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Mortgage / Real Estate Update Report
Low mortgage rates opens door of opportunity
By Jim Woodard
The window of opportunity for home buyers has opened wider with mortgage interest rates dropping to the lowest level in four years. In early February, the average rate for a 30-year fixed-rate mortgage is only about 5.6 percent, but is beginning to edge up a bit. Last year at this time the rate for the same loan was 6.25 percent. The 15-year fixed-rate loan, particularly popular with homeowners wanting to refinance their existing mortgage, is now 5.04 percent.
“Recent economic news has confirmed the weak condition of the housing market,” said Frank Nothaft, chief economist for Freddie Mac, a government-sponsored enterprise that purchases mortgages. “Housing construction starts has fallen to its slowest pace since May, 1991. Last year, as a whole, housing starts dropped nearly 25 percent from the previous year's level. This is the largest annual decline since 1980. New building permits also fell to the lowest level since March, 1993,” he said.
hen the Federal Reserve recently cut the federal funds rate dramatically, including the January 30 cut of another half a percentage point, the actions were extraordinary in both the magnitude and timing, Nothaft noted. The two cuts in January were the largest since October, 1984.
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Reviving boom in refinances
Another notable trend in the mortgage market is the current boom in applications for refinance mortgages. “Refinance applications are up 92 percent since the beginning of November, while purchase applications are up 7 percent,” said Jay Brinkmann, vice president of the Mortgage Bankers Association. “With tighter credit conditions we don't know how many of these applications will become loans, but it is clear that borrowers are responding to the recent lowering of interest rates.” The refinance share of mortgage activity has increased to 73 percent of total applications.
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| International buyers more active
A growing number of Realtors are serving international clients – foreigners who are actively seeking residential properties in the U.S. This was revealed in the recently released “Profile of International Home Buying Activity,” prepared by the National Association of Realtors. The top three state destinations for foreign homebuyers are California, Florida and Texas, but a significant number of overseas buyers are seeking properties in all areas of the country, the report noted.
The currency environment probably played a major role in the proportion of foreign buyers who paid cash for their homes. About 28 percent are paying cash – much greater than that of the general U.S. homebuyer population (8 percent). International buyers who can afford a home abroad often are from wealthier households with higher monthly incomes and cash reserves.
It should be noted that the tax benefits of mortgage interest deductions may not apply to foreign buyers, depending on the buyer's home country's tax code. This, of course, lowers the incentive to take out a mortgage. Buyers are coming from around the world to buy different types of properties at various prices. They plan on using their U.S. homes for different reasons. The typical international buyer purchased a single-family home or townhome. The primary purpose in purchasing the home was for use as a vacation venue for family and friends.
The typical foreign buyer in the U.S. spends 4.2 months in his or her U.S. property. U.S. visa rules allow non-residents (unless under a student or work visa) to remain in the country for only six months, the NAR report noted.
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Foreclosure report
An interesting perspective on our current problem regarding home foreclosures was revealed in a recent report from RealtyTrac Inc. More than 2.2 million foreclosure filings were recorded last year. That's a 75 percent increase over 2006. However, a closer look at fourth quarter numbers included in the report shows slightly divergent trends to close out the year.
While bank repossessions (REOs) spiked to more than twice the level they were at in the fourth quarters of 2006 and were up 35 percent from last year's third quarter, auction and default notices were actually down 6 percent from the third quarter to the fourth quarter. But they were still up by 75 percent from the fourth quarter of 2006. This may reflect the banks' willingness to give borrowers more leeway, helping them work out a plan that would be a better alternative to a foreclosure.
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A down market can be an up market for buyers
We've all seen numerous negative reports on the current home selling market. Those news reports have motivated many prospective home buyers to hold off with a purchase of a home until good times return. For the sake of achieving a balanced perspective, consider the following reasons for taking action now to acquire that needed home.
In recent months, a record number of homes have been added to the for-sale inventory. That translates to a very wide selection of available homes, making it more likely you can find the ideal residence in precisely the right location to meet your needs and tastes. Once the home sale slump is over, that selection base will dwindle. Since there are so many properties on the market, sellers are very willing to negotiate price and terms. Prices generally are now near the bottom of the cycle, according to several analysts.
