Mortgage rates slowly rising

The 30-year fixed-rate mortgage is predicted to gradually increase in rates to 6.7 percent by the fourth quarter of this year, according to NAR projections. As we enter the new year, rates are drifting slowly upward to an average of 6.18 percent for a 30-year fixed-rate mortgage as of January 1 – 5.93 percent for 15-year fixed loans, according to Freddie Mac, a major buyer of existing home mortgages. Mortgage lenders require an average of 0.4 percent points (fees). Last year at this time, the rate for a 30-year fixed mortgage was 6.22 percent.

“Mortgage rates are edging up following news of a jump in consumer spending in November,” said Fran Nothaft, Freddie Mac's chief economist. “Financial markets are concerned that stronger spending could keep inflation elevated.” The projected average interest rate for home mortgages in 2007 was lowered recently by Freddie Mac. The new projected average rate is 6.3 percent – a substantial drop from the previously forecasted 6.7 percent.

Refinance mortgage applications up

It appears we've almost reached another boom era in applications for refinance mortgages. In recent weeks there has been a dramatic increase in applications for refi mortgages. One key reason is that many homeowners who have existing adjustable-rate mortgages (ARMs) are now experiencing the inevitable increase in rates and monthly payments. This is especially true with certain nontraditional types of ARM loans.

In some cases, homeowners are facing such serious financial problems they must either refinance their mortgage or sell their home to avoid foreclosure proceedings. And with mortgage insurance premiums being tax deductible in 2007, refinancing will be even more appealing to some families in coming months.

Also, the substantial decline in mortgage rates over the past six months has led to a significant increase in refinance activity, it was noted in a report from the Mortgage Bankers Association. “Additionally, we are seeing a steady increase in purchase applications,” said Mike Fratantoni, MBA's senior economist. Refinance activity is at the highest level since September, 2005, while purchase applications are the highest since last January, MBA noted. The refinance share of mortgage activity is now up to 52.6 percent of total applications.

In addition to the need to refinance a problem ARM loan, many borrowers are applying for a refi mortgage to take advantage of today's lowered interest rates. In many cases they want a cash-out refi loan, generating cash in the refinance process that can be used to finance home improvement projects, paying off up-to-the-limit credit cards, or other financial obligations.

Fannie Mae tightens standards

Fannie Mae, a government-sponsored buyer of many home mortgages, has announced that, effective January 30, mortgage borrowers must be qualified at a fully-indexed rate that assumes a fully-amortizing repayment schedule in order to qualify a loan for purchase by the enterprise. This could make it more difficult for many prospective borrowers to qualify for a needed mortgage.

Brisk activity for commercial real estate

Commercial real estate is a market niche that looks particularly bright this year. It will grow with record investment, and individual sectors in many areas seeing tighter vacancy rates and higher rents – good news for property owners, managers and developers.

“The office and industrial markets continue to shine brightly, supported by job growth and trade, while the rental apartment sector is seeing healthy rent increases,” said NAR's David Lereah. “The retail sector is essentially flat, but the hotel industry is doing better than at any time since 2001.” There's a record flow of capital into commercial real estate at this point. Institutional investors, pension funds and foreign investors have focused on commercial grade properties to diversify portfolio assets with expectations of solid long-term gains, an NAR report noted.

New home sales sluggish

New-home sales are expected to continue their slide downward, showing another 9.4 percent drop this year. Much of the sluggishness in sales is pegged to cuts in builder construction to support pricing for current inventories. Also, high construction costs in many areas are minimizing potential profits. However, it should be noted that sales of new single-family homes increased in November by 3.4 percent over the previous month, according to a U.S. Commerce Department report – a jump that surprised many experts.

“This is a very good report and is consistent with the idea that the abrupt downward correction in home sales from the unsustainable highs of 2005 has reached its end,” said David Seiders, chief economist for the National Association of Home Builders.

Use of Internet is growing

More home seekers are using the Internet, at least initially, to help them understand the real estate market and find a home they might purchase. That's because of the increasing volume of Web sites showing home listings, and up-to-date information about the current and future market found on some sites.

About 39 percent of online Americans go on the Internet to access needed real estate information, according to a report from the Pew Internet and American Life Project. That reflects an increase from 34 percent in 2004, and 27 percent in 2000. More than half of online adults under 30 have done so, possibly reflecting the fact that they are typically more transient. Nine percent of online users age 18-29 say they looked for housing information on a typical day, compared with four percent two years ago.

Rationale for choosing close-in homes

More working families are finding that purchasing a home in outer suburbs, far from their point of employment, is financially counter-productive. The reason for selecting a home in that location is usually to benefit from lower housing costs. But in many cases the added cost of transportation to commute to work each day is more than the money saved in a lower home price and mortgage, according to a study conducted by the Center for Housing Policy, the research affiliate of the National Housing Conference.

The study found that the combined burden of transportation and housing costs for working families was similar in all 28 of the major metropolitan areas studied. The study focused primarily on low- to moderate-income families.

“Working families are increasingly moving further from their jobs to find affordable housing,” said Jeffrey Lubell, executive director of the Center for Housing Policy. “Yet, we found that many of these families end up spending more on transportation costs than they save on housing. Ultimately, these findings emphasize the importance of coordinating the development of housing and transportation policy as well as expanding the supply of affordable housing close to both central city and suburban job centers. Also, improving public transit in areas with lower housing costs and reducing the costs of commuting by car for working families is important.”

