Mortgage Rates: what happened to 5%?
As we head into the Fall selling season it is worth pausing to reflect on where mortgage rates stand and what the outlook is. Well the second is easy: we don’t know with any confidence. What we do know is that forecasts of rates hitting 5% or more this year have proved pessimistic despite the improving US economy. (more…)
Do mortgage rates and sales volume really drive home prices?
Conventional wisdom is occasionally right, but I like to query it.
Let’s look at two widely quoted “facts” in real estate: that higher sales are a sign of a healthy market; and that mortgage rates drive prices.
First, I plotted the annual median price of SFHs in Essex County vs the annual level of sales. I think one can say that both sales and prices declined from 2005-2008, but from 2000-2003 prices went up sharply while sales were largely flat, and from 2011-2013 sales jumped but prices were up only modestly. Verdict: some correlation, but no consistent link between sales and prices.
Next I turned to mortgage rates. I keep reading that the reason that sales are down a bit this year is because higher mortgage rates – coupled with higher prices – have made home buying less affordable.
Let’s look at history. I have plotted median prices of SFHs in Essex County against the 30 year mortgage rate.
What we see here is that falling mortgage rates have indeed coincided with periods of rising home prices, as in 2000-2004, but they also fell along with home prices from 2006-2009. And you will note that the absolute level of mortgage rates during the boom years of 2000-2005 ranged from 6-8%, compared with just over 4% today. Verdict: some correlation when mortgage rates dropped from very high levels, but no consistent link since.
The decision to buy a home or scale up to a new home is complex. It is driven by a desire to have the security of owning one’s own home, and is influenced by a number of factors: confidence in one’s job and future prospects; confidence in the economy; confidence in the future of home prices.
I asked a respected and well-informed real estate professional yesterday where he thought mortgage rates were today compared with a year ago. He guessed 1/2% higher. The answer? Well according to Freddie Mac, the 30 year mortgage rate this week is 4.14%. A year ago it was 4.46%.
Next week I shall publish my mid-year reviews and these will show that in the first half of 2014 sales were down slightly, the mortgage rate was up, and prices were…….check back next Saturday to find out!
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 617.834.8205 or Andrew.Oliver@SothebysRealty.com.
Andrew Oliver is a Realtor with Harborside Sotheby’s International Realty
Sotheby’s International Realty® is a registered trademark licensed to Sotheby’s International Realty
Affiliates LLC. Each Office Is Independently Owned and Operated
Are mortgage rates really going to jump this year?
At the start of each of the last two or three years we have been warned that mortgage rates were likely to increase, possibly sharply, in the coming year. Last year, when the Fed announced that it was thinking of ending its purchase of mortgage-backed securities, there was indeed a sharp jump, but since then rates have dropped back again.
So far this year the yield on the US 10 year Treasury, the main determinant of the 30 year fixed rate mortgage, has dropped from 3% to 2.5% and mortgage rates have followed, with the rate reaching 4.12% in Freddie Mac’s latest weekly survey. The same geopolitical factors (that would be Russia’s expansionist activities) that have sparked renewed buying of US Treasuries are also restraining economic growth in Europe. There are no signs of renewed inflationary pressures.
Against that background, the yield of 2.5% on 10 year Treasuries compares favourably with that in Germany, 1.4%,or Japan, 0.6%, with only the UK at 2.6% offering a comparable return.
While it is hard to see the reason for mortgage rates to rise, it is also worth bearing in mind that we remain very close to all-time lows. I am including a chart of rates over the last year together with one going back to 1971. (more…)
Mortgage rules eased to help housing market, but don’t tell Congress
I have written Fannie Mae and Freddie Mac that the best solution for the housing market would be to make sure that Fannie Mae (FNM) and Freddie Mac(FRE) returned to their core mission of providing liquidity to the housing market. They got away from that mission during the boom and Congress, in typical knee jerk fashion, decided to shut them down – with no plan to replace them, other than a vague hope that the “private sector” would step in.
Well, that hasn’t happened, and this week Mel Watt, the recently appointed head of the Federal Housing Finance Agency (FHFA), which oversees FNM/FRE, reversed course on some of the new mortgage rules amid concern that they would hinder the housing market recovery. Mr. Watt went further and said:” I don’t think it is FHFA’s role to contract the footprint of Fannie and Freddie.” Winding down the companies without clear proof that private investors are willing to step in “would be irresponsible.” (more…)
Fannie Mae, Freddie Mac and the FHA: heroes or villains?
This week the Senate Finance Committee leaders issued new proposals for winding down Fannie Mae and Freddie Mac, while the Federal Housing Administration (FHA) announced that it would not need another bail-out this year.
FHA
With so much going on it is no surprise when we discover that we have missed a news item, but it was only while listening this week to a lecture from Yale Prof. Robert Shiller (of Case-Shiller fame and recent Nobel Prize recipient) that I discovered that the FHA did indeed receive a bail-out in September 2013 as anticipated in my article from late 2012: First Fannie and Freddie: next up FHA?