The days of “bidding wars” are over, at least for a while. You can now take your time in finding the right home and negotiating the purchase, without fear of another buyer quickly entering the scene and snatching the property from your grasp. Mortgage financing is still available at near record low interest rates. True, it's tougher to qualify for a loan today, but if you have good credit and a decent “credit score” you should have no problem in obtaining financing with very favorable terms.
If you do encounter problems in obtaining a conventional mortgage, you have other options. In some cases, the home seller owns the property free and clear (no debt) and may be willing to carry the financing himself at a negotiated interest rate. Or if you lack the usual 20 percent cash down payment, the seller may be willing to carry back a portion of that amount as a second loan on the property. The bottom line: For some buyers, this is a very strategic time to look for and acquire a home.
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Unethical appraisal practices
The problem of appraisers artificially inflating values of residential properties on their reports under pressure from some lenders and brokers seems to be worsening. There is an increasing number of complaints regarding this unethical practice, and at least two law suits have been filed – in California and New York.
Inflating the value of homes above a realistic market value can be disastrous for the home buyer when the time comes to sell or refinance the property. Also, when a home is purchased and financed based on an inflated value, it can adversely affect other homes in the neighborhood. Those unrealistic prices are used as “comparables” in determining the values of other homes. “Pressures to inflate values has been endemic industry wide and is a significant contributing factor in many mortgage fraud cases and foreclosures,” said Gary Crabtree, principal appraiser for Affiliated Appraisers.
There is now pending legislation in Congress that would increase penalties for anyone who interferes with the proper appraisal process. That includes those who offer inducements for favorable valuations or punishes appraisers who refuse to deliver inflated numbers. Passing tough rules and laws of this type, on the federal or state level, will definitely benefit consumers and the majority of appraisers who are true professionals.
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Mortgage lenders try to help
The mortgage industry is trying very hard to help borrowers who find themselves in serious trouble in making their payments, particularly those with rising payments with their adjustable-rate mortgage (ARM). For example, about 54,000 mortgage loans were modified and another 183,000 borrowers had their loans structured with formal repayment plans during the third quarter of last year, according to a report from the Mortgage Bankers Association. By comparison, foreclosure actions were started on about 384,000 loans, but of those loans, 63 percent were cases where the borrower did not live in the home or where the borrower did not respond to repeated attempts by the lender to contact them.
“The mortgage industry is taking major steps to help those borrowers who can be helped,” said Jay Brinkmann, MBA's vice president. “It is likely that the number of loan modifications for subprime ARMs will continue to grow through the outreach efforts of the industry. The U.S. Treasury Department is playing a crucial role in bringing the lending community together to develop approaches to deal with the current problems.
While investor-owned properties account for about 18 percent of foreclosure starts for subprime ARM loans, they account for about 28 percent of subprime fixed-rate foreclosure starts, 18 percent of prime ARM foreclosure starts, and 14 percent of prime fixed-rate foreclosure starts. California is showing the fastest increase in foreclosures.
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Needed legislative action
Strategic legislative changes relating to housing is a key element in efforts to avoid recession and turn the housing market in an upward, positive direction. That's the view of most real estate experts who are analyzing the current real estate market. But precisely what those changes should be is the focus of intense discussions today. Changes that clearly benefit consumers, particularly home buyers and sellers, are often resisted by legislators facing political pressures.
The Federal Reserve Board's aggressive action in cutting the Fed rate substantially in recent weeks will help in stimulating the economy and keeping mortgage rates low. It's now at the lowest rate since 1982. The president's announced “stimulus package” plan to help homeowners and the economy sounds like a constructive step to avoid deepening problems. But it lacks specific details, and certain important steps affecting housing are needed in the plan, according to organized real estate groups.
One point often raised by real estate experts is the importance of loosening constraints of Fannie Mae and Freddie Mac, government-sponsored enterprises that buy existing mortgages. They need to raise their maximum loan limits. “We believe that any stimulus package must address housing issues and increasing the conforming loan limits of those two enterprises,” said Dick Gaylord, president of the National Association of Realtors. “The increase in loan limits would not only improve liquidity in the mortgage marketplace, but also boost homebuyers' confidence levels, resulting in increased sales and economic activity.”
