Archive for December, 2009
Mortgage rates have been steadily climbing, from a low of 4.5% around November 27, 2009 to above 5% on December 22, 2009. For the past two months I’ve been warning that this will eventually happen. It’s not because the economy is recovering; it isn’t recovering. The reason mortgage rates will rise to 6% or above, sooner rather than later is because that is the "natural" market.
About a year ago, the Federal Reserve announced a $1.25 Trillion mortgage rates subsidy, by purchasing mortgage-backed securities in the open market, through March, 2010. Right before the subsidy was announced, mortgage rates were at or above 6%. The subsidy was referred to as Bernanke’s "nuclear option" meaning he was using an extraordinary monetary stimulus to keep mortgage rates artificially low.
One year and 12 months into the 15-month game, we’re at $1.07 Trillion spent on this open market MBS purchase program. This means that the Fed still has about $150 Billion to spend in three months, so mortgage rates should stay around 5%, right? After all, the Fed only spent $80 billion/month and they have at least 2 months of money left.
Markets are discounting mechanisms meaning that traders anticipate how potent the Fed can be. The Fed is just about out of bullets and MBS traders know it. Let me try to give you an example of what the Fed did by recanting the explanation I gave, to a Del Mar Realtor, on the beach this summer.
Leave it to the government to take a crippled housing market (which they helped destroy) and make it worse by prolonging its recovery.
Regulators have taken a loose and passive role watching the housing bubble inflate. Now, true to their nature, regulators are making the problem worse with their slow response and lack of real-world solutions.
Real estate investors, in my opinion, have been unfairly squeezed by the ever tightening underwriting guidelines. We are dealing with larger down payments, higher credit scores, larger cash reserves, and lower debt-to-income ratios.
As a real estate investor, Fannie Mae and Freddie Mac require you to have a bullet proof credit profile to even be considered for financing. When you consider that investors put up a larger down payment than most home buyers, require better credit, and typically research and buy investment property with a cash-on-cash return, lenders and regulators should be more willing to finance these solid transactions. They would also help solve the housing crisis by reducing the excess foreclosure inventory sought by rehabbers and wholesalers.
Categories are graded from A thru F:
Economic Growth: D
The economy remains weak and although some indicators have improved compared to last month, they are improving from very low numbers. The third quarter GDP growth rate was revised downward to +2.8% from the preliminary report of +3.5%. Despite the downward revision, it still marks a great improvement from the second-quarter, and is the first quarterly increase in four quarters.
Job losses have eased slightly compared to last month, yet remain awful compared to history. In the last 12 months the U.S. has lost nearly 4.7 million jobs, which is equal to a decline of 3.4% of the total payroll workforce – representing one of the largest declines in 60 years. The headline unemployment rate surprisingly declined this month, reaching 10.0% in November, down from 10.2% in October.
The U-6, a broader measure of unemployment that covers part-time workers who would like full-time work and those who have given up looking for work, also decreased to 17.2% in November, down from 17.5% in October. Mass layoff events – defined as a cut of 50 or more jobs from a single employer – eased once again in October to 2,127, and marks the first year-over-year decline since August 2007, representing a 3.5% drop compared to last year.
The length of time required to find employment continues to increase, with job seekers taking over twice the normal length of time to find employment. The November CPI (all items) rose to 1.8% from one year ago, while the Core CPI (minus food & energy) remained flat at 1.7%.
Leading Indicators: C-
The U.S. leading indicators took a leg down this month after a run of steady improvements in recent months. In October, the Leading Economic Index 6-month growth rate declined to 10.2%, yet remains one of the largest year-over-year growth rates on record since 1983. Although the ECRI Leading Index, which is a gauge of future economic growth, also declined to 23% since one year ago, it still represents one of the largest growth rates since ECRI began tracking the statistic in 1968. Read more »
Housing prices have taken a beating over the last few years all around the country. However, a few major cities have finally hit bottom and are on their way back.
The question that some are asking now is whether the rebound is temporary, or a clear sign that those markets have come back from their trough.
Here are ten major cities that are clearly on the mend:
| City / Market | Rebound off the Bottom |
2009 Bottom |
Y/Y Change (Aug ‘09) | Monthly Change (Aug ‘09) |
| Minneapolis, Minnesota | 12.94% | April | - 14% | 3.2% |
| San Francisco, California | 12.5% | March | - 13% | 2.8% |
| Cleveland, Ohio | 10.9% | March | - 3% | 0.5% |
| Denver, Colorado | 8.19% | February | - 2% | 1.0% |
| Dallas, Texas | 8.10% | February | - 1% | 0.2% |
| Washington, D. C. | 7.79% | March | - 8% | 1.4% |
| Boston, Massachusetts | 6.94% | March | - 4% | 1.0% |
| Chicago, Illinois | 6.75% | April | - 13% | 2.7% |
| San Diego, California | 6.17% | April | - 9% | 1.6% |
| Atlanta, Georgia | 5.82% | March | 11% | 1.0% |
A large percentage of the sales activity today is coming from first-time home buyers and investors. In some markets this activity makes up over 75% of the total sales volume.
Remember that job growth is the primary driver of housing demand. And job growth translates into more people with incomes who can buy or rent homes. These markets have not been affected as much by the high unemployment we see in other parts of the country.
If you are a real estate investor sitting on the sidelines waiting for a bottom then this may be the nudge you need to get up and start investing. There are a large number of prudent real estate investing opportunities available today with historically low interest rates to boot!
The mortgage loan limits and policies established in 2008 and 2009 will continue through 2010.
There are several types of mortgage loan limits. Generally, most borrowers need to look at conventional, FHA and VA loan limits to see how much can be financed with the most-widely originated loans.
If you borrow at or below the conventional loan limit for non-government mortgages, you would have what is generally known as a “conforming” loan. If the amount borrowed is above the conventional loan limit, you would have a “jumbo” loan and face a higher rate because larger loans imply more risk to real estate investors, the folks who buy mortgages.
Conventional Loans
For 2010 the conventional loan limits depend on the county where you’re located. Instead of one national mortgage limit, we now have one for each county – and there are more than 3,200 counties.
In general terms, 2010 loan limits for a single-family home range from $417,000 to $729,750. Once you know the loan limit for a single-family home in a specific area you can then see the limits for owner-occupied homes with two to four units.
The mortgage crisis has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry. The chart below shows you those ferocious fish may still have an appetite:
It shows you that we are past the viscous subprime crisis, when that shark chewed through the balance sheets of a number of banks and financial institutions, in some cases devouring them whole. However, it is not yet safe to get back in the water:
There are these other slices of mortgages that are not quite as risky as subprime that reset in the next couple of years. Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.
