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Mortgage / Real Estate Update Report
Mortgage rates edging up
By Jim Woodard
Average mortgage rates for a 30-year fixed loan rose above the 6 percent level in late May – a signal to many prospective buyers that this is a strategic time to buy and finance a home before rates go higher. As we roll into June, the average rate is 6.08 percent, according to Freddie Mac, a major government-sponsored buyer of mortgages. The rate a year ago was 6.42 percent.
“Mortgage rates are drifting up over market concerns that the Federal Reserve may raise short-term rates later this year,” said Frank Nothaft, Freddie Mac's chief economist. “While existing home prices continue to decline, new home sales unexpectedly rose in April and the number of month's supply of new homes for sale fell from 11.1 months in March to 10.6 months in April.”
More good news was noted by Richard F. Gaylord, president of the National Association of Realtors. “Freddie Mac and Fannie Mae have announced they are eliminating their 'declining market' policies, effective June 1,” he said. “This means consumers across the country will have access to safe, affordable financing with down payments of only 5 percent on most mortgages, with 100 percent financing available on some loan products, and we could see an upturn in home sales this summer,” he said.
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| New home sales rising
New home sales rose by 3.3 percent in April, reaching a seasonally adjusted rate of 526,000 units, according to the U.S. Commerce Department. It was the first gain in six months, and the positive news sparked a boost in the stock market. The news helped to offset data previously released, showing housing priced during the first quarter of this year had their biggest decline in 20 years.
This development may indicate the start of a slow turnaround in the housing market. It will be interesting to see how it will evolve over the next few months. The inventory of new homes on the market declined in April by 2.4 percent. It's now down to a 10.6-month supply at the current sales rate. Completed homes accounted for 40 percent of total new homes for sale – up from 33 percent a year ago.
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| Foreign buyers active in current market
Many prospective home buyers are still sitting on the fence waiting for prices to come down further. In the meantime, foreign buyers are actively looking for and acquiring U.S. properties. They seem to believe this is a very strategic time to buy real estate in this country. Prices and financing costs are low and they are confident our market will soon turn around.
Foreign buyers are particularly targeting mid-level and luxury market properties. About 18 percent of Realtors surveyed by the National Association of Realtors report increasing interest and sales transactions from international clients. They consider property offerings in this country to be real bargains at this point, particularly considering the currently weak dollar. Generally, foreign buyers are showing strong confidence in the health of the U.S. real estate market – a positive view that is still lacking with many domestic buyers.
Now, with new home sales rising nationally, it's a good time to consider taking action on plans to purchase a home or other property. It's also a good time to obtain mortgage financing for the purchase of a home, or to refinance an existing mortgage loan. Interest rates are still at near record low levels, but our in a rising mode.
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Required down payments reduced
Required down payments when seeking financing for a home purchase were reduced by Fannie Mae, the nation's largest government-sponsored buyer of existing home mortgages, effective June 1. The new minimum down payment requirements now ranges from 3 to 5 percent for loans on single-family, primary homes. The new policy opens a door of opportunity for homebuyers with minimal cash for a down payment but are motivated to purchase a home now.
The basic objective of the policy change is to help the mortgage market in equalizing the down payment requirements for borrowers in all parts of the country – not tied to local market conditions. The previous policy, established in December of last year, required higher down payments in markets where home prices are declining.
“This new down payment policy reinforces our goal to support successful home owning, not just home buying, as we seek to bring liquidity to all communities and help the housing market recover,” said a Fannie Mae spokesperson. “We recognize that down payment assistance programs remain a viable tool for borrowers who can afford a mortgage long term, but might need a little help getting started.”
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Credit-rating rules may change
The Security Exchange Commission (SEC) will probably propose a significant change in rules for credit-ratings companies, requiring risk rankings for certain financial instruments. The move is controversial, opposed by several major real estate and mortgage organizations, including the National Association of Realtors and Mortgage Bankers Association.
The new rules would identify “structured products” that have been blamed for much of the financial problems we now face. Rating companies have been targeted for causing some of those problems because of their overly optimistic ratings of mortgage-related securities and for their very slow response to the down-turning housing market. The SEC is scheduled to vote on the rule changes on June 11.
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Time to update property tax assessment values
Many local governments are raising their property tax rate as a means of relieving their revenue shortfalls. That couldn't come at a worse time for most homeowners who now struggle with higher gas and food costs – higher prices for almost everything. Facing higher taxes is particularly difficult for owners having trouble meeting their mortgage payments and are worried about a possible foreclosure of their home. However, property taxes are a key source of funds for municipal governments. They account for about 40 percent of general revenue, according to the Census Bureau.
It should be noted that lowering home values, including its assessed value, mean lower taxes, if appraisals are up to date. If you feel your tax bill does not properly reflect its lower value, contact your local assessor and request a reassessment. Procedures are in place to address those requests.
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New policy from Justice Department ruling
Internet-based real estate brokers (those with virtual office online) were given a big helping hand by the Justice Department on May 27 when it ruled that new industry policies must be implemented, giving these brokers access to property listing they previously could not obtain. The agreement still requires court approval.
The new ruling means the National Association of Realtors must update its Virtual Office Web Site policy. The new policy will continue to protect the rights of property sellers who don't want their property or their address displayed on the Internet. It will also protect sellers from having false or other unwanted information about their listings appear on virtual office Websites.
