Whoa!  What in the wild world of sports happened yesterday?!   Mortgage rates absolutely tumbled, which is obviously great news for the housing market.   We actually saw rates on 30 year fixed rate mortgages drop as low as 5.25%.

So what happened?

In a bold move, the Fed announced that it would be buying up to $500B in mortgage bonds backed by the “Mae” triplets, Fannie, Freddie and Ginnie.   Most of my sources think this was a smart move.   The net result should be an increase in the availability of credit for refinancing and the purchase of homes along with low—albeit still volatile—long-term rates for the foreseeable future.

This sort of decisive action on the part of the Fed is critically important.   Their action will support the housing markets and cultivate improved conditions in the financial markets.   We need credit to be available.   When the credit markets are too tight—e.g. the liquidity crunch we’ve witnessed—our economy suffers.

Likewise, by keeping LONG-TERM rates low, the Fed can provide more stability to the markets.   One of the few ways for the Fed to influence long-term rates is through actions like providing stability the mortgage-backed securities market.

Many people think there is a direct correlation between Fed rate cuts and mortgage interest rates, but this is not the case.   When the Fed cuts rates, it has a direct correlation to short-term rates only, such as the Prime Rate, CD rates, and banking indices.

Long term rates are tied to mortgage-backed securities, so when money flows into Mortgage-backed Securities, it means more liquidity, and lower long-term mortgage rates.   That’s why the Fed’s actions were so important.
If you have any doubt as to how lower rates translate to improvements in the housing market and more buying opportunities, consider this example:

Let’s presume a buyer put down 20% on a “typical” house in California that one year ago cost $500,000 when mortgage rates averaged 6.5%.   With a $400,000 mortgage at 6.5%, the mortgage payment would be $2528.

Now fast forward a year…

In this particular area, let’s say prices have come down 20%.   Now the home is worth $400,000.   With interest rates now at 5.5%, and a buyer puts 20% down for a mortgage of $320,000, their payment would be $1816, a savings of $712 dollars a month!   That opens the market to a lot more buyers.

Of course, not everyone has 20% down, so fortunately we still have FHA loans which only require 3% down.   On a $400,000 loan, the borrower only has to come up with $12,000 for the down-payment with interest rates comparable to conventional loans.   The only difference is that the borrower pays an up-front and monthly mortgage premium to insure the loan against default.

This is a great time to buy or refinance, especially over the holidays.   There are lots of buying opportunities out there!

Tags: fed bailout, fed buys mortgage bonds, interest rates, mortgage rates

It’s been a wild couple of weeks in the bond market, which of course led to massive volatility in the bond markets.   Generally, the rule is that inflation is the enemy of interest rates and last week, a number of reports came out showing inflation rising faster than at anytime in nearly three decades.   Overall inflation rose 9.8% in the past 12 months, the fastest annual pace since 1981. 

Likewise, tensions (err…war) between Russia and Georgia pushed oil up to $122 a barrel.  Generally, when oil goes up, so do inflation concerns, and interest rates follow. 

The Good News:  Interestingly, interest rates have actually been holding up quite well during this turmoil and have actually improved over the past week.   The benchmark Fannie Mae 30 Year Fixed rate mortgage is averaging in at 6.32%, which is a significant improvement from last week at 6.43%. 

The Bad News:  I don’t think the long-term prognosis for rates is very good.   It’s truly amazing that amid all the inflation concerns and a SERIOUSLY contracting credit market, interest rates are still at historic lows.  I mean, we’re still in the low 6’s!!  Does anybody remember where rates were the last time we had this kind of Carter-style inflation??  20% interest rate mortgages were not unheard of! 

Back to Good News:  The good news is that in this is an incredibly good time to buy!  It’s probably one of the best times in history to buy.  Thanks to the massive supply of bank owned properties and short sales, banks are finally being responsive.   A few months ago, it seemed impossible to get a short-sale done.   Now, with reality sinking in, banks are getting off their butts and approving these transactions. 

 If you can buy right now, it’s definitely the time.   Could prices come down further?   Sure, but with the combination of historically low rates and highly motivated sellers, I can’t think of too many other times in California history that have been better to buy.   Chasing a bottom is rarely a good strategy, because as I’ve said before there are too many factors at play.  Interest rates may go up and now you can no longer qualify for the house that you could qualify today.   Underwriting guidelines continue to tighten, so who know what additional rules and restrictions they’ll impose in the future that will prevent more borrowers from being able to qualify.
 

The most exciting piece of legislation in the soon-to-be enacted housing relief bill is the tax benefit for first-time home-buyers. First-time home-buyers will be eligible for a tax credit of up to $7500 towards their federal income taxes provided they meet the income requirements. The tax credit isn’t a complete giveaway; buyers will have to repay the $7500 over 15 years, but the loan comes interest-free. Not a bad deal! The income limitations are $75,000 for a single person, $150,000 for a couple filing jointly.

This could provide a boost especially to first-time buyers in higher-priced markets like California where for years they felt priced out of the market.

Another component of the relief bill will be to enable distressed homeowners who are underwater on their mortgages to refinance into lower risk federally insured FHA loans. Legislators say this could benefit up to 400,000 homeowners, but in practice there’s no way to know how many will benefit.

The bill would require lenders to “write-down” homeowners’ notes so that they can be refinanced into a loan below the market value of the homes. The question remains whether or not lenders will be willing to write down the notes or even be able to. Most loans are securitized on the secondary market, so there are numerous investors that would be affected, and modifying the loans could subject the banks who service the loans to litigation.

Wow, what a crazy week in the bond market! Due to increased concerns about inflation, the bond market took a beating for well over a week, causing rates on a 30 year fixed rate mortgage to hit a high for the year by mid-week. Although by Wednesday we experienced a bond rally which looked like we were poised for a turn-around, however, the rally was short-lived, and by Friday we saw most of these gains erased.

What happened Friday? The Michigan Consumer Confidence reading shocked the markets, with a much better reading than expected at 61.2. The expectation was 56.4. Likewise, we saw a strengthening of the dollar and lower oil prices, which caused a stock market rally at the expense of bonds.

In fact bond deterioration was so significant on Friday, that many lenders had two mid-day interest rate re-prices totaling .375% discount points. .375% discount equates to $1564 on a $417,000 loan, which means if you were to lock after the lender re-prices, it would cost an additional $1,564 to lock the same rate as before the re-price.

What’s the lesson here? Avoid the temptation to chase a bottom in the real estate market, because there are simply too many variables at play.

There are essentially two strategies that buyers are taking right now:

1) Chase the bottom of the real estate market.

Or,

2) Find a home that you like, that you can get a good deal on and that you can afford.

My opinion is that strategy #1 is not a prudent strategy. As I mentioned, there are simply too many variables at work that we can’t control. If you chase the bottom of the market, who knows where rates are going to be? If interest rates go up a full point, you could see your purchasing power seriously erode. For example, on a $729,000 loan, an increase of 1 percentage point, say from 6.5% to 7.5%, you would lose approximately $80,000 in purchasing power. It’s not uncommon in this market to see a change in rates of .25% - .5% in a week, so a change of 1% over a 3 month period is not inconceivable.

The best strategy is to simply find a home that you like, that you are prepared to live in or keep for at least five years, and make an offer on it with which you feel comfortable.

The national average interest rates as of Friday morning, July 25, 2008 are as follows:

6.49% 30 Year Fixed
6.53% 30 Year Fixed FHA
5.91% 5/1 ARM
7.56% 30 Year Fixed Rate JUMBO

Source: Bankrate and Mortgage101

Note: Interest rates are based on full income documentation, excellent credit and 80% Loan-to-Value.