The FHA’s original role was to provide mortgage credit for low and moderate-income borrowers, but they joyfully joined the frat party that was housing in the early years of this century, including one program which allowed sellers to cover the down payment on behalf of buyers, often by inflating the price of the home.
And with the approval of Congress the FHA backed loans of as much as $729,750 in some areas. I guess it depends on your definition of low to moderate income. By the standards of members of Congress, as the chart below of their median net worth shows, I suppose somebody qualifying for a $700k mortgage would be considered low or moderate income:
The Bloomberg article I quoted in 2012 included this wonderful passage: “The U.S. should also consider raising the minimum 3.5 percent down payment to 5 percent or more, because research shows that mortgages with larger down payments are less likely to default.” No kidding!
During the discussion period about the new rules for mortgages Federal banking authorities proposed that borrowers needed to put 20% down when buying a home in order for the mortgage to be considered qualifying. This was watered down in the end, but I cannot help but note that while these discussions were taking place the FHA was offering loans – and still is – with 3.5% down.
Anyway, in 2013 the FHA had to draw down $1.7 billion from the Treasury in order to maintain the mandated level of its reserve funds. One of the main factors quoted by the FHA was losses on low down payment mortgages written in 2007-09. In contrast, this week the FHA announced it would not need another draw down since its capital reserve was now up to $7.8 billion. One of the reasons for FHA’s recovery is the large increase in fees it has imposed.
Senate Banking Committee proposals for mortgage insurance
Also this week the Senate Banking Committee leaders issued a proposal calling for the replacement of Fannie and Freddie with a new system of federally insured mortgage securities in which private insurers would be required to take initial losses before any government guarantee would be triggered. It seems unlikely that any such proposal will pass Congress this year, but at least we are starting to get some proposals that show how the mortgage market may look in the future.
Fannie and Freddie “dividends” now exceed bail out funds received
Separately, the White House Budget Office said that Fannie and Freddie, which have already paid more than $185 billion in “dividend” payments on their $187.5 billion Treasury bail-out, could pay a further $181.5 billion over the next 10 years. And still owe the same $187.5 billion they started with.
This is how the Wall Street Journal described the situation this week:
“By the end of March, the two mortgage-finance companies that were seized by the U.S. in 2008 will have returned $202.9 billion in dividend payments, after receiving $187.5 billion in federal support between 2008 and 2011. The budget projections released Monday by the White House Office of Management and Budget show that the companies could return an additional $163.8 billion through the 2024 fiscal year if the bailout arrangement remains in place.
By that tally, Fannie and Freddie would return $179.2 billion more to taxpayers than they were required to borrow. Last year, the budget showed that taxpayers faced a net gain of $51 billion through 2023.
Even though both companies will have soon sent more in dividends to the Treasury than the amounts they borrow, those dividends don’t reduce the $187.5 billion in stock held by the Treasury. The terms of their government support don’t provide a clear mechanism for them to redeem those shares, and the companies are currently required to send all of their profits to the Treasury as dividend payments.
The Treasury faces lawsuits from nearly 20 investors challenging the dividend terms, which were modified in 2012. They say the government’s collection of the firms’ entire profits amounts to an unconstitutional appropriation of assets and that the Treasury and the firms’ federal regulator engaged in illegal self-dealing when it made those changes.”
Heroes or Villains?
Fannie Mae was established in 1938 as part of FDR’s New Deal to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. Fannie Mae – and later Freddie Mac – bought mortgages from banks, thereby making it possible for banks and other loan originators to issue more housing loans.
After the housing crash of 2008-10 Fannie, Freddie and the FHA accounted for some 90% of new mortgages. Over a period of 75 years one or more of these entities has provided liquidity to the mortgage market, enabling among other things banks to issue 30 year fixed rate loans. Like many others all these entities got caught up in the housing boom and like others they suffered losses.
I remain unclear as to why the solution is to dismantle Fannie and Freddie, rather than take on board the lessons learned and put in place controls to make sure that they do not deviate again from their intended aims. I fear that the answer lies more in politics – they are an easy target to blame for the crash – than economics.
If you – or somebody you know – are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.
Andrew Oliver is a Realtor with Harborside Realty in Marblehead
Fannie Mae and Freddie Mac continue to finance Government deficit
My goal in this post is just to report the facts. My opinions on the ethics of the change the Treasury imposed on the terms of the bail-out of Fannie and Freddie have been expressed in previous posts. The result of the change is that by the end of March 2014 Fannie and Freddie will have repaid more than they borrowed from the Treasury but, because these payments have been deemed by the Treasury to be dividends rather than capital payments (like interest rather than principal on our mortgages) the two companies still “owe” the Treasury as much as before they made payments.
