Look at Mortgage Rates Lately?

Source: Bankrate.com

Mortgage rates for 30 year fixed mortgages have been dropping like a rock. The first wave was in late October, dropping from the 6.5% range to the 6% range. In the last week, rates have fallen even further into the 5.5% range after the Fed announced it would purchase mortgage backed securities from Fannie and Freddie Mac. There is also talk of a government plan to drive 30 year fixed mortgage rates as low as 4.5% in an attempt to reinvigorate the slumping housing market.

Mortgage rates are a key component of affordability, and lower rates theoretically translate into greater affordability. (To borrow $100,000 at 6.5% on a fixed rate 30 year loan, your monthly payment would be $632.07, while at 5%, your payment would be $536.82.) "Affordability" right now probably isn't the single most important factor contributing to the sales slide; there are still a lot of folks who can "afford" a house (and qualify for a loan), but are hoarding their acorns and deferring any major purchase until they have more confidence.

That being said, mortgage rates below 5% could have a positive psychological impact on buyers. Of course, using cheap money to buy an overpriced house in the end is no great value. But there are some very "value priced" houses on the market (not a lot, but some), and using value money to purchase a value house could add up to an overall great value.

Some folks may scream, "More cheap money and loose credit. Isn't that what got us into this mess?" These loans are going to be different in many ways — buyers will have to have down payments, documented income and good credit scores. They likely will only be available to owner-occupiers, not investors, and will only be for "conventional conforming" loans (in Sullivan County, that means a loan value no greater than $417,000).

An interesting side note to all the mortgage news is the growing spread between "conventional conforming" rates (the types of loans purchased or guaranteed by Fannie and Freddie), and non-conforming jumbo loans (for loan amounts above $417,000 in Sullivan.) Yesterday, Chase was offering conforming 30's to buyers with 20% down payments and excellent credit at 5.25% with 1.25 points. Their jumbo loans were being quoted a full 3% higher, at 8.25% with 1 point. That's a huge spread, and really shows the wariness of investors to purchase mortgage debt that doesn't have some type of tacit guarantee.

Comments

[Deflation Ghost]

In today's deflation spiral economy:
5.5% mortgage rate is high.
Even 4.5% is high.

When inflation is -5% (as is being estimaed for 2008), you are actually paying 9.5% on a 4.5% loan. Therefore, in today's economy, even 0% interest rate would mean you are actually paying 5% interest during the deflation spiral.

To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of 0% actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficient deflation, the real cost of borrowing becomes prohibitive.

http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm#fn8

[David Knudsen]

The very real possibility of deflation in housing prices is the reason I think buyers should really be only considering 'value priced' homes if investment protection is a prime consideration. By 'value priced', I don't mean only less expensive houses, but houses that are well priced at the low end of the range for the type of property. That does, however, tend to be a more limited selection of inventory.

The problem I often have with this pure numbers approach is that it doesn't take into account use and personal enjoyment. With stocks, you really neither use or enjoy them. They're just investments, and you get no more pleasure out of owning a stock now than owning it in a year. That's different with a house. You can enjoy a house, and if you postpone a purchase for two years, you've essentially 'lost' two years of enjoyment.

Consider the apartment I bought in the Bronx last March. (My Bronx apt. is my 'second' home.) I bought a less expensive apartment than I could afford because I didn't want a big financial burden. (Sure, I would have loved to have an apartment in London Terrace in Chelsea, but I would have taken on a huge monthly mortgage payment to swing it.) Since buying the apartment, I've used it almost every week for at least a day or two. I love it, because of the flexibility and added dimension having a 'city' counterpoint to my country life has given me. Sure, there's a possibility that the value of this apartment has shrunk since I bought it. But I don't think about it, nor do I really care, and I'm not looking to sell. If I waited until 2010 to buy it (or something similar), sure I might have gotten it cheaper — or for the same amount of money gotten into northern Manhattan rather than the Bronx — but I wouldn't have had two years of enjoyment of it.

I'm not being all Pollyannish and rose colored glasses here, or trying to pump up a flagging market. But I think its important to remember that people buy personal-use real estate for reasons other than solely for investment or future value.

[David Knudsen]

On a related note to the above, I think we're going to have a very slow winter season, particularly in the second home market. Unless a buyer finds an almost-ideal house at a fabulous price, there just aren't many compelling reasons for a more casual second home buyer to 'buy now'. For most folks, second homes in Sullivan aren't primarily winter getaways; they're spring-summer-fall. Folks who are in the market for a getaway for next summer can really wait until March and still be 'in' by Memorial Day. By next March, we'll have a new President and a new economic team. There may well be some new home purchase incentives (e.g. those 4.5% mortgage rates), and we'll have a better idea of where the economy is heading (along with home prices.)

