If the presence of inflation causes mortgage rates to rise, then the absence of inflation should cause mortgage rates to fall. And, in most markets that's true.
Today, it's not.
Despite a deep dip in consumer prices not seen since 1947, mortgage rates are inching higher this morning.
Higher mortgage rates make homes less affordable to home buyers.
The main reason why rates are rising today is that the Cost of Living didn't just ease last month -- it plunged. In fact, the monthly drop was so severe that Wall Street now questions whether this summer's record-breaking inflation will lead to equally-strong deflation this winter.
In economic terms, deflation is the opposite of inflation -- it's when prices and wages chase each other lower. The two can be equally bad for the economy. What's often best for Americans are moderate, steady readings.
Because of the rapid decline, markets fear that Consumer Prices may have swung way past moderate in October and started a downward spiral. As always, however, market opinions can change quickly and when they do, they usually take mortgage rates with them.
(Image courtesy: The Wall Street Journal Online)
In March 2008, HUD temporarily raised FHA loan limits around the country. Effective January 1, 2009, FHA loan limits revert.
FHA home loans are mortgages made by private lenders and insured by the federal government.
Historically, FHA home loans have been "easier" for which to qualify than their conforming mortgage counterparts and, therefore, tend to be associated with borrowers of tarnished credit quality.
Today, that's the not the case.
The FHA home loan underwriting process can be as tough -- or tougher -- than a conforming mortgage underwrite. There is extra documentation required and the home appraisal process is often more thorough.
Where FHA home loans shine is in their limited downpayment requirements.
To purchase a home with a FHA-insured mortgage requires a 3 percent downpayment as of today; in January, it moves to 3.5 percent. Versus the typical conforming mortgage requirement of 5 percent or more, FHA serves as somewhat of a home affordability product for Americans. In addition, FHA allows larger "cash out" refinances than Fannie Mae or Freddie Mac.
The 2009 FHA loan limits (in most areas of the country) are:
- 1-unit : $271,050
- 2-unit : $347,000
- 3-unit : $419,400
- 4-unit : $521,250
Note that the loan limits don't apply to all areas of the country equally. Higher-cost regions feature higher loan limits, based on typical home values. Homes in Los Angeles County, for example, can be FHA-insured up to $625,500 in 2009, and there are exceptions made for Alaska and Hawaii.
The official FHA announcement published all of the counties with access to higher loan limits, spread across two spreadsheets. The first spreadsheet lists each county at the $625,500 maximum; the second list is everyone else.
If your home county is on neither list, use the "base" numbers above.
Vacuum cleaners are meant clean our homes, but in addition to picking up dirt, dust and mites, most vacuum cleaners also spread harmful bacteria.
As revealed in this this 4-minute video from NBC's Today Show, E. Coli, salmonella and other virus-causing entities are commonly found on vacuum cleaner under-bristles and, in some cases, bacteria can be 100 times more concentrated than on a public toilet seat.
The video goes on to give some general rules to limit indoor germ exposure -- some more practical than others. The rules include:
- Avoid wearing shoes indoors
- Wash your hands after playing on the carpets and rugs
- Don't stop vacuuming
And, of course, having the right hardware can help, too.
If it's time to replace that old vacuum, start your search online with a discount store like GoVacuum.com. Most online sites will have a wider selection than your local hardware store and shipping is usually free.
To help demystify the mortgage process, the federal government is giving the much-maligned Good Faith Estimate document a makeover. Effective January 1, 2010, the current, 2-page form will be replaced by a new, easier-to-understand version, spanning 3 pages.
The biggest strength of the new Good Faith Estimate is that it uses everyday English to explain how the mortgage works. For example, in one section titled "Loan Summary", the Good Faith Estimate specifically answers:
- What is your interest rate?
- Can your interest rate rise?
- Does your loan have a prepayment penalty?
Using today's disclosures, the answers are spread across 3 separate forms.
In addition, the new-look Good Faith Estimate identifies what charges are legally allowed change at the time of settlement, and how a mortgage applicant can opt for higher fees in exchange for a lower mortgage rate, and vice versa.
These educational elements are lacking from the current model.
