Fear or Trust
Today I turn to an email that I received entitled, “Fear or Trust.” The author is unknown. After reading the email I couldn’t help but to blog about it. I re-wrote it to add in my theory of Chicken Little and added my own flair. However, I want to give credit where credit is due and disclose that this is not all my own writing. If I knew the author I would love to say, “Man, you are right on with your thinking.” Here we go …
Fear or Trust
Let’s get Chicken Little.
You all know the story … young chicken, fearful of the worst, runs around declaring, “The sky is falling! The sky is falling!” I think we have too many Chicken Littles running around. No wonder the economy is still facing challenges! The 24/7 media is creating a frenzy of panic and fear that fills the collective psychology of the country with gloom and doom. Some people are more stressed and fearful than they have ever been in their life.
Mortgage Rates: Impact of the Credit Rating Downgrade
I want to discuss the impact the downgrade of the U.S. credit rating will have on mortgage interest rates. In these times of uncertainty and volatility, no one knows for sure what will happen next. However, we want to talk about possible scenarios.
Mortgage rates normally run parallel to the country’s Treasury bonds. If many people are buying Treasury bonds the return on those bonds decrease. If less people are interested in buying bonds, then the return on those bonds must increase in order to draw more buyers. If bond returns increase or decrease, mortgage rates normally follow.
Why You Should Own Your Own Home
Is home ownership now a dirty word? With the economy creating challenges like most of us have never experienced in our lifetimes, does it still work to buy your own home?
I say it does. In fact, owning a home makes more sense than not owning a home for most families in this country. Here are five reasons why.
When Will Home Prices Return to their Peak Values?
Some experts predict that we will need to wait until 2013 or 2014 to see home values in our area return to the peak prices they were at in 2005-2006. Meanwhile, according to some, we may see a 7% drop in home values before the end of 2010. A long, slow recovery is expected beginning in 2011.
| Year | Housing market |
| 2005-2006 | Home prices at an all time high |
| 2010 | Home prices may fall another 7% before the year is over* |
| 2013-2014 | Home prices in Dane County may return to peak* |
*According to some experts
Fiserv teamed up with Case Shiller to examine different parts of the country and predict when those regions will rebound to the prices we experienced at the height of the market.
Home prices in 2010 and 2011
According to a report prepared by Fiserv and Case Shiller, “Nationally … data points to a further seven percent decline in home prices through the end of this year, with a prolonged recovery beginning early in 2011. In many markets, the emphasis is on the word ‘prolonged’”
When will prices return to peak values?
The report continues, “We see several powerful forces in the market that will severely hinder the housing recoveries of many metro areas, particularly in the hard-hit states of California, Florida, Arizona and Nevada. It will take these markets 15 or more years before home prices climb back to their peaks.”
Here is the map that accompanied the press release:
There is a certain amount of guesswork in all of this because there are so many variables to consider: interest rates, foreclosures and unemployment to name a few.
What does this mean to you?
If you are thinking of selling but want to wait for peak prices to return, you may need to wait until 2013 or later. No guarantees. If you are thinking of buying, the best bargains are now. Prices may drop later this year, but, if interest rates climb, you may end up making up more than the difference in interest payments.
The BEST ways to spend to your tax credit
$8,000 Can Go a Long Way
The $8000 tax credit for first-time home buyers who sign a contract by April 30, 2010 (and who close by the end of June) is making a big difference for many buyers. For some, it makes a home purchase possible. Others are using the money in more creative ways.
Here’s an idea: Pay $8,000 in additional Discount Points on your mortgage. By doing this buyers gain two benefits:
First, Discount Points are tax deductible as prepaid interest on the mortgage. That means buyers in the 28% income tax bracket will save $2240.00 on their taxes next year.
Second, by paying 2 points on a $400,000 mortgage (cost $8,000), a borrower is likely to receive approximately a .50% lower interest rate on their mortgage. Over the course of the first five years of home ownership, they would save nearly an additional $8,000 in monthly mortgage payments!
Another angle …
By paying the points for a lower rate, you would reduce your Principal & Interest Payment about $132/month on your $400,000 loan. If you were comfortable with your original payment, you could actually borrow an additional $20-25,000 for the same payment. That’s $20-25,000 that you could put into a 203K loan to finance home improvements OR it’s buying the bigger house OR buying in a better part of town….for the same payment you were willing to accept without the tax credit.