I think "shelter" buyers, looking for primary rather than second homes, will have a different perspective. In the primary home market, its more a question of relative affordablility, availability of credit, and the comparison of rent versus buy. I don't think in the primary home market we're going to see a lot of trading up, but as mortgage rates and house prices come down, we may reach a tipping point where it makes more economic sense to buy rather than rent, particularly for moderate income home buyers that qualify for lower down payment FHA or SONYMA loans.

[~avedon]

Dave,
You are dreaming.

Take a look at the New York Times article today about the employment numbers.

http://www.nytimes.com/2008/12/06/business/economy/06jobs.html?_r=1&hp

1. You sell a discretionary product.
2. People are losing their jobs.
3. Home prices are falling.
4. There is more inventory coming onto the market.
5. Winter and cold weather is coming - i.e.; what's the rush?
6. Too much uncertainty.

Even with mortgage rates low at 5.5% - so what?

One thing you are spot on about is that this coming winter will be dead at least until we get a clearer picture and that won't be coming until at least the 1 or 2 Q of 2009.

~avedon

[JJ]

David,

Talk amongst friends and colleagues has the majority fed up with the stock market gyrations and looking to have something tangible where they can connect with family, friends, and nature. The upstate vacation home fits the bill. I had an overpacked house of lookers over Thanksgiving and a wait list for the Christmas Holiday.

A vacation home may or may not be a good financial investment right now but it is an investment in life. You can't have fun with your stock certificates.

[friday910]

"...National Association of Realtors, whose members want to bolster home sales, is lobbying hard for the idea [4.5% rate]."

http://www.nytimes.com/2008/12/05/business/05housing.html?scp=1&sq=bernanke%20realtors&st=cse

[4.5% rate] "...It has already opened up a rift between the real estate industry, which wants to increase sales, and the banking industry, which wants to get out from under staggering volumes of troubled mortgages."

Good luck bolstering those home sales.

"Mortgage rates are a key component of affordability, and lower rates theoretically translate into greater affordability."

30 year term, and a $1015/month mortgage:

$200K @ 4.5% (1013.37/month) = $150K @ 7.15% ($1013.11/month) = $100K @ 11.76% ($1010.18/month)

From a buyer's perspective who can only afford $1015/month for a mortgage, higher interest rates and lower mortgage/asking price is just as "affordable" as lower interest rates and higher mortgage/asking price.

From a buyer's perspective who doesn't need financing/cash-down, higher interest rates and lower asking price is the best case scenario.

From a (seller/buyer) agent perspective lower interest rate and higher asking price is the best case scenario.

[David Knudsen]

JJ, that's exactly the point I'm trying to make --- that a house is qualitatively different than a stock certificate. I'm actually agree with one of Avedon's points, that with winter coming, there's no rush. And yes, people are losing their jobs, but not everyone is. There are still lots of folks in NYC who are gainfully employed, and while a hot shot trader on Wall Street loses his or her job (and not be in the market for a house), lots of other professionals aren't. A young doctor at Sloan Kettering who's employed today will still probably be employed next year, and have the resources to buy a place in the country. Of course, the business will be slower and prices will likely be lower.

[andy]

If so-called "primary" style houses are selling when "second home" style houses aren't, maybe a lesson to take is this: If you want a second home but you're concerned about preserving resale value, think in terms of a second home that on resale might appeal to a "primary" home buyers. So much of this blog seems devoted to a narrowly defined "second home" style -- the farmhouse, the chalet, etc. -- when a well-sited "primary" style house will give you full access to precisely the same "country" experience -- an possibly greater liquidity.

[David Knudsen]

Good point, Andy. I don't define the 'second home' style; buyers do. For years, I've said that the best 'values' are on houses in styles with less second home appeal — ranches, bi-levels, houses with a more suburban feel. You get a lot more house for your money with those styles. However, I don't know if buying a more primary-style home is the silver bullet to preserving future value. Primary home sales depend on a somewhat different set of demographic and economic trends, and I don't think the local, full time economy is perkier than NYC.

[JJ]

Dave,

Winter in the Catskills is beautiful! It is truly a 4-season destination. We even go bareback horseback riding in the winter - the horse is your heater!

[dd]

JJ

Are you bareback or is the horse bareback? Please clarify this for us.

[David Knudsen]

dd, I was wondering the same thing but was too embarrassed to ask.

[JJ]

Haha...you guys are funny. Bareback horseback riding is the riding of a horse without a saddle or saddle pad. The rider is fully clothed (it's cold!).

[jeff paul portal]

well for me i suggest working from home and make your living on it . and its possible i have been doing this for about a year i am preety much happy with what i am making .