But for all of its clarity, the Good Faith Estimate doesn't address the issue of suitability. As in, is this the right loan for the right borrower? The new Good Faith Estimate won't prevent homeowners from choosing "bad loans" -- it will only educate them about the loan's facts.
For suitable advice -- as always -- talk with a trusted mortgage professional who will both listen to your needs and help you make plans for them. Getting the "best terms" on an unsuitable loan can be far worse that getting great terms on a loan that fits.
Foreclosure is a hot topic among the press lately. It's hard to turn on the television or open up a newspaper without seeing a story about it.
But what's most interesting about foreclosures is that they appear to be concentrated in just a few parts of the country.
According to the foreclosure-tracking service RealtyTrac, 4 states accounted for more than half of nation's foreclosures last month.
And those 4 states -- California, Florida, Arizona, and Nevada -- share some very similar characteristics including:
- Their respective popularity with retirees and real estate investors
- Their large home value increases earlier this decade
In looking at the rest of the country's foreclosure data, the remaining 46 states combined accounted for just 48.8 percent of October's foreclosures.
That's 1.06% per state on average.
Now, this isn't meant to diminish the impact of foreclosures on the economy -- quite the opposite. Foreclosures harm to the national housing market because most mortgage lenders are national. But, we highlight statistics like this to show that the foreclosure "problem" isn't so bad in most parts of the country, relative.
Furthermore, mortgage lenders are intervening to slow the flow of defaults nationwide. Following the lead of JP Morgan and Bank of America, CitiMortgage announced a sweeping plan this week to help homeowners avoid default and stay in their homes.
In a way, for as good as this news is for homeowners, it's equally bad news for home buyers. As the number of foreclosures decrease in any given market, it reduces the inventory of homes for sale. Lower supply levels often lead to higher sale prices and less room to negotiate.
And this may be what the banks are trying to accomplish.
For the 4th consecutive year, the government has set the conforming mortgage loan size limit at $417,000.
A conforming mortgage is one that, quite literally, conforms to the mortgage guidelines set forth by Fannie Mae or Freddie Mac.
The 2009 conforming loan limits, as released by the government, are:
- 1-unit properties : $417,000
- 2-unit properties : $533,850
- 3-unit properties : $645,300
- 4-unit properties : $801,950
Loans in excess of conforming loan limits are more commonly called "jumbo", or "super jumbo" home loans, depending on their size.
Out-sized mortgages like these are often more costly than their conforming-mortgage counterparts because jumbo loans are not guaranteed by the U.S. government like Fannie Mae loans are.
There are exceptions to the loan limits, however.
Left over from the Economic Stimulus Act of 2008, specific, "high-cost" areas around the country have their own conforming loan limits, not to exceed $625,500. There are 59 designated high-cost regions in the U.S., most of which are in California.
Loan limits are re-assigned each year, based on "typical" housing costs around the country. Since 1980, as home prices have increased, so have conforming loan limits. As home prices have fallen in recent years nationwide, however, the conforming loan limit has not.
If the amount of air that leaked from a typical home's gaps and cracks was measured, it would equal the amount of air that leaves through an open window.
This is why so many Home & Garden experts recommend a recaulking of your home prior to the Winter -- a solid caulk job can reduce a home's Winter energy bill by 20 percent.
In this 2-minute video from Home Depot, learn how you can to identify leaky windows, and then how to fix them using caulk, putty knives and a host of other tools. Or, if DIY is not your style, find a competent contractor online.
The project is small so the costs should be low.
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)
The interest rate against which adjustable-rate mortgages change is falling -- evidence that the global banking system is starting to stabilize.
This is good news for U.S. housing markets.
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 ARM-holders. 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 your mortgage lender to see which plan fits you best.
The Federal Reserve confirmed what most of us already knew -- getting qualified for a "prime mortgage" is increasingly more difficult.
In a quartely survey of 84 banks, 75 percent of respondant 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.
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.
Higher mortgage rates means higher monthly payments on a home.
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. Again, higher home payments.
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
When a home is listed for sale, fresh flowers in various rooms can add life and color to the property, increasing the home's marketability. And courtesy of 5-Minute Life, here are some tips to make those flowers last longer.
