Archive for August, 2008

How Labor Day Weekend Complicates Mortgage Rate Shopping

David Kosmecki | August 29, 2008 in Uncategorized | Comments (0)

Vacations on Wall Street mean more volatility in mortgage ratesAs we get closer to Labor Day, volume on Wall Street is dwindling as market players get a head start on their long weekend.

Today could be a difficult day to shop for mortgage rates. Expect volatility.

This is because mortgage rates are based on the price of mortgage bonds and, on Wall Street, bonds trade a lot like stocks.

There has to be a buyer and a seller at a specific price to make a deal.

With so many traders on vacation today, though, there are fewer opportunities to match buyers and sellers. This can cause mortgage prices rise or fall faster than on a “normal” day, directly leading to mortgage rate volatility.

For a light-volume trading day, there is a lot of information for markets to digest, including:

By themselves, each of these points can move markets. Together, however — and aided by Labor Day — they can move markets a lot.

Mortgage bond pricing is fluid, changing every minute of every day. Today, those changes will be exaggerated and, as an example, in the first 30 minutes of trading, mortgage rate pricing swung from rate improvement to rate deterioration in a flash.

To See Where Mortgage Rates May Go This Week, Keep An Eye On The Weather Channel

David Kosmecki | August 28, 2008 in Uncategorized | Comments (0)

Three years to the week after Hurricane Katrina caused $81.2 million in damages, Tropical Storm Gustav is charting a similar Gulf of Mexico path.

Memories of Katrina are making oil traders nervous. The 2005 storm shut down 30 platforms and 9 refineries. And, this week, oil prices are up nearly 4 percent on fears that the market, once again, may be disrupted by storm.

Mortgage rates are edging higher on the news.

The link between oil prices and mortgage rates is not a direct one, but it’s worth paying attention to.

Rising oil prices strain business and consumer budgets, creating inflationary pressures on the economy. And at no time was this relationship more evident than in May and June of this year. As oil prices reached new, all-time highs almost daily, Americans felt the impact each time they opened their wallets — the Cost of Living inflation gauge reached a 17-year high in July 2008.

Inflation is the enemy of mortgage rates so as inflation rises, mortgage rates tend to rise, too.

And this is one reason why mortgage rates are ticking higher this morning — there is an overriding fear that Gustav will strengthen into a full-fledged Hurricane before making landfall, causing damage to oil refineries and shipping ports around the Gulf of Mexico.

Damage reduces oil supplies and that causes oil prices to rise. It’s basic supply and demand.

Gustav is expected to make landfall Monday or Tuesday. If the storm continues on its path, we may see mortgage rates continue to trend higher. If the storm dissipates, rates should reverse.

According To The Data, Housing May Have Already Touched Its Bottom

David Kosmecki | August 27, 2008 in Uncategorized | Comments (0)

According to the June 2008 Case-Shiller Home Price Index, home prices in 15 of the 20 largest U.S. real estate markets either improved, or showed growth from the month prior.

This is the fourth straight month in which that happened which means that a national housing recovery may already be underway.

Now, it’s worth stating that all real estate is local and that there’s no such thing as a “national real estate market”, but for home buyers looking to to maximize their negotiation power to get the best possible “deal”, spotting trends like this before the media does is a good thing.

So far, only Bloomberg and a few others have chosen to highlight the positives from the otherwise-negative Case-Shiller report. By contrast, most publishers are focusing on annual home price figures which show a hefty drop of 15.9 percent.

We shouldn’t dismiss annual trends because they’re helpful in the theoretical sense, but for real, live home buyers trying to identify trends and market bottoms, it’s the month-to-month data that matters most.

After looking at 4 consecutive months of Case-Shiller data, the month-to-month data appears to show that home prices have stabilized in most major markets. And, in some, they’ve already started to recover from their lows.

U.S. House-Price Slide Eases, S&P/Case-Shiller Shows
Courtney Schlisserman, August 26, 2008

Converting Your Primary Residence To An Investment Property? You May Not Qualify For Your Next Mortgage.

David Kosmecki | August 26, 2008 in Uncategorized | Comments (0)

If it seems like mortgage rules are getting strict, that's because they are.When a homeowner buys a new home, he has 3 options of what to do with his current residence:

  1. Sell the home, paying off the mortgage in full
  2. Keep the home as a second/vacation home
  3. Convert the home to an investment property

The most common action plan is the first one — sell the home and pay off the mortgage. However, with home prices poised to rebound, some savvy homeowners are trying to avoid “selling low”.