Okay, one more …
$8,000 untouched in a conservative investment (like Savings Bonds) at 6% would compound to more than $25,000 in 20 years to help pay for college, a wedding, or a car. In 30 years, when you retire, it would blossom to more than $46,000! That’s a lot of trinkets for your grandchildren.
Take the money and enjoy it! Save monthly, improve your home, improve your lifestyle, or improve your future. Any way you look at it, $8,000 can go a long way.
Who is buying real estate in 2010?
Foreclosures and interest rates are climbing. Prices are down. Despite these developments three groups are re-entering the real estate market as buyers in 2010. According to recently-released major reports, here are the people who again see opportunity in real estate:
The Wealthy
The Wealth Report, a study released by Citi Private Bank and Knight Frank, reveals that the wealthy are bullish on real estate.
The tangible and straightforward nature of residential property, especially when the outlook for other asset classes is uncertain, explains this attraction. The results of The Wealth Report’s 2010 Attitudes Survey clearly indicate that High Net Worth Individuals, wherever they are around the world, still see property as one of the best assets to own, with most predicting values to grow in 2010.
The report asked: “Will 2010 be a good year to invest in these asset classes?” Here were the results:
When asked which type of real estate they thought would make the best investment, 50% said residential properties.
The Investor
Move, Inc. released its survey this week. They report:
Interest in real estate as an investment has more than tripled in the past year. In fact, 17.2 percent of potential home buyers today say they plan to purchase a home in the near future as an investment compared to just 5.6 percent in March 2009.
Interest Rates Start to Climb as Predicted
As the Fed was planning to exit the mortgage market at the end of last month, more and more experts were calling for the exit to be uneventful. Their belief was that there was ample demand sitting on the sideline ready to replace the Fed’s role.
What actually did happen?
RATES ARE UP OVER ONE QUARTER OF A POINT.
The Mortgage Bankers Association’s (MBA) Weekly Rate Survey reported:
The average contract interest rate for 30-year fixed-rate mortgages increased to 5.31 percent from 5.04 percent … for 80 percent loan-to-value (LTV) ratio loans. This is the highest 30-year rate recorded in the survey since the first week of August 2009.
While other factors besides the Fed exit may have helped to cause the jump, Michael Fratantoni, MBA’s Vice President of Research and Economics pointed to the Fed’s exit in the press release: “Mortgage rates jumped last week as the Federal Reserve completed their purchases of mortgage-backed securities.”
How high might rates go?
The million dollar question is what will happen to rates throughout the year. Housing Wire in an article Wednesday suggested that rates might continue upward throughout the year. The article pointed out that mortgage rates may need to rise to 6% to attract investors in private Residential Mortgage Backed Securities (RMBS). Also on Wednesday, MSNBC reported, “Many analysts forecast rates will rise as high as 6 percent by early next year.”
What will this do to the housing recovery?
Let’s look at how the purchaser’s buying power is impacted by a rise in rates. From the MSNBC article:
For every 1 percentage point rise in rates, 300,000 to 400,000 would-be buyers are priced out of the market in a given year, according to the National Association of Realtors.
And it dramatically affects the buyers whom it doesn’t eliminate:
Taking out a 30-year mortgage for $300,000 at a rate of 5 percent will cost you about $1,600 a month, not including taxes and insurance. But the same monthly payment at a rate of 6 percent will only get you a loan of $270,000.
What does this mean to you?
If you are buying, buy now before rates go any higher. If you are selling, take advantage of the fact that buyers are coming to the market now. If you wait, higher rates may force many buyers out of the market for your home.
Mathweg Minute Feb/March 2010
The Spring Market Rush Is On Now and Could End Early
Now is a great time to buy and sell real estate, but that could soon change. You may have a 30 to 60 day window for the best deals.
Here’s the good news …
- Our economy is improving according to the seasonally adjusted annual growth rate (source: commerce department) (see graph).
- 77% of people believe that owning a home is still part of achieving the American Dream (Trulia.com).
- Year over year sales are up 32-60% in every price point.
This exciting news gives us reason to show confidence in our economy and in our real estate market.
