies has given him the opportunity to learn much about the mortgage industry, allowing him to pass that knowledge down to both his agents and clients as well. The depth of his experience includes senior management in sales, operations, training and marketing. Much of his career has been focused on building mortgage companies from the ground up. Richard is Broker/Owner of West Coast Financial Group, Inc. with two offices serving the San Fernando Valley and Ventura County.
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