Unfortunately — as of August 1, 2008 — waiting out the market won’t be so easy.

Burned by foreclosures and wary of risk, Fannie Mae issued new conforming mortgage guidelines that specifically apply to home buyers planning to convert an existing primary residence into a second home or investment property.

Among the highlights of Fannie Mae’s changes:

Selling the primary residence
If the new home being purchased closes prior to the existing home’s sale, both payments must be used to qualify the buyer for the new mortgage.

Converting to a second home
If the home has less than 30 percent equity in it, the home buyer must show 6 months of PITI reserves for both properties to qualify for the new mortgage.

Converting to an investment property
If the home has less than 30 percent equity, its rental income may not be used to help the buyer qualify for the new mortgage.

If it seems like mortgage rules are getting strict, that’s because they are. And they’re expected to get tougher, too. With each foreclosure and high-profile bank collapse, mortgage lenders tighten up their guidelines just a bit, freezing out the “fringe” borrower from access to mortgage money.

Mortgage rates may rise through 2009, or they may fall. We don’t know. But what we do know is that borrowing money to buy a home will be tougher.

If you plan to buy a home in the next 12 months, consider moving up your timeframe or — at least — planning ahead. Understanding the mortgage rules and how they can change may be the difference between getting approved for a home loan, or getting turned down.

Looking Back And Looking Ahead : August 25, 2008

David Kosmecki | August 25, 2008 in Uncategorized | Comments (0)

Momentum carried mortgage markets through a week of low trading volume and few economic releases. Rates were volatile, but ended the week unchanged overall.

Don’t let the word “unchanged” fool you, however.

From day-to-day last week, mortgage rates covered a huge range and it was only coincidence that Friday ended where Monday began.

And it’s the second week in a row that that happened.

Lately, mortgage rates have been highly sensitive to both inflation data and to the U.S. dollar. Lucky for rate shoppers, both were given a boost of support last week by high-profile Americans:

  1. Ben Bernanke said that inflation should moderate in 2009
  2. Warren Buffett said that he has no bets against the U.S. dollar

Comments from both of these men attracted buyers to the mortgage market, propping up prices and offsetting those that fled because of lingering trouble at Fannie Mac and Freddie Mac and skyrocketing wholesale prices.

But, for Americans in need of a home loan, know this: As long as there is uncertainty about the U.S. economy, mortgage rate volatility will continue.

And, this week, volatility will get an extra boost because of Labor Day.

Starting mid-day Thursday, trading volume will start to thin and will lead to larger-than-normal movements in mortgage bond pricing. This should cause fits for mortgage rate shoppers because rates will jump heading into weekend.

If you’re currently comparing lenders, consider getting your rate locked in early in the week instead.

The Worst Places To Find Local Real Estate Information

David Kosmecki | August 22, 2008 in Uncategorized | Comments (0)

Real estate requires local analysis -- not nationalStories on TV about the national real estate market are misleading to Americans.

This is because there is no such thing as a “national real estate market”.

Consider the latest American Housing Survey. It found that there are 124,377,000 homes in America spread across:

  • 50 states, with
  • More than 30,000 incorporated cities, and with
  • An innumerable number of neighborhoods

And yet, the media repeatedly groups all 124 million homes into one giant lump and then gives an analysis. No matter how you slice and dice the data, a home in Oregon can’t be compared to a home in Mississippi.

This is why national real estate statistics are somewhat useless.

To get real estate analysis that matters, look local instead. And I don’t mean stats from your state — I mean stats from your neighborhood. It’s the only way to know what’s driving home prices on your street.

Unfortunately, finding local data like this isn’t easy; it’s far too narrow to be covered by the press. So, the best place to get local real estate data is from a local real estate agent or from somebody else with access to raw real estate data in and around your neighborhood.

By talking to “in the market” professionals that know your backyard, you’ll get a much clearer picture of your local market — good or bad — than the national media could ever provide.

Real estate is a local market so your real estate data should be local, too.

Mortgage Insurance Rates Skyrocket (For Homeowners That Still Qualify)

David Kosmecki | August 21, 2008 in Uncategorized | Comments (0)

Private Mortgage Insurance (PMI) is an insurance policy paid to a lender in the event that a homeowner defaults on his home loan.

With the growing number of mortgage defaults nationwide, mortgage insurers are finding their balance sheets under attack and their revenues in the red.

So far this year, mortgage insurers have paid out $6 billion in claims.

