Economic Headlines

2-15-2008 Are Mortgage Rates Going Higher?

Well as information in the main article below says, mortgage rates are tied to the Bond market not directly to what the stock market or the Fed are doing. I just received this information from Jeff Furr (loan officer with Myers Park Mortgage). He often fowards me reports that he received from Daily Market Update written by Barry Habib. Here is the jist of today's report.

The main report below showed with arrows how the when the stock market goes down, the bond market usually goes up. This drives the mortgage rates down. Here is what Barry Habib says today, "Very often we see Bonds and STocks trad in opposite directions. But yesterday both traded sharply lower because of Inflation, which both Stocks and Bonds hate...We are now seeing the Bond Market that has sobered up to the idea that Inflation is a very real threat and future Fed cuts could fan the inflationary flames higher. The media has not grabbed onto this as they are still talking about how mortgage rates have shot lower due to the Fed cuts, meanwhile we have been getting re-prices for the worse on a daily basis for the past couple of weeks." (Note from Sara: Media gets it wrong - again! The Fed cuts do not affect most mortgage rates.)

Habib goes on to say, "Also pressuring both Stocks and Bonds lower was news late yesterday that Moody's, a credit rating agency, downgraded FGIC, one of the largest bond insurers...the downgrades of the Bond insurers also threaten the ratings of the Bonds they insure. If the added saftey from insurance on Bonds is in doubt, the yield typically increases to compensate investors for the additional risk."

I will try to keep an eye on what is happening and keep you informed. The Bon Market closes at 2 p.m. ET today and will be closed on Monday in observance of Presidents Day. The next report will not come out until Tuesday.

Stimulus Plan

Much is being said about the stimulus package meant to stimulate the economy. This one some of you will remember from the old "School House Rock". Enjoy the memories about how a bill becomes a law. School House Rock

Thurs. 1/24/08 Update

Here is an example of what I mentioned in the report below. The Mortgage Xsites report this morning states that the bond market dropped significantly yesterday with large sell offs as the stock market rallied. Funds moved back from the Bond market to the Stock market. My mortgage friend, Jeff Furr said that the mortgage rates changed 3 times yesterday from the 5.125% on a prime 30 fixed mortgage that was reported at 11 a.m. Jeff says, "This was one of the most volatile days I have ever seen in mortgage interest rates."

What do all these headlines mean for you!

Federal Reserve Lowers funds rate 75 basis points!

As a REALTOR, I often hear people get all excited about the drop in the Feds prime rate. Many people believe that this drop in the Prime will automatically cause a drop in the mortgage rates. This is just not true. Yes, if you have an adjustable rate that is tied to the prime rate, your rate will drop. But most adjustable rates that are on First Mortgages, are not are based on the Prime. Now there are some home equity lines, like the one that I used to have with Bank of America, that are adjustable at Prime plus a point or so. This type of rate will drop because of the Feds actions. There are also some credit card rates that are adjustable tied to the Prime and they will drop. The fixed rates for getting a new loan, are definitely NOT tied to the Prime Rate.
The Federal Open Market Committee according to its statement “took this action in view of a weakening of the economic outlook and increasing downside risks to growth…broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households…The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.” The Committee also mentions indications of a deepening of the housing contraction as well as the “softening” of the labor markets as an additional reason for their quick action.
These are moves to hopefully help the banking industry and the overall economy. This means that banks can borrow money at a lower interest rate. But the banks are reporting severe cuts in their net incomes ("2nd UPDATE: Bank Of America Net Plunges 95% On Credit Woes" at 12:05 p.m. EST, 1/22/2008; “On 1/22/2008, WB (Wachovia Corp) reported full year 2007 earnings of $3.34 per share. This result …missed last year's results by -28.9%.”Reported on Scottrade). This cut in the banks borrowing rate, in itself will not cause them to pass on this savings.

Stocks traded at the worst levels since January 2000!

The stock market on Tuesday, January 22, 2008 did at one point trade at the worst levels since January 2000 according to the Daily Market Update, written by Barry Habib. He goes on to report that the “mornings stock selloff has caused Mortgage Bonds rally higher with prices at the best levels since June 2005!” This is good news. I have been studying this for several years and watching the figures and talking with loan officers. This is what I have learned:

While the Feds Prime Rate, has little affect on the mortgage rates, the stock market and the bond markets do greatly affect the mortgage rates. This is an
interesting study. When the stock market is doing badly and Dow drops, the interest rates also drop. I told a client last spring that I have quite a dilemma. I want my stocks to go up, but when they do, people are not as enthusiastic about buying houses. Most REALTORS prefer the lower mortgage rates that come when the stock market is in decline. Tied to this is the fact that when the stock market is down, the bond market is up. It looks something like this:

Add to these interesting facts, the LIBOR which was at 5.15% a few weeks ago, is now at 3.75%. This is also good for many mortgage rates. Some adjustable rates are tied to the LIBOR so when it is down, the interest rates on those loans are also down.