The ceiling on loans being purchased today by the two enterprises is $417,000. Many real estate leaders want this increased to at least $625,000. “This change would permit more families to enter the housing market by making more mortgages available with lower interest rates,” Gaylord said. “Increased home sales will lower inventories and immediately start stabilizing the housing market and the economy.”
Mortgage loans of more than $417,000 are known as jumbo loans. They are usually harder to obtain and carry higher rates than conforming mortgages. By lifting the loan limit to $625,000, it would lower interest payments for consumers who must now obtain a jumbo loan, reduce the supply of homes on the market, strengthen home prices by two to three percentage points, and increase economic activity by $42 billion, according to NAR estimates. Also, by increasing conforming loan limits it would help reduce foreclosures by 140,000 to 210,000 and result in an additional 348,000 home sales.
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Changing homebuyer profile
The profile of the average home buyer is constantly changing. One of the most dramatic changes currently is growth in the number of women buyers, particularly single women. Single women now comprise more than one in every five home buyers. Married couples make up the largest share of buyers (about 61 percent of transactions).
“Single women have a particularly strong sense of home ownership as a good investment and an inherent appreciation of what it takes to build a nest-egg and wealth over time,” it was stated in a report from the National Association of Realtors. Especially appealing to women buyers are condos and townhome's. With these residences they don't have to mow the lawn or maintain landscaping, and they often have amenities they particularly enjoy such as a recreation room, swimming pool, and a strong security system.
The rise in single women home buyers can be attributed to three main factors, according to a study by Harvard University's Joint Center for Housing Studies. Today there are more unmarried women in the population, more women are delaying marriage until later, and more women are forming their own households.
More women are also buying homes for the first time. The Harvard study found that first-time female buyers accounted for 41 percent of all unmarried female buyers of homes. “The role of the single woman home buyers in the real estate market is clearly strong and shows signs of continued growth and expansion,” the NAR report noted.
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Needed legislative action
Strategic legislative changes relating to housing is a key element in efforts to avoid recession and turn the housing market in an upward, positive direction. That's the view of most real estate experts who are analyzing the current real estate market. But precisely what those changes should be is the focus of intense discussions today. Changes that clearly benefit consumers, particularly home buyers and sellers, are often resisted by legislators facing political pressures.
The Federal Reserve Board's aggressive action in cutting the Fed rate substantially in recent weeks will help in stimulating the economy and keeping mortgage rates low. It's now at the lowest rate since 1982. The president's announced “stimulus package” plan to help homeowners and the economy sounds like a constructive step to avoid deepening problems. But it lacks specific details, and certain important steps affecting housing are needed in the plan, according to organized real estate groups.
One point often raised by real estate experts is the importance of loosening constraints of Fannie Mae and Freddie Mac, government-sponsored enterprises that buy existing mortgages. They need to raise their maximum loan limits. “We believe that any stimulus package must address housing issues and increasing the conforming loan limits of those two enterprises,” said Dick Gaylord, president of the National Association of Realtors. “The increase in loan limits would not only improve liquidity in the mortgage marketplace, but also boost homebuyers' confidence levels, resulting in increased sales and economic activity.”
The ceiling on loans being purchased today by the two enterprises is $417,000. Many real estate leaders want this increased to at least $625,000. “This change would permit more families to enter the housing market by making more mortgages available with lower interest rates,” Gaylord said. “Increased home sales will lower inventories and immediately start stabilizing the housing market and the economy.”
Mortgage loans of more than $417,000 are known as jumbo loans. They are usually harder to obtain and carry higher rates than conforming mortgages. By lifting the loan limit to $625,000, it would lower interest payments for consumers who must now obtain a jumbo loan, reduce the supply of homes on the market, strengthen home prices by two to three percentage points, and increase economic activity by $42 billion, according to NAR estimates. Also, by increasing conforming loan limits it would help reduce foreclosures by 140,000 to 210,000 and result in an additional 348,000 home sales.
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Jim Woodard writes a nationally syndicated newspaper
column on real estate news and trends, carried in about 230
U.S. newspapers – along with freelance features.
Reproduction of this report, in part or entirety, is
prohibited without the express permission of the author.
E-mail: storyjim@aol.com.
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Licensed by the State of Michigan Department of Consumer and Industry Services
Office of Financial and Insurance Services
MI Lic# FL 2547 and Secondary Registration No. SR0883
    
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