Coaching and teaching - many through the mortgage process and others on the field

Category: Mortgage (Page 1 of 38)

Change Is Around The Corner – May 2022

a close up shot of letter dice on an open notebook

It looks like the housing market is showing signs of change.

The last 2+ years have seen huge increases in prices, historically low interest rates, and extreme inventory shortages.

couple passing carton box to each other while unpacking car

Today, however, we seeing the early signs of a housing market change.

Home Prices and Inventory

Home prices have skyrocketed over 35% in the last 2+ years…and even more in some parts of the west.  This has to do with increased demand and low supply (you might remember this from your Econ 101 class).  Couple that with low interest rates, and you have a true barn burner on your hands!

Recently, though, it looks like more homes are coming to market.

Phoenix, for instance, has been one of the hottest markets in the US. Inventory has been at near all-time lows over the last year-and-a-half.

However, in the week of 5/16 through 5/22, more than 3,000 active listings have been added to the ARMLS residential database. That’s more than any time since 2010. Home inventory is now growing at the fastest rate since 2005 in the Valley of the Sun.

As another example, the mountain communities of Southern California have seen inventories essentially double in the last 3 months…and buyers are now starting to see price reductions on homes that haven’t sold as quickly as sellers would like.

That’s something that market hasn’t seen for years.

Home Sales and Starts

Per data from Redfin, April had a 9% year-over-year decline in homes for sale — the smallest annualized decrease since March 2020 and the first single-digit drop in supply for any month since the COVID-19 pandemic started.

And as you can see in the graph above, housing starts are increasing as well, but not quite as fast as demand.

While the inventory issue may be showing signs of easing, homes continue to sell quickly.  The typical home that sold in April went under contract in only 18 days, Redfin reported. That’s six days faster than the same month last year and the shortest average time on market ever recorded in April.

What most industry analysts are forecasting are that prices will likely go up more slowly than they did in early 2021, but they will keep rising, just at a slower rate.

Industry Analysts

From Justin Pope at The Motley Fool“Home prices will likely peak when supply and demand meet in harmony, which doesn’t seem to be the case yet. It’s hard to make that case until I stop coming across mobs of people trying to squeeze into an open house showing. When sellers no longer can turn away buyers offering thousands over the asking price.”

decorative illustration of money box and arrows

“There could be a recession coming, and mortgage rates might keep rising, like buckets of water trying to calm the raging fire of home prices in the U.S. Nobody knows for sure what will happen next, but I don’t see enough evidence that prices will be plunging anytime soon”

David Crown in Forbes for investors – “Multifamily also appears poised to remain on the incline. In fact, CBRE expects a record-breaking 2022 for the sector: “We forecast multifamily occupancy levels to remain above 95% for the foreseeable future and nearly 7% growth in net effective rents next year.”

Julie Vincent from Mashvisor“Though the housing market prices are expected to jump at the beginning of the year, experts predict that towards the second half of the year, prices are to stabilize. It is due to more inventory being available and, therefore, more choices for buyers. Property values are expected to remain more consistent.”

In Conclusion

It does appear that there’s change on the horizon in the housing market. It looks like things are beginning to move back towards a “normal” cycle, with increased supply and single digit valuation increases anticipated later this year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s changing market.  It would be my pleasure to help you!

Financing Strategy, Recession, and Mortgage Rates – May 2022 Edition

white paymaster ribbon writer adding machine placed on tabletop

Many experts are warning of a potential recession later this year, which has many questioning if it’s a good time to purchase a home…and worrying about mortgage interest rates, in particular.

We know that inflation is at 40-year highs – and as a result, mortgage rates are up over 2% in the last 4 months.

This is one of the most rapid increases in mortgage rates we’ve seen in recent memory.

With all of this in play, what’s the outlook for the future of mortgage rates and housing – and what’s the best strategy to navigate these rough waters?

Let’s take a look at a what’s happening today and also consider a little history of Federal Reserve rate hikes and recession.

Believe it or not, we might be in for an upcoming perfect storm – and in a good way for borrowers.

Inflation

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives.  When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

When the Federal Reserve increases the federal funds rate, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will indeed decline.  History proves this during rate hike cycles for the past 50 years.

Here’s a quick look at what’s happened historically when the Federal Reserve raises the federal funds rate:

Notice how rates actually DECREASE after inflation starts to slow. 

Most experts hope that the Federal Reserve is aggressive at tackling inflation, as they are really late to the game.  Better late than never, I guess!

By the way, don’t be fooled if you see inflation numbers come in lower over the next few months.  Many in the media have talked about “peak inflation” as right around the corner.  I don’t buy it. 

Federal Reserve Chairman Jerome Powell

Peak inflation will be in September/October of this year.  Just watch.

