Weak Employment Data May Boost The Affordability Of Homes

On the first Friday of every month, the Bureau of Labor Statistics releases its Non-Farm Payrolls report.  More commonly, it’s called the “jobs report” and the October’s data is trending with the rest of 2008.

After shedding another 240,000 jobs last month, the economy has now put 1.2 million Americans out of work this year and unemployment rates have climbed to 14-year highs.

As a strange twist, though, today’s weak jobs data may lead to a positive turn for the economy and for housing in 2009. 

In the wake of the jobs report, members of Congress are already calling for both tax cuts and direct stimulus to reverse the course of the economy.  Both of these actions would put money back into U.S. citizens’ household budgets, spurring consumer spending nationwide.

Because consumer spending accounts for 70 percent of the economy, this would be expected to push the economy forward at a time when it natural forces are slowing it down.

In addition, markets are betting that the Federal Reserve will cut the Fed Funds Rate below its current 1.000 percent level.  This, too, would spur spending because the Fed Funds Rate is directly tied to consumer credit card rates and business credit lines.

Expectations for stimulus are one reason why mortgage rates have not risen today as high as they otherwise would have if this were a “normal” market.

Mortgage rates are slightly elevated as we head into the weekend, but don’t be surprised if there’s a late-afternoon push that brings them lower. For active home buyers, this could help home affordability as we cruise towards the holiday season.

(Image courtesy: USA Today)

As LIBOR Falls, Homeowners With Adjusting ARMs Get Lower Rates

The interest rate against which adjustable-rate mortgages change is falling — evidence that the global banking system is starting to stabilize.

On any adjustable-rate mortgage, the initial “starter rate” remains fixed for some period of time, and then adjusts according to some pre-determined rules.

For a conforming mortgage, an ARM will typically adjust once per year, based on this formula:

(Adjusted Rate) = (Variable) + (Constant)

Where the variable is often assigned to 12-month LIBOR, and the constant is often fixed at 2.250 percent.

LIBOR is the equation’s variable.  Therefore, it’s of paramount import to holders of ARMs.  LIBOR is the rate at which banks lend money to each other.  The 12-month LIBOR, therefore, is the borrowing rate for a 1-year, interbank loan.

So, to take the formula and apply to an real live mortgage, a homeowner’s adjusted mortgage rate would be equal to whatever the 12-month LIBOR is at the time of adjustment, plus another 2.250 percent.

Looking at the chart, note LIBOR spiked in September.  It’s a direct correlation to the September 15 failure of Lehman Brothers.  That bank shutdown started a wave of “who’s going to be next?” anxiety on Wall Street but as global governments stepped up support for banks, LIBOR predictably fell.

For homeowners with adjusting mortgages, this is terrific news.

However, mortgage markets have rallied a bit this week, created an interesting opportunity for some holders of ARMs.  Depending on credit scores and the amount of home equity, mortgage rates on a new loan may be lower that the soon-to-be-adjusted mortgage rate of the old one.

In other words, getting a new loan may be smarter than letting your current mortgage change.  Contact Me to Receive a complementary Mortgage Plan: Will@MyEquityPro.com or 1.888.271.3437 x7

Planning To Buy A Home In 2009? Expect A Tougher Mortgage Road Ahead.

The Federal Reserve confirmed what most of us already knew — getting qualified for a “prime mortgage” is increasingly more difficult.

In a quarterly survey of 84 banks, 75 percent of respondent banks tightened mortgage guidelines over the last 3 months for the most qualified of home loan applicants.

“Prime” is a vague term when it comes to mortgages, but, historically, a prime borrower is one that can document:

• A well-documented credit history
• Very high credit scores
• Very low debt-to-incomes

Historically, banks bent over backwards to lend money to this class of borrower.  Today, they’re thinking twice.

The chart’s steep ascent reinforces that members of all tax brackets face consequences from the current credit market turmoil.  And, although some corners of credit looked poised to recover — interbank lending, for one — the mortgage market is yet unaffected and should be among the last to thaw.

All prospective home buyers should prepare for the likelihood that mortgage guidelines continue to toughen before they start to ease.  Mortgage applicants on the cusp of being approved today will almost certainly be turned down for a mortgage in 2009.

Owning real estate can require a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what’s coming ahead. 