Interest rates for a 30 year fixed with an average loan amount of $175,000 and a credit score of 680 on Friday, January 18th were 5.625% , rates on Tuesday, January 22 were 5.375% and rates on the same mortgage today (1/23/08) are 5.125% . These rates will be affected by the loan amount and the credit score. Lower interest rates are always good for the housing market. (These rates are from Jeff Furr with Myers Park Mortgage. 704-971-6140)

Treasury Secretary moves for an economic stimulus package by Spring!

Treasury Secretary Hank Paulson on Tuesday, January 22, was also in the news saying that he, and his team at the US Treasury, has been monitoring the global sell-off in stocks. Perhaps in an effort to stem the global panic selling that has been taking place and to restore confidence in the US economy, Paulson said he will move to carry out an economic stimulus plan ”as soon as possible.” Paulson state he is optimistic a plan can be implemented with Congressional approval “long before winter turns to spring.” There are a lot of mixed reactions from those who study the financial markets on whether this will really help to keep us out of a recession or at least lesson the severity of the recession.

What does this mean for the Charlotte Metrolina Real Estate Market?

It is difficult to say for certain how all these factors will affect our market, but we can draw some conclusions. For one, if the stock market continues to be shaky, then the interest rate will continue to be lower than we saw most of last year. What does that mean? If you want to pay $1200 per month for your basic Principle and Interest (this does not include the escrow for taxes and insurance) on a 30 year fixed loan with your interest rate at 6%, you could take out a loan of about $200,000. With a 95% loan to value that would mean that you could buy a new house costing about $211,000. The same monthly amount and loan criteria with an interest rate of 5%, you could get a loan amount of $223,600 which is 95% of a $235,300 (approximately) house. That is considerably more house for the same payment.

Let’s look at another problem that we have all been reading about for the last many months. That is the failures of the mortgage industry due to foreclosures on the sub-prime financed home. The credit score requirements for a basic prime loan was based on a credit score of about 620 even into early 2007. For several years now, a person could get a loan with just about any credit score. But usually if the credit score was below 620, they had to go to a “sub-prime” loan which had a higher interest rate. Many of these loans have failed. Several reasons probably account for this. For instance, the habits that created the low credit score could have continued and when added to the high interest rate and larger payments, the borrower was unable to keep up with the payments. Now if you add to this an adjustable rate mortgage where the borrower qualified at the lower interest rate, when the payments go up, there is little hope making ends meet. Yes, there are tax advantages to owning your own home, but there are also expenses that many people do not take into consideration.

To help deal with this problem, lenders have raised the credit score that is required for getting a “prime” loan, which has the best interest rate, from 620 up to 640 a few months ago and now as of today a credit score of 680. This along with almost-complete shutdown of the sub-prime credit market, has reduced the number of buyers who will qualify to purchase a home. This would look really bad for the market until you figure that more people will be needing to rent, so investors from areas where property values are dropping, are looking to our market for investment properties. Exactly how this will affect the housing prices here is yet to be seen, but the statistics at the end of 2007 still show a good appreciation over the 2006 figures. (Check out Metrolina Statistics)

(HINT: If you want to buy, work to keep your credit score as high as possible. For tips go to Newsletter and read the entry entitled “Raising Your Credit Score”)

Something else that will affect the Charlotte Metrolina market will be an increase in foreclosure listing. So far, I am not seeing a great number of foreclosures but I have noticed an increase in what are called “Short Sales”. These are where an owner, in an attempt to keep from being foreclosed on, makes an agreement with their lender to allow the house to be sold for below the usual market value and in most cases even below what is owed to the lender. This is especially prevalent in newer construction. These provide good buys, though the lenders can be difficult to work with at times. Most investors are looking for foreclosures or short sale properties. The short sales may hold down the sale prices of the neighborhood that they are in, but not as much as having a foreclosed property sitting for months unoccupied while the lender works out the foreclosure process and gets the house on the market.

As I mentioned, there has been an increase in investor interest in the Southeast in recent weeks. If this continues, it may increase the demand on homes in our area, thus stimulating an increase in home prices. While areas like New York, California, and Florida were seeing double digit home price increases, Charlotte home prices maintained a slow but steady rise. As a result, when the crash occurred in the fast rising areas, Charlotte continued on its slow, steady increase. Now we are a better value than many other areas of the country. If the investors can come in and pick up the slack from buyers who don’t qualify to