Also, it does look like some of the supply chain issues that have plagued us (and has contributed to inflation), might be worked out by this fall.  Or at least, we can hope for that!

Recession

The first quarter US Gross Domestic Product (GDP) reading came in at -1.4%.  That means the US economy actually shrunk by nearly a percent and a half.  Not good news, to be sure.

The definition of a recession is back-to-back negative GDP quarters.  So, if the April-June numbers are negative, we will officially be in a recession.  And this seems likely. If not now, it will be soon.

The Fed has stated that they will be moving the federal funds rate higher in the coming months – possibly even 3 percentage points this year.

The thick grey bars in the chart below demonstrate recessionary periods…and they correspond very closely to the Federal Reserve interest rate hikes.

Secondly, when you take a look at the combination of high inflation and low unemployment, a recession always follows:

Finally, another great barometer of a coming recession has to do with the difference in yield between the 10-year treasury bond and the 2-year treasury bond.

Investopedia: An inverted yield curve describes the unusual drop of yields on longer-term debt below yields on short-term debt of the same credit quality. Sometimes referred to as a negative yield curve, the inverted curve has proven in the past to be a relatively reliable lead indicator of a recession.

As you can see by the chart below, we are nearing that point now where we have an inverted yield curve.

So, when you take a look at negative GDP growth, the combination of inflation/high-employment, and the inverted yield curve, it is most likely that we will see recession very soon.

Mortgage Rates

As stated earlier, mortgage rates generally FALL during recessionary periods.

This might seem counter-intuitive, but history bears this out.  Take a look at the chart below:

Notice that mortgage rates actually fall during recessionary periods.  You can see the recessions are pictured in the dark blue verticals, and mortgage rates are highlighted inside of them.

Also, one of the few areas that seem relatively immune from recession is the housing market.  Historically, one of the safest bets during recession is real estate.

The chart below shows how housing stays quite resilient during and through recessions:

Looking back at eight of the nine recessions since 1960, home prices significantly increased or at least remained stable each time during and after the recession.  One of the reasons this occurs is because interest rates significantly fall during recessionary periods.

So, things look to be lining up for lower rates ahead!

Potential for Perfect Financing Storm

Essentially, all of these factors listed above combine for LOWER rates later this year into 2023. 

lightning and gray clouds

So, what’s a buyer or home owner to do now?

Of course, things can change, but it sure is looking like a recession is on the horizon, which will undoubtedly bring lower mortgage rates.

Well, waiting to purchase a home and “timing the market” is one option…but it’s almost always a bad idea. 

Why?  Because no one knows exactly when rates will hit rock bottom – and home prices will continue to accelerate.

More importantly, buyers will miss out on the gains of owning a home. Homes increased in value over 15% last year in the west…and things aren’t getting any cheaper.  More on trying to time the market here…

Today’s housing market is extraordinarily strong, as there is record low inventory:

On the other side, there are more new households than ever – and these are competing for fewer homes:

Strong demand and tight supply should continue to be supportive of home price increases, so prices are not coming down.

Again, what’s a potential buyer to do? Fortunately, there’s a great solution here.

Purchase Strategy

I recommend making your purchase now – and NOT paying extra discount points to lower your interest rate.  As a matter of fact, you could use “negative” points to help offset any closing costs.

Instead of paying discount points to access lower mortgage rates, borrowers can receive credits from their lender and use those monies to pay for closing costs and fees associated with the home loan.

More on that strategy here…

Yes, the interest rate might be slightly higher, but you will want to refinance this mortgage when rates drop later this year or next year!  This will also limit your out-of-pocket fees for the initial transaction.

Refinance Strategy

selective focus photo of stacked coins

If you are considering refinancing, now might be a good time to do a “cash-out” refinance and take advantage of all of the equity that’s been built over the last 5 years and pay down debt.

Rebates can be good for refinances, too, as loan’s complete closing costs can be “waived”. This allows the homeowner to maximize the amount of money received from the refinance transaction.

Then, refinance in early 2023 when rates come down.  That means you can have the cash now, and a more-than-likely lower rate later.

In Conclusion

Although things look a little grim currently, the future is actually looking bright for mortgage rates later this year and into next year.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

Real Estate/Mortgage Market Webinar – Featuring Industry Expert Barry Habib

The Lending Coach and Finance of America Mortgage are proud to present a special virtual event featuring mortgage and housing expert Barry Habib on Wednesday, April 6th. He will be discussing where the housing market’s heading in 2022.

In case you are unfamiliar, Barry Habib is a real estate and mortgage industry executive, bestselling author, and founder and CEO of MBS Highway. Barry is also a well known media resource and TV commentator on the mortgage and real estate markets.

