Here is a selection of recent posts by Dean Rizzi:
The Farther They Fall, The Higher They Could Rise
Richard Carson and Samuel Dastrup, two university professors, recently published an interesting academic paper (a synopsis is posted at Econbrowser.com). Carson and Dastrup examined how the magnitude of housing-price declines correlated with various factors, such as overbuilding, extent of sub-prime lending, and median income. Not surprisingly, these factors were related to price declines. However, the most important factor was the magnitude of the previous price run-up, which accounted for more than half of the observed variance in the size of the price decline. Read more
A Look at the Past and a Look at the Future
This time last year we predicted that 2009 would end a lot better than it began. We were right, though it wasn’t a great accomplishment to be right considering how low the housing market, stock market, and overall economy had sunk during the latter half of 2008. As we’ve stated repeatedly over the past year, a low base and a dour outlook provide an excellent buying opportunity, so we weren’t surprised when buyers stepped forward to exploit the opportunities.
Looking ahead to 2010, we see continued improvement in home sales and home prices. In fact, we wouldn’t be surprised if the market turns to a sellers’ market from a buyers’ market by year’s end. We are almost certain that will be the case if we see a two to three percentage point drop in the unemployment rate. Low mortgage rates and income tax credits are contributing factors in stabilizing the market, to be sure, but no factor is more important than employment in not only maintaining stability but stimulating activity. Read more
Are We There Yet?
We cannot say for sure, but we think we are darn close. Of course, we are speaking of the bottom in mortgage rates. Last week we explained how the Federal Reserve has influenced the market with its massive purchases of mortgage-backed securities. This week we offer statistical support for our contention that rates are at least close to bottoming, if not likely to reverse soon.
Calculated Risk, an insightful Web site that tracks the comings and goings of the housing and mortgage markets, supplied the evidence. Calculated Risk has noted (as have we) the close relationship between the 30-year conventional fixed-rate mortgage and the yield on the 10-year Treasury note. Based on statistical analysis reprinted on Calculated Risk’s Web site, the 30-year conventional fixed-rate mortgage is expected to rise to 5.4% based on the current 10-year Treasury yield of 3.45%.
www.deanrizzi.com
Still the Time to Borrow and Buy
For the past four months, we have been forwarding the argument that housing prices have stabilized. Wells Fargo has provided another arrow for our quiver. To avoid defaults and foreclosures, the banking giant is offering homeowners with Alt-A ARMs the option to offset monthly payment increases with interest-only loans to defer amortization for six to 10 years.
It sounds like a risky move. After all, interest-only loans were a contributing factor to the housing meltdown. But many of those loans were originated in a much riskier era – near a market top. That is certainly not the case today, which is why Wells Fargo is betting that home prices have stabilized and that the economy will improve. We think it is a smart move.
We also think it is a smart move to refinance or buy today. Rates are very, very good (but they will not be forever, for sundry reasons we have previously stated). What’s more, the purse strings aren’t nearly as tight as borrowers might think. According to the Federal Reserve, the rate of banks that reported tightening lending standards for prime residential real estate loans was 25% in October, which is well off the peak of 75% reported in July 2008.
In other words, 30-year fixed-rate mortgages are readily available at 5% (which for borrowers in the 28% federal income tax bracket works out to 3.6% after tax). Meanwhile, the 5/1 hybrid ARM presents an intriguing option for borrowers planning to move within the next few years. A 3.75% 5/1 works out to a mere 2.7% after tax for someone in the 28% tax bracket. Yes, rates could go lower, but not much lower.
Possibly Overstated, But That’s Okay
Many kudos have been given to the federal homebuyer’s credit for revitalizing the housing market. To be sure, the credit has moved people into the market who wouldn’t have been there otherwise. However, are we overstating the impact? The question is worth asking, considering a recent analysis of the cash-for-clunkers program by Edmunds.com, which found the overwhelming majority of auto sales during the program would have occurred anyway. In other words, sales were simply moved up a little because of the credit.
Perhaps the same situation has occurred in the housing market. Perhaps too many of us are giving too much credit to the homebuyer’s credit while giving short shrift to important economic variables. After all, low home prices and low mortgage rates should be expected to lift the market. That said, no one could say which had the bigger impact, so it is understandable the industry is playing it safe and lobbying for the credit extension. Nevertheless, should its efforts fail (and don’t get us wrong, we’d like to see the credit extended), it’s worth noting that most decisions are based on economic reasons, not tax reasons. Read more
Up, Down, or Sideways?
We are speaking of mortgage rates, which continue to move down. Bankrate’s latest survey had them averaging their lowest levels in over four months last week, with the 30-year fixed-rate mortgage averaging 5.25% and the 15-year fixed-rate mortgage averaging 4.64%. Given the recent qualms over unemployment, rates would seem likely to move down further.
And they could, but they could also move up. Last week, Dallas Federal Reserve President Richard Fisher said that the winding down of the Fed’s stimulative monetary policies needed to start as soon as the economy shows signs of sustained improvement. “When it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity to that with which we pursued monetary accommodation,” Fisher said in a speech to the Texas Christian University Business Network of Dallas. Read more
Buyer (Still) Beware
We warn once again that it will not be a buyer’s market into perpetuity, though others have a different opinion. Some forecasters – Goldman Sachs being the most prominent – project the Federal Reserve will hold the fed funds rate low for “many years” in order to help U.S. consumers and companies pull out of their funk. If that were the case, then it would appear that mortgages rates ranging between 4.5% and 5.5% could be the norm deep into 2011.
Meanwhile, Reuters reports that homebuyers are still negotiating good discounts based on data released in July’s Zillow Real Estate Market Report. Zillow notes that buyers paid 3.3%, or nearly $7,039, less than the last listing price on homes for sale during July. What’s more, 22.8% of all homes listed for sale on Zillow during August were listed for a median 96 days, up from 91 in July.
It sounds like the trend will remain the buyer’s friend through 2011 – until you dig a little deeper. Zillow also noted that the 3.3% discount is down from June’s 3.5% discount and substantially down from January’s 4.6% discount. It is also worth noting, yet again, that the usual hard-hit burgs in Nevada , Florida and California skew the data.
“Even if prices stabilize and rise, we can still finance at cheaper rates,” so the counter argument goes. Yes, that is the case today, but we think Goldman and others are underestimating how quickly an economy can turn and how quickly inflation can conflate. It is a buyers’ market today, so buyers should take advantage of it today. As for tomorrow? We are much less sure.
Money to Spare
All that talk about TARP recipients withholding their bailout funds appears to be just that – talk. Lending among the top 21 recipients of bailout funds through the Capital Purchase Program within the Treasury Department’s Troubled Asset Relief Program posted growth in May, with mortgage originations rising by 7% over April’s figures.
Furthermore, there is more money available to lend to more people. A few weeks ago we mentioned Fannie Mae’s and Freddie Mac’s home affordable refinance program. It’s worth plugging again. The HARP affects millions of homeowners currently in Fannie Mae or Freddie Mac loans and permits first-mortgage loan amounts up to 125% of the home’s current appraised value, with and without a second mortgage already attached. In addition, closing costs and as many as two payments can be rolled into the loan and up to $2,000 can be taken out of the mortgage. Read more
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- Short Sale vs. Foreclosure – Ethical Considerations
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- The Farther They Fall, The Higher They Could Rise
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