According to the Federal Reserve’s survey, what’s coming ahead is more mortgage application scrutiny.

How The Presidential Election May Impact Mortgage Rates

More than a handful would-be home buyers stayed on the sidelines this year, waiting for Election Day to pass. 

The prevailing thought was that once the new President-Elect was identified, credit markets will systemically unfreeze and housing markets will return to normal.

If history is a guide, this is an unlikely scenario.

Election Day doesn’t figure to alter markets any more in 2008 than it did after the four previous presidential elections. 

If anything, post-Election Day market reaction has been muted:

• 1992 : Dow closes down 0.9 percent the day after Election Day
• 1996 : Dow closes up 1.6 percent the day after Election Day
• 2000 : Dow closes down 0.4 percent the day after Election Day
• 2004 : Dow closes up 1.0 percent the day after Election Day

But just because the stock market has a history of idling on the day after the election doesn’t mean that mortgage rates will rest easy this week.  The likely outcome is the opposite, actually. 

If investors believe the President-elect will successfully stimulate the economy, stock markets would likely rally, causing mortgage bonds to sell off and mortgage rates to rise.

Or, if investors think the winning candidate will fail to revive the economy, money would flock to government bonds as a place of safety.  This dollar flow would occur at the expense of the mortgage market, causing rates to rise in this scenario, too.

Of course, it’s as difficult to predict post-Election market conditions as it is to predict the election itself but one thing is for certain — rates may rise and fall before the week is out, but credit guidelines will remain extra-tight.  Getting approved for a mortgage won’t be any easier — no matter which party wins the Presidential Election.

Source
Will the election drive the Dow?
Eamon Javers
Politico
http://news.yahoo.com/s/politico/20081022/pl_politico/14826

No Matter What Happens To The Fed Funds Rate Today, Markets Are Going To Turn Up The Volatility A Notch

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank’s press release.

In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It’s this last point to which mortgage rate shoppers should pay attention — when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America’s balance sheets, thereby rewarding shareholders.  Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up.  Part of that process, of course, includes selling the “safe” parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A “pause” is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their “bad bets”.  This will add to market volatility for sure.

Mortgage rates are calm this morning.  The calm likely won’t last.  If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release. 

FED Rate Cut Does NOT Equal Lower Mortgage Rates!

The Federal Reserve is scheduled to meet this week and announce its new Policy Statement and Interest Rate Decision Wednesday…and will cut the Fed Funds Rate once again. This is no big surprise. Throughout 2008, the Fed has lowered key interest rates in an effort to stimulate the economy – including cuts in its Fed Funds and Discount Rates earlier this month in an unscheduled meeting. As we know however, cuts in these interest rates do not translate into lower home loan rates. In fact, they typically move in the exact opposite direction.

That’s the reason I wanted to share this information with you today. If you want to secure a lower mortgage rate, the best time to act could be before the Fed meets and announces its latest cut.

In the chart below, notice the pink line. That line represents the interest rate the Fed impacts with its financial policy. As you can see, the line has been consistently lower since January. The blue line, which represents 30-year fixed-rate mortgages, shows that mortgage rates have risen since the first Fed rate cut announcement.

Don’t wait until Wednesday. Whether you’re considering buying a home or refinancing your existing property, call me today (888.217.3437 x7). I will review your individual situation and see what’s best for you and your family. And don’t believe the hype about credit being impossible to get. Credit standards for many loans have tightened up, but mortgage money is widely available on home purchases for borrowers who can provide documentation and support their mortgage application.

And even if you don’t have a home loan need at the present time, feel free to check in with me anyway. We can discuss your current situation, plan for the future, and make sure you are in the best possible position for any financial needs that may be coming down the road.

Strength In New Home Sales

Despite turmoil on Wall Street, the housing sector continues to deliver good news.

Last month, led by a 22 percent surge from the West Region, New Home Sales rose 2.7 percent over August.

A “new home” is a newly-built residence, never before lived in.  New homes are usually built and sold by real estate development companies and their respective marketing firms.

The surge in New Home Sales volume is consistent with the other good news we’ve seen from the housing sector.  It marks the 4th positive signal in the last two weeks.