He has recently been named America’s top real estate forecaster by Zillow and Pulsenomics®.

Join us to learn all about housing rates, recession, and how to be best prepared to serve your borrowers this year!

Wednesday – April 6, 2022 at 10:00 a.m. PDT:

As a professional in the real estate industry, you know that interest rate fluctuation and real estate pricing can be a challenge to predict.

Stay ahead of your competition and find resources to help you become a trusted advisor to buyers and borrowers in your community in this rapidly changing environment.

Barry will discuss his predictions for the housing market going forward in 2022 and the benefits of utilizing this system to show clients and referral partners the power of homeownership.

Do register today!!

Mortgage Rate Update – March 2022

white android tablet turned on displaying a graph

Mortgage interest rates just keep moving higher.  They have risen nearly 1.5% points since January 3rd… and it seems like almost every day rates move up again.

pattern luck usa business

The outlook for lower rates isn’t great right now, thanks mostly to the Federal Reserve’s handling of the money supply and out-of-control inflation.

How will the Fed’s recently announced quarter point hike to the Fed Funds Rate affect mortgage interest rates?  The answer may surprise you.

The Federal Reserve

The Fed Funds Rate is not the same as a mortgage rate because it can change from one day to another, while mortgage rates can be in effect for 30 years. More on that here….

Mortgage rates are primarily driven by inflation, which erodes the buying power of the fixed return that a mortgage holder receives.  When inflation rises, lenders demand a higher interest rate to offset the more rapid erosion of their buying power.

You probably know that inflation has been rising significantly of late, and as a result, so have mortgage rates.  Inflation is pushing 9%, the highest level we’ve seen in over 40 years.  This has moved mortgage rates into the mid 4% range this week.

Essentially, The Federal Reserve has bungled their management of inflation and now have to make severe changes to offset the damage.  This brings market instability and increased mortgage rates.

When the Fed hikes rates, they are trying to slow the economy and curb inflation. If successful in cooling inflation, mortgage rates will decline.  History proves this during rate hike cycles for the past 50 years.  Unfortunately, this isn’t an overnight fix.

Federal Reserve Chairman Jerome Powell

However, the Fed may also reduce its holdings of Mortgage Bonds, which can cause some interest rate volatility.  And if inflation continue to surge, the Fed might not be able to do much to help.  The situation isn’t great at this moment.

30-year fixed mortgage rates

The average 30-year fixed-refinance rate is 4.53 percent, up 20 basis points over the last week. A month ago, the average rate on a 30-year fixed refinance was lower, at 4.17 percent.

At the current average rate, you’ll pay $503.13 per month in principal and interest for every $100,000 you borrow. That’s $7.08 higher compared with last week.

Mortgage Rates and Treasury Yields – a great barometer

Fixed mortgage rates and Treasury yields tend to move together because fixed-income investors compare the returns they can get on government and mortgage-backed securities. 

Investors compare yields on long-term Treasuries to mortgage-backed securities and corporate bonds. All bond yields (including mortgage backed securities) are affected by Treasury yields, because they compete for the same type of investor.

Mortgages, in turn, offer a higher return for more risk. Investors purchase securities backed by the value of the home loans—so-called mortgage-backed securities. When Treasury yields rise, investors in mortgage-backed securities demand higher rates. They want compensation for the greater risk. 

You can dig deeper by reading Kimberly Amadeo’s article here…

You can see the rise in the 10-year treasury yield here…and mortgage rates have been following a nearly identical course over the last 3 months.

What Really Causes Rates to Rise and Fall?

Mortgage rates are determined by a complex interaction of economic factors, such as the level and direction of the bond market, including 10-year Treasury yields; the Federal Reserve’s current monetary policy, especially as it relates to funding government-backed mortgages; and competition between lenders and across loan types.

Because fluctuations can be caused by any number of these at once, it’s generally difficult to attribute the change to any one factor.  Although in our current situation, inflation (and the Fed’s mismanagement of it) is the number one cause.  When this is coupled with the large increase in government spending, you see a double dose of fear in the markets.

roll of american dollar banknotes tightened with band

In today’s case, the Federal Reserve has been buying billions of dollars of bonds in response to the pandemic’s economic pressures, and continues to do so. This bond-buying policy (and not the more publicized federal funds rate) is a major influencer on mortgage rates.

On March 16, the Fed announced that it expects to begin reducing its balance sheet in May, meaning it will start reducing the overall amount of bonds it owns. This will be on top of its existing move to reduce new bond purchases by an increment every month, the so-called taper, which began in November.

You can find out more here from Investopedia….

Most experts agree that this “taper” will also move treasury yields and mortgage rates higher.