- Dip flower stems in boiling water before vasing them
- Allow vase water to sit for an hour before adding flowers
- Add a small amount of bleach to the vase water
- Keep the flowers away from fruit
Of course, fresh flowers go well in any home -- not just those listed for sale. If you're buying them, the video above will help you get more for your money.
When the government nationalized mortgage lending in September, housing analysts predicted lower mortgage rates.
For a brief two-week stint, they were right -- post-takeover, the 30-year, fixed rate mortgage fell below 6.000 percent nationally for the first time in 7 months.
Since then, however, mortgage markets have reversed. Rates are now at pre-takeover levels.
Now, this isn't to say that the nationalization was a failure -- far from it. The government's takeover of Fannie Mae and Freddie Mac accomplished two very important goals:
- It restored failing confidence in the U.S. mortgage markets
- It opened legislative channels for faster, more relevant housing reform
And, long-term, most people agree, these are essential elements for a U.S. economic recovery. Over the short-term, however, the plan has not delivered the sustained low mortgage rate environment that was envisioned.
The biggest reason why rates are higher is because of Wall Street's manic trading behavior. When the economic outlook shows hints of sun, investors sprint to risky stock markets; when it shows signs of gloom, they flee in favor of ultra-safe treasuries. The buy-sell patterns have led to some of the wildest trading days on record and it's not what the Treasury expected.
See, when the takeover was first announced, mortgage-backed bonds were elevated to "government status". This created new demand for mortgage bonds which helped to push down rates. But, in the weeks that followed, the world's credit markets unraveled and traders sought the dual comfort of safety and liquidity in their portfolios.
That's a combination that only U.S. treasuries can provide. Versus "true" government bonds, mortgage-backed securities are just quasi.
We can't know where mortgage rates will move for certain but, for now at least, the 4 percent range some had predicted is out of reach. Until credit order is restored globally, expect volatility to continue and rates to remain up.
(Image courtesy: The Wall Street Journal)
The Federal Open Market Committee voted to cut the Fed Funds Rate by one-half percent today. The benchmark rate now stands at 1.000 percent.
In its press release, the Fed wasted no time addressing the key issue at-hand, stating that economic activity has "slowed markedly", pointing to three main causes:
- Consumer spending is falling
- Business equipment spending is falling
- Slowing foreign economies are hurting U.S. businesses
Furthermore, the voting FOMC members are wary of an "intensification" of the current financial market turmoil.
The announcement's 4th paragraph is noteworthy, too. It lists the plethora of growth-stimulating steps that the Fed has taken so far this year and concludes that credit conditions should improve in time. It does notes, however, that if markets don't improve in good time, the committee will "act as needed".
In the wake of the announcement, stock markets rallied. Investors liked what the Fed had to say and it drew funds into the stock market from all corners of Wall Street. Unfortunately for mortgage rate shoppers, one of those corners happened to be the mortgage bond market.
The exodus from bonds caused mortgage rates to rise.
It's a common misconception that the Federal Reserve controls mortgage rates and today's market action should help dispel that myth. As the Fed Funds Rate falls back near its 50-year low, mortgage rates are bumping up against a 3-year high.
Source
Parsing the Fed Statement
The Wall Street Journal Online
October 29, 2008
http://online.wsj.com/internal/mdc/info-fedparse0810.html
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.
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:
- Banks are getting better about selling foreclosed homes
- 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.
(Image courtesy: AP.org)
Now that you've replaced your home's energy-hogging light bulbs with compact fluorescent ones, meet the next wave of environmentally-friendly home lighting -- LED.
Though nearly 10 times as expensive as compact fluorescent bulbs, LED lights hold several advantages as a green alternative:
- LED bulbs consume up to 1/30th of the energy of a CFL
- LED bulbs contain no mercury or other toxins
- LED bulbs last up to 60,000 hours
- LED bulbs are suitable for dimmer and sensor-activated switches
LEDs aren't without disadvantages, however. The aforementioned bulb cost is one of them -- units can exceed $40 each. The limited "light angle" is another. LED bulbs do not spread light over as wide an area as CFLs or incandescent bulbs.
However, long-term, LED light bulbs save more money than any other commercial available light bulb choice and are better for the environment.
LED light bulbs are available at Home Depot and other hardware stores.
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:
- The national home supply is now down to 9.9 months
- 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)
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.
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)