• October 8: Homes under contract to sell surge 7.4 percent
• October 23: Foreclosed homes fall 12 percent in September
• October 24: The supply of “used homes” falls to an 8-month low
• October 27: The supply of new homes falls by 7 percent

However, it can’t be ignored why housing is showing a statistical improvement.  The main causes are two-fold:

1. Banks are getting better about selling foreclosed homes
2. Builders are keen to dump their excess inventory

Both of these factors drive down home sales prices nationwide which, in turn, draws value-seeking home buyers back to the market.  In addition, because the number of active sellers dwarfs the number of active buyers, today’s home seekers enjoy a tremendous amount of negotiation leverage, making real estate even more attractive.

But, as with everything in business, markets seek balance.  As home supplies dwindle, buyers’ ability to negotiate sales prices and closing costs will fall.  It’s Supply and Demand — as supplies drop, relative demand rises, and prices rise with it.

In every American neighborhood, homes that are priced “right” are selling quickly.  And now that banks and builders have figured out the formula, more homes are going under contract than at any time since 2007. 

Much of the current economic climate is being blamed on housing.  If the data is accurate, though, we can infer that the climate may not last much longer.

Home Sales Are Up, Home Supply Is Down — This Is What A Recovering Market Looks Like

Statistics are what you make of them, but sometimes, they can provide good perspective.

For example, from its peak in 2005 to its trough in late-2007, the number of “used” homes sold nationwide plunged.

• In 2005: Roughly 7 million homes sold annually
• In 2007: Roughly 5 million homes sold annually

Through all of 2008, though, Existing Home Sales volume has been essentially flat.  Some months up, some months down, but always hovering near the 5 million unit mark.

The data from September is no different. 

For the 13th consecutive month, the number of home resales nationwide straddled the 5 million benchmark, clocking in at 5.18 million units.  This tells us that everyday Americans are still buying and selling real estate at a fairly steady clip — despite what the news keeps telling us.

Versus August, September sales volume grew by 5.5 percent.

Now, couple this two other data points and we can see that the housing market is showing multiple signs of strength:

1. The national home supply is now down to 9.9 months
2. The number of homes under contract is up 7.4 percent

Again, though, statistics are what you make of them.  Just as there are positive signals about real estate, there are negative ones, too.  The credit markets are one example of that.   

But, either way, with a full year of stable sales volume behind us and stories of recovery in beat-up markets like California, we can’t ignore the idea that housing may be done trolling its bottom.

It takes willing buyers and willing sellers to turnaround a market.  It appears that housing may have both.

(Image courtesy: The Wall Street Journal Online)

Foreclosures Fell 12 Percent in September 2008

According to foreclosure-tracking service RealtyTrac, the foreclosure rate is falling nationwide. 

Versus August, foreclosures fell by 12 percent in September 2008 as more than half of the states showed month-over-month improvement. 

Most interesting in the data is that several states that led the foreclosure boom in 2007 now appear to be leading the charge out of it.

For example:

• In Arizona, foreclosures are down 9.43 percent
• In California, foreclosures are down 31.64 percent
• In Colorado, foreclosures are down 6.22 percent
• In Illinois, foreclosures are down 5.14 percent
• In Michigan, foreclosures are down 22.43 percent

But despite September’s promising data, the press is choosing to report that foreclosures are up 71 percent over the same period last year.  The data is accurate, but not necessarily relevant. 

When home buyers and sellers engage real estate markets, they rarely think in annual terms.  For them, it’s about buying or selling this month, or next month, or the month after that.  When someone is “in” the market, their mentality is “right now”.

In other words, annual data is more befitting of an economist, while month-to-month data is more befitting of you.  Of course foreclosures are up 71 percent since last year — a lot has happened since then.  But on a monthly basis, signals point to improvement.

September’s foreclosure data may be a signal of market recovery, or it may just be a blip.  Time will tell, really.  Either way, RealtyTrac’s foreclosure data reinforces what most real estate professionals already know and that’s that markets all over the country are showing signs of life.

Simple Real Estate Definitions : Amortization

In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan’s principal balance pays down to $0.

The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest.    Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

Now, if you’ve ever paid on an amortizing home loan, you don’t need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest. 

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due.  And, if you’ve ever heard someone say, “You don’t pay down much of a loan in the first few years,” now you know — mathematically — why that is. 

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn’t mean that a homeowner can’t change it.  In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date. 

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first.  Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk.  Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)