Moving Forward

There may come a point when mortgage rates drop back down and borrowers can enjoy some of the remarkably low rates they were available from mid-2020 through late 2021.

And throughout 2022, we could have periods when rates dip to some degree.

But for the most part, borrowers may need to come to terms with the fact that the days of record-low borrowing are behind us.

With that said, it’s important to put today’s rates into perspective. Compared to the rates we saw from mid-2020 through the end of 2021, the rates above look high. But historically speaking, locking in a 30-year mortgage anywhere in the 4% range is not a bad deal at all.

Would you like to find out more?  Contact me to discuss your current situation and how you might be able to take advantage of today’s market.  It would be my pleasure to help you!

The Upfront Costs of Buying a Home: What Borrowers Can Expect

It’s important that borrowers understand the upfront costs of buying a home and the fees (known as “closing costs”) that go along with the purchase. In some cases, many home buyers only consider the down payment when they are saving for a house and are surprised by the additional upfront costs.

person with keys for real estate

The actual amounts needed for both the down payment and closing costs can vary by a wide margin. It’s important that would-be buyers meet with their mortgage professional first to get an idea of what they might be.

If buyers understand their options and choose their mortgage wisely, they can minimize upfront costs when buying a home.

I’m linking to an article by Erik Marin at The Mortgage Reports  – and he does a great job of going through what borrowers can expect in terms of closing costs.  I highly recommend that you read the entire article here…

What are the upfront costs of buying a home?

There are several costs that borrowers must pay prior to the closing of a real estate transaction. Collectively, these are called “cash to close.”

Upfront home buying costs include:

  •     Earnest money – 1% of purchase price or more (paid first but goes toward your down payment)
  •     Down payment – This figure can be anywhere from 0% to 20% plus
  •     Closing costs – 2–4% of home loan amount
  •     Prepaid property taxes and home insurance – 6–12 months’ worth

It’s crucial that borrowers have a good idea of the upfront costs associated with buying a home so they can set their expectations realistically and have enough cash on hand to complete the transaction.

woman with credit card pondering while buying online with laptop

Earnest Money

This is also called a ‘good faith deposit’.  Earnest money is a wire transfer or personal check paid to the seller and held by the escrow company shortly after your offer is accepted. This money tells the seller that you’re serious about purchasing the property.

Provided the deal goes through, your earnest money will be applied to your down payment at closing.

You can find out more about earnest money here…

Down Payment

Buyers must also make a down payment that counts toward the home purchase price.  This payment is made at the close of escrow.

The amount of the down payment varies by loan type.  VA and USDA loans can be done with $0 down payment.

man in blue crew neck long sleeve shirt holding wooden home decoration

FHA loans can be done with as little as 3.5%.

Conventional loans vary from 3% down to 20%+.

If you’re not sure how much down payment you need, talk to your mortgage lender about which types of mortgage loans you qualify for and how much cash is required for each one.

You can find out more regarding down payment options here…

Closing Costs

Your down payment is only one of the parts due at the close of escrow, as closing costs must also be considered. These cover all the fees required to set up your mortgage loan, including the lender’s fees, appraisal, inspection, and other third–party service fees.

Borrower’s can estimate paying 2–4% of your loan amount in closing costs.

A few of the major ones include:

  • Mortgage application, origination, and underwriting fees
  • Home inspection
  • Home appraisal
  • Discount points
  • Mobile notary fees
  • Title search and insurance
  • Recording fees
carton boxes and stacked books on table

Soon after you apply for your home loan, the lender will give you a document known as a Loan Estimate. This standardized, three-page document gives you a lot of important information about your new loan.

Page 1 includes your loan amount, mortgage rate, and estimated monthly payments, as well as an estimate of your total closing costs. Page 2 provides an itemized breakdown of the various costs associated with your loan.

You can find out more regarding the specifics on closing costs here…

Prepaid Taxes and Insurance

Prepaid taxes and insurance are usually lumped into closing costs. But it’s helpful to explain them separately so borrowers can better understand these costs and classify them as unique expenses.

At closing, borrowers are required to pay for a year’s worth of homeowners insurance coverage.  Lenders will not lend on uninsured property, hence this requirement.

Prepaid taxes are also collected at the time of closing and are estimated from the date of closing to the next tax due date.

Note that you may not have to pay these costs upfront if you put at least 20% down and decide not to open an escrow account for your taxes and insurance.

Getting Started

Interestingly, all home buyers pay essentially the same set of upfront fees…although the actual cost is quite different from one buyer to the next!

The total upfront home buying costs depend on your loan type, location, mortgage lender, mortgage rate, and a number of other factors.

For this reason, reach out to me before you start looking for a home.  I will be able to go through how much you can expect for your down payment and closing costs. It would be my pleasure to help you!

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