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Renters also suffer from foreclosures
Homeowners aren't the only persons who suffer greatly from foreclosure actions on residential properties. Renters often suffer pain as well. About 20 percent of all foreclosures are on investor-owned rental properties. That means many tenants face sudden eviction from their rented residence. More attention by all levels of government should be focused on those rental households currently being harmed by the mortgage market turmoil, according to Harvard University 's Joint Center for Housing Studies. They recently concluded a study on this aspect of the market.
“Because many high-risk home purchases and home refinance loans now in default are concentrated in low-income and minority communities, the fallout from foreclosures is hitting the same neighborhoods where many of the nation's most economically vulnerable renters live,” said Nicolas Retsinas, director of the Joint Center.
The report examined recent mortgage market events in the context of long-standing affordability problems that plague millions of renters. Fueled by record foreclosures and sluggish home sales, the share of households owning their home is declining, while the number of renter households jumped by nearly one million last year. That's more than four times the rate of renter growth over the 2003 to 2006 period, according to the Joint Center report.
Despite current signs of economic weakness, monthly rents last year reached a record high. Also, the rising foreclosures and the resulting turmoil in credit markets raises the cost of financing rental housing construction and preservation. However, it should be noted that in recent weeks there has been a significant increase in construction starts of multi-unit structures, many planned as rental units.
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Possible positive trend for first-time buyers
Historically, California often leads the nation in starting new real estate trends. Hopefully, that will be the case with the state's recently announced increased number of homebuyers who can afford an entry-level home. About 44 percent of households in the state could afford an entry-level home during the first quarter of this year, according to a report from the California Association of Realtors. That's up from 26 percent during the same quarter last year.
The minimum household income needed to purchase an entry-level home in California during the first quarter was $67,830, based on an adjustable mortgage interest rate of 5.65 percent and assuming a 10 percent down payment. First-time buyers typically buy a home equal to 85 percent of the prevailing median price in the area. For a home priced at $67,830, the minimum qualifying income was 30 percent lower than a year earlier when households needed $96,500 to qualify for a loan on an entry-level home. Recent decreases in home prices and low mortgage rates have brought affordability into better alignment with income levels of the typical household, the CAR report stated. |
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Preferences of luxury home buyers are changing
The demands and preferences of luxury home buyers are changing. One factor they all seem to have in common is for their home to have unique features that reflect their affluent lifestyle, according to architect Jamie Gibbs who pointed out specific examples of what many of today's buyers want.
Easy-to-use, serviceable controls for operating elements in the home are important, sometimes including computerized controls. Many buyers want new cutting-edge features such as in-home theaters (entertainment centers) with deluxe sound systems. Some luxury buyers want to really pamper themselves with features like a spa or sauna in the bath. Some want features that might be considered frivolous by many others, like a special ice sink for cooling wine during a dinner party.
Gibbs stressed the importance of architects or other real estate professionals to work closely with clients seeking a luxury home with specified features, or those planning a remodel of a luxury home. “Walk them through options and educate them on different issues. Help them facilitate their decision-making,” the architect said. Prices and sales of luxury homes are generally holding up very well, compared to other segments of today's home selling market. But every local market has its own characteristics and trends. |
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Number of new homes increasing
At this writing, the number of newly constructed homes is on the increase. That's the first really good national news about the housing market in the past couple of years. Housing construction increased by 8.2 percent in April, according to a report from the Commerce Department. However, most of the increased activity was in the construction of multi-housing projects (apartments, condos, etc.). The construction of single-family homes continued to decline a bit, down by 1.7 percent.
Home sales generally are increasing in certain local and regional markets. For example, in Ventura County , California , sales in April were up by 40 percent over the preceding month, according to DataQuick Information Systems. Median prices are even edging up a bit. |
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Condos popular as second homes
Increasingly, second home buyers are turning to condos as their preferred housing type. Sales of all types of vacation homes fell by about 31 percent last year, it was estimated by the National Association of Realtors. But sales of condos as vacation residences dipped only 2.8 percent. And apparently their popularity is growing. For comparison, sales of detached homes last year dropped by 38 percent.
Condos, as second homes, are often preferred for several reasons: They don't require owners to maintain lawns and shrubs, paint exteriors or replace roofs. These factors are particularly important to older buyers. Also, most condo communities offer popular amenities such as swimming pools and clubhouses. And condos are less expensive and easier to resell than single-family detached homes.
However, prices of vacation condos dropped by about 10 percent over the past year – a substantially bigger drop than was experienced by single-family detached homes, according to the Realtor association. That's good news for prospective buyers who hope to make the purchase of a second home condo this year while prices and mortgage interest rates are low. |
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Remodeling activity projected to rise
At this writing, remodeling activity is slow, but is expected to increase as we move into the summer season. Some owners are planning to expand their living space and enhance features to accommodate a growing family, as opposed to selling their home and purchasing another residence in today's sluggish market. Others are planning strategic projects to make their homes more salable. Still others are catching up with needed repair and improvement jobs.
“While remodeling is down nationally, some markets continue to churn with activity,” said Lonny Rutherford, chairman of the Remodelers group of the National Association of Home Builders. “Many remodelers are handling smaller jobs and have a shorter backlog, but we expect activity to increase because necessary home repairs cannot be postponed for a long time.” Most markets with increasing remodeling activity are in the Western and Midwestern regions.
“Remodeling not only enriches a homeowner's quality of life, but it can provide financial rewards,” Rutherford noted. “Smart remodels increase a home's value and saves homeowners money by improving home performance. Adding a full bath or renovating a kitchen are good investments, but smaller projects such as replacing siding or adding a deck can effectively add value and beauty to a home.” |
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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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