In response to the losses, the mortgage insurance industry is using two tactics to return to profitability — and both mean bad news for homeowners.

  1. Raise the minimum standards to get insurance
  2. Raise the annual mortgage insurance cost

This is very similar to what Fannie Mae and Freddie Mac are doing to shore up their respective balance sheets; lending to only the most credit worthy, and making sure to charge them for their commensurate risk.

Because of the higher PMI rates, it’s getting more expensive for small-downpayment home buyers to finance their homes. And that’s if they can even still get mortgage insurance.

Some mortgage insurers now require a 10 percent minimum downpayment in certain states.

So with the number of mortgage defaults expected to rise through 2009, qualifying for PMI should get more expensive and more difficult. If you plan to make a small downpayment on your next home — or plan to remortgage your current low equity home — consider moving up your timeframe.

It may not be as cheap or as easy to get financing as it is today.

The Mortgage Market’s Abnormal Reaction To July’s Producer Price Index Reading

David Kosmecki | August 20, 2008 in Uncategorized | Comments (0)

The Producer Price Index is a business inflation meter and it’s now up 9.8 percent annually.

This is a huge number for PPI and represents the highest year-over-year rate of inflation since 1981.

Normally, blowout inflation like this would be terrible for mortgage rates but mortgage markets are actually improved since Tuesday’s data release.

Usually, a rocketing PPI would create an inflation expectation on Wall Street which would, in turn, cause mortgage rates to rise.

Yesterday, however, that’s not what happened.

Upon the PPI release, Wall Street looked at the 9.8 percent number and simply shrugged it off. “Of course PPI is high,” traders thought. “Did you see how high energy costs were last month?”

Traders know that in July, oil prices reached an all-time high of $147.27 per barrel and, since then, crude is down more than 20 percent. Because of this, Wall Street has now turned its attention to the August PPI data, thinking it will much more calm than July’s.

In other words, instead of fearing inflation, traders believe the worst of it is over, providing an unexpected boost to home buyers in need of mortgages. As inflation expectations fall, mortgage rates are following suit.

Good News For Homeowners : Housing Starts Tumble In July

David Kosmecki | August 19, 2008 in Uncategorized | Comments (0)

Housing Starts measure the number of new housing “units” on which construction has started and in July, Housing Starts fell to its lowest levels since March 1991.

For homeowners, this is a welcome bit of good news because as fewer homes are built, there is less inventory from which home buyers can choose.

With fewer homes for sale, the supply-and-demand curve shifts in favor of home sellers and this adds a support floor for home prices.

For home buyers, though — and for the opposite reason — the low number of Housing Starts may not be as welcome.

With fewer new homes on the market, owners of “used” homes may feel less pressure to lower their asking prices or to make other concessions to interested buyers. This means that home buyers may pay more for a home, or get fewer “throw-ins” on the contract.

For all of the hocus-pocus that surrounds real estate data, in the end, home prices are based on the supply of homes versus the demand for homes. When supply outpaces demand, home prices fall.

Homebuilders learned this lesson and July’s Housing Starts data supports that.

Looking Back And Looking Ahead : August 18, 2008

David Kosmecki | August 18, 2008 in Uncategorized | Comments (0)

Mortgage rates overcame a terrible Monday last week, climbing back to unchanged by Friday. And like most weeks this year, rates were volatile.

Most interesting about last week, though, was that there was a ton of news that should have dragged mortgage rates down, but it didn’t seem to happen.

Instead, a soaring U.S. dollar attracted global funds to Wall Street and a renewed demand for all things denominated in U.S. dollars, helping drive up prices in the mortgage bond market.

When mortgage bond prices move higher, mortgage rates move lower.

Like last week, the path of the dollar will likely determine in which direction mortgage rates move between today and Friday. If the dollar increases in value, mortgage rates should fall. And conversely, if the dollar decreases in value, mortgage rates should rise.

Of all the economic data hitting the wires this week, the only one of major importance is the Producer Price Index — a “Cost of Living” reading for American businesses.

Normally, we’d pay attention to the inflation-predicting PPI because inflation causes mortgage rates to rise. This month, however, we’re ignoring it. Oil prices have fallen 20-plus percent since July highs and the PPI reading from last month doesn’t reflect the “current marketplace”.

So, in the absence of hard data, mortgage rates should move with momentum this week. To follow along at home, keep your eyes on Bloomberg and stay close to your loan officer.

It’s during weeks like this that rates can really move.