Baby boomers retirement home preferences

Even though many baby boomers are quite wealthy, they are no more likely to purchase second homes or move from the suburbs to an urban area than the retirement age households that preceded them, it was revealed in a study by the Research Institute for Housing America.

However, sales of second homes and urban area retirement homes to boomers will grow in future months and years due to the sheer numbers of boomers who will be entering retirement age. The future increase in the size of those markets and their associated mortgage markets will be driven by increasing numbers of older households as the population ages, it was noted in the study report.

The share of population that is 45 or older will rise from almost 35 percent in 2000 to 42 percent by 2050, primarily because of the baby boomers, according to a Census Bureau report. Individuals who are 45 to 64 years old are considered the prime market for second and urban retirement homes.

Private mortgage insurance premiums now deductible

Beginning this month, many home buyers who must purchase private mortgage insurance to obtain needed financing will finally be getting a break. Premium payments for such insurance are now tax deductible for borrowers who earn less than $100,000 a year. That tax break will usually save borrowers from $300 to $350. “That will go a long way to help homeowners and potential homeowners who simply want to own a piece of the American dream,” said Marc Morial, president of the National Urban League. The new law was passed by Congress on December 9.

Private mortgage insurance (PMI) is usually required by lenders for borrowers who contribute less than 20 percent of a home's purchase price as a down payment. The insurance (protecting the lender) is quite expensive, but in some cases it's the only way a home buyer can finance a home purchase. About one in five new mortgage loans within the past few years include mortgage insurance. However, there is a growing trend to take steps to avoid the cost of this insurance.

The most obvious and practical way is to hold off the purchase of a home until the family saves enough to make a 20 percent down payment. But that is not always possible or advisable, due to personal factors. Other often used methods are to finance the down payment separately with a home-equity loan, or a second “piggyback” mortgage loan.

Women pay more for home mortgages

Apparently women are paying more for home mortgages than men. That's the conclusion of the Consumer Federation of America after examining factors that surfaced from a study they sponsored.

The study revealed that about a third of women took out mortgages with interest rates over 7.6 percent – well above the average prime mortgage rate of 5.8 percent, compared with about a quarter of men. The study examined 4.4 million mortgage originations nationwide where borrowers were identified by their gender. It also found that women with high incomes were 46 percent more likely than men with comparable incomes to have the more expensive mortgages.

Condos are hot and varied

The six million condominiums in the United States comprise a major share of our total housing stock. They are becoming more popular, and more varied in style and use, with every passing year. When I first started writing about real estate news and trends 35 years ago (in 1971), the term condominium was a strange and unfamiliar word. I had to explain what it was in every column when I addressed the subject. Today, it's as common as the word house. But the concept continues to evolve in the current real estate marketplace. Today, I live in a condo (town home) and my office is in an office condo.

The recent American Housing Survey, produced by the Mortgage Bankers Association, defines a condominium as “a type of ownership that enables a person to own an apartment or home directly in a project of similarly owned units. The owner's name is on the deed, and the owner may have a mortgage on the unit occupied. The owner also may hold common or joint ownership in some or all common areas such as grounds, hallways, entrances and elevators.”

Condos are widely varied. Some are occupied by their owners, some by tenants. Some are units in large buildings, while others are single-family detached homes. Most are located in suburban areas, but an increasing number are in central cities. The survey shows that last year about two-third of condo units (63 percent) were occupied by owners and 23 percent by renters. About 16 percent were vacant. Many boards of condo associations stipulate a maximum number of units within their complex that can be rented. This is to ensure that a substantial proportion of owners are residents and hold an equity stake in the condo development. Some mortgage lenders also insist on a limited number of “investor” owner units before approving a mortgage application.

Growing demand for rentals

There's a steadily growing demand for rental apartment units, and a decreasing supply of available units. Builders are taking note of these factors and are responding by planning new rental construction projects.

“Good economic conditions – particularly growth in the job market – are driving a growing demand in the rental apartment market,” it was stated in a report from the National Association of Home Builders. “For-sale condos have accounted for a large share of multifamily housing starts over the last few years. At the same time, a sizeable number of apartment units were being converted to condos, thus reducing the supply of rental units.”

Buyer incentives that work

Today's home buying market – still a “buyer's market” – is producing a variety of gimmicks or incentives to attract qualified buyers. A study recently focused on those incentives and identifying ones that worked most effectively. When consumers were asked what incentive appealed to them most when buying a home, three out of four chose “closing costs paid.”

“Not surprising, this would represent a bottom-line savings of several thousand dollars in normal closing cost fees and services,” said Mike Bearden, president of HouseHunt, Inc., the real estate related Internet firm that conducted the survey. “In contrast, only two percent of respondents chose a paid trip or vacation as their top incentives.”

Listed in second place as incentives were free upgrades, named by 9 percent of respondents. In third place was “free property inspection,” followed by “free appliances” and “flooring credits.” The incentive scoring last was “landscaping credits.” The survey also showed that it's taking longer to sell a home in today's market – no news to any current seller. It now takes an average of a bit more than 60 days to sell a home, with sellers getting about 95 percent of their asking price. Multiple offers have almost disappeared.

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.