However …
We need to jump in now because things are going to change. Forbes.com reports “late spring and summer are usually thought of as the best time to put a home on the market because buyer demand builds steadily through spring … But this year, experts predict that the selling boom, which normally starts in spring, will hit at a different time that it has in the past. Sellers with flexibility should market their homes earlier in the year.”
Here’s the bad news …
The Fed is scheduled to exit the housing market this spring. The Fed has already announced that their program purchasing mortgage-backed securities will expire on March 31, 2010. Most anticipate a quick and dramatic rise in interest rates at the conclusion of that program. On top of that, the Home Buyer Tax Credit ends on April 30, 2010 (the date the house must be in contract). These developments will drive many buyers out of the market, dry up demand, and may cause values to fall and make homes much more difficult to market.
Here’s why.
The end of the tax credit
Recent history teaches us that housing demand falls when these programs expire. The original end date of the Tax Credit was to be November 30, 2009 (the date you needed to close on your purchase to be eligible for the credit). Most experts did not believe the federal government would extend the credit (which it did). That meant as buyers were making a purchasing decision, they needed to buy a house that they could close on by November 30. Reports coming out now show that when the original tax credit was set to expire there was a rush to purchase. After that original rush, demand faded rapidly.
What happened to values? Last month the US Census Bureau’s New Construction Report showed sales month-over-month had fallen by 11.3%. The NAR’s Pending Home Sales report released in early January showed a 16% fall off in pending contracts and this month’s Existing Home Sales report showed a fall of 16.7% in sales. The explanation? After a rising surge from September through November, existing-home sales fell as expected in December after first-time buyers rushed to complete sales before the original November deadline for the tax credit and all indicators show sales all fell off dramatically after the tax credit was supposed to originally expire.
Will demand drop after the tax credit expires on April 30? Most likely it will. And interest rates will probably be on the rise at the same time.
Rising mortgage rates
Bankrate explained that rates will eventually be pushed higher because the Fed seems intent on wrapping up mortgage bond purchases at the end of the first quarter (DSnews.com). In addition The TARP Report to congress reads; “The government has done more than simply support the mortgage market, in many ways it has become the mortgage market.” The residential housing market is a huge part of our national economy, and problems in that market were a significant contributing factor to the current financial crisis. The Federal Government has long played an important role in financing residential housing, and that role has increased dramatically since the outset of the crisis – with the Federal Government and the organizations it backs now guaranteeing or insuring almost all net new borrowings for mortgages and mortgage backed securities. (see graph below)
Here is what the pros are saying;
- HSH & Associates reports rates will nudge closer to 6% than 5%
- Moody’s Economy.com reports, “6% that sounds about right.”
- Washington Post says, “6% by the end of 2010.”
- Barry Habib says, “as high as 6.5%.”
- Morgan Stanley reports, “7.5% to 8%”.
When demand falls, prices fall. When interest rates climb, fewer buyers can qualify for a loan. All of this could be very bad news for sellers and buyers who choose to wait.
Best strategies
Sellers: You must price your home to not be competitive, but to be compelling. The feds have done everything they can to help home values. The first time buyer tax credit and the purchase of mortgage back securities helps buyers, yes. But it was really designed to help you, the seller. Right now you have an $8,000 incentive and low mortgage rates working for you. Expect that to end soon. Now is the time to sell. If you wait, you may need to drop your price double digit. Seek to sell now by making your home’s price compelling today.
Buyers: If you are buying with a mortgage, now is a great time to buy. Prices are down and interest rates are low. Waiting for prices to fall further is risky because there’s no guarantee that interest rates will stay this low. Even a small increase in interest rates can make a cheaper sticker price much more expensive to you in monthly payments. However, if you are a cash buyer and can afford to wait, you may want to take your time before you buy. Expect to find great bargains as months unfold.
Mathweg Minute – Jan/Feb 2010
What’s happening with property values?
Will property values go up, down or stay the same? Is this the right time to buy? To Sell? To get a mortgae?
To find the answers, we need to look at Economics 101: Supply and Demand.
Tax credits and low interest rates are bringing more and more buyers back into the marketplace. Demand is growing, and the feds are doing what they can to make it grow, including purchasing mortgage back securities to keep interest rates low.
Will this increase in demand drive home prices back up? If more buyers are competing to buy my home, can I push the price up?
Probably not. At least not right away.
Here’s the problem: Supply is up too.
A good way to compare supply and demand is to look at our inventory. In other words, we look at how many homes are on the market in a given price range, and how long it would take for those homes to be sold (absorbed) in this market. Here’s what typically happens to market values depending on the housing supply
Housing inventory Market values
1-2 months of inventory Rise 10% +
3-4 months of inventory Rise 1-9%
5-6 months of inventory Balanced market – stable values
7-8 months of inventory Fall 1-9%
9+ months of inventory Fall 10% +
As you can see in the charts below, homes in some categories (lower priced homes) are gaining values, while homes in many categories are losing value.
All in all, things are looking better than they did. However, there is still reason for concern. Here’s why: The shadow inventory, that is, the number of homes that may soon enter the market because of foreclosure and delinquency, is rising. While foreclosures are holding steady for the moment, delinquencies are 55% higher than they were a year ago reaching the level of 1.7 million (Sept. 2009), according to estimates by First American Corelogic. If shadow inventory wasn’t a problem, we could say that supply is beginning to approach more normal levels. However, when shadow inventory is taken into account, we have a phenomenon that may impact housing values for the next few years. This is further complicated by a declining “cure rate” for delinquent loans. In the past, those who were 30/60/90 days past due with their mortgage were finding ways to get caught up and stay caught up. Now, more and more of those delinquencies are drifting into foreclosure. Compare the 2005 numbers with today’s (see graph).
In addition to the cure rates being down, we are now starting to see loan defaults as a Strategy. According to Northwestern University Kellogg School of Management, more than 25% of mortgage loan defaults are strategic. That is, a quarter of homeowners who default on their mortgages are walking away from their homes even if they can afford to make their payments. Homeowners are especially motivated to walk away when home values have fallen by more than 15%. Even banks themselves are walking away from properties.
Morgan Stanley walked away from four buildings they owned because values had fallen. So if they are doing, why wouldn’t the public? We have to stop this! Maybe the risk of going through a foreclosure will slow it down. Not only is walking away from a commitment the wrong thing to do, but a foreclosure stays on a consumer’s credit record for seven years and can send a credit score plunging by as much as 160 points, according to Fair Isaac Corp., which provides tools for analyzing credit records. A lower credit score means auto and other loans are likely to come with much higher interest rates, and credit card issuers may charge more interest or refuse to issue a card. In addition, many states give lenders varying degrees of scope to seize bank deposits, cars or other assets of people who default on mortgage.
When Will Mortgage Rates Increase?
The experts on mortgage rates can agree on one thing: rates are going higher in 2010. Most analysts do not think the low rates seen during 2009 will be seen again. Once The Federal Reserve’s Mortgage Backed Security buying program expires at the end of March, it is likely that rates will edge higher. Mortgage rates are about 1% lower right now than they would be if The Fed weren’t buying all those Mortgage Backed Securities. Analysts predict the upper end range of mortgage rates could be as high as 6.50% by the end of the year, with rates being very volatile throughout.
If interest rates increase by 1 percentage point it would mean the purchase price of a home would have to come down by 10% in order to have the same monthly mortgage payment. Another way to look at it is on a $200,000 loan amount and 30-year fixed rate mortgage, the additional interest payment at 6% instead of 5% is $125.46/mo. That equates out to be $1505.52/yr more in interest that you will be paying, or $45,165.60 over the life of the loan! When mortgage rates have increased in the past, the trend has been quick and dramatic. The chart below, The Federal Reserve demonstrates these rapid increases.
Best strategies:
Buyers: If you are buying with a mortgage, now is a great time to buy. Prices are down and interest rates are low. Waiting for prices to fall further is risky because there’s no guarantee that interest rates will stay this low. Even a small increase in interest rates can make a cheaper sticker price much more expensive to you in monthly payments. However, if you are a cash buyer and can afford to wait, you may want to take your time before you buy. Expect to find great bargains as months unfold.
Sellers: Your strategy is to price it right so you can sell it soon. Overpricing in this market is dangerous, because you may lose good buyer prospects as values may continue to decline.
Have a great day!
Neil Mathweg – Century 21 Affiliated
Jan/Feb. 2010
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