The “dividends” from Fannie and Freddie in calendar 2013 totaled $134 billion which contributed to a reduction in the budget deficit as shown in the chart below. Bear in mind that the numbers relate to a September 30 year end but the basic argument is intact:Fannie and Freddie have been helping to reduce the deficit. (more…)
New mortgage rules raise costs for borrowers
Carl Edwards, V-P Lending for National Grand Bank in Marblehead, made a presentation at the offices of Harborside Realty this week. His main message was that the new rules, designed to “protect” the consumer, would have the effect of increasing the cost of mortgages.
The new rules, which are part of Dodd- Frank: generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling …… and establishes certain protections from liability under this requirement for “qualified mortgages.”
The concept of requiring a lender to determine if a borrower can repay a loan may seem like basic common sense, but with regulation comes additional costs. For example, a borrower with a credit score of 700 making a deposit of 30% on a loan sold to Fannie Mae or Freddie Mac will now pay 1.50% in upfront fees. (more…)
Is the 30 year fixed rate mortgage an endangered species?
Discussion about mortgage rates normally focuses on the 30 year fixed rate mortgage (FRM). As the table below shows, the US is unique in developed countries in having FRMs as the dominant product:
Only Denmark and France have significant FRM markets and their products differ from the US in certain ways. (more…)
Year end reviews
I shall be publishing year-end reviews over the course of this weekend. The best way to know when they are published is to sign up on www.OliverReports.com to receive email alerts of new articles. Here’s a screenshot showing where you can sign up on the home page.
If you are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.
Andrew Oliver is a Realtor with Harborside Realty in Marblehead
New FHFA Head moves to delay fee increases
According to the Wall Street Journal’s Nick Timiraos, Rep. Mel Watt (D., N.C.), the incoming director of the regulatory agency that oversees Fannie Mae and Freddie Mac, said on Friday night he would delay an increase in mortgage fees charged by the housing-finance giants, which was announced earlier this month by that agency.
Upon being sworn in, “I intend to announce that the FHFA will delay implementation of the loan-fee increases until such time as I have had the opportunity to evaluate fully the rationale for the plan,” said Mr. Watt in a statement.
(more…)
Conforming mortgage loan limits raised for Essex County
While the Federal Housing Finance Agency (FHFA) has announced that the 2014 maximum conforming loan limits for mortgages acquired by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, will remain at $417,000 for one-unit properties in most areas of the country, the limit in Essex County will increase from $465,750 to $470,350.
Earlier this year FHFA had announced that it was contemplating a reduction in loan limits for 2014, but that announcement was met with a tsunami of protests.
With the change in the rules for Senate approval of most nominees, it is highly probable that the FHFA will soon have a new head, Rep. Mel Watts, who is expected to be more amenable to carrying out the Administration’s goals in the housing market.
Here is an article with comment on some of the effects expected with Mr. Watts in charge.
Conforming Loan LimitFannie Mae and Freddie Mac are restricted by law to purchasing single-family mortgages with origination balances below a specific amount, known as the “conforming loan limit.” Loans above this limit are known as jumbo loans. The national conforming loan limit for mortgages that finance single-family one-unit properties increased from $33,000 in the early 1970s to $417,000 for 2006-2008, with limits 50 percent higher for four statutorily-designated high cost areas: Alaska, Hawaii, Guam, and the U.S. Virgin Islands. Since 2008, various legislative acts increased the loan limits in certain high-cost areas in the United States. While some of the legislative initiatives established temporary limits for loans originated in select time periods, a permanent formula was established under the Housing and Economic Recovery Act of 2008 (HERA). |
If you are considering buying or selling a home and have questions about the market and/or current home prices, feel free to contact me on 781.631.1223 or andrew@HarborsideRealty.com.
Andrew Oliver is a Realtor with Harborside Realty in Marblehead.
Mortgage rate forecast to rise to 5.1% in 2014
This time last year, when the 30-year mortgage rate was under 3.5%, the Mortgage Bankers Association forecast that it would rise to 4.5% by the end of 2013. That is very close to current mortgage rates so with that track record their forecast for 2014 bears noting.
MBA is forecasting a rise to 5.1% by the end of 2014 and a further rise to 5.3% by the end of 2015. (more…)
Falling mortgage rates and other housing news
As suggested in last week’s blog, mortgage rates have fallen back with the national average for a 30 year fixed rate loan at 4.32%, a level last seen in July.
While the 30 year fixed rate mortgage is the benchmark normally quoted, note that the average 15 year rate is 3.37%, while the 5/1 ARM is just 3.07%. Freddie Mac weekly mortgage rates
For my comments on Adjustable Rate Mortgages (ARMs) read Is it time to consider an ARM?. (more…)
Mortgage rates drop as Fed blinks
On Wednesday, when it was widely expected that the Federal Reserve would announce plans to start reducing its purchases of mortgage backed securities (MBS)* this month, it surprised the market by announcing that the start of the slow down – the taper – would be delayed. The result was a drop of about 1/4% in mortgage rates. (more…)
Outlook for mortgage rates
I have commented before that HSH Associates (HSH.com) publishes very good commentary on the mortgage market.
In this week’s article (which will be on their website on Monday) they point out:
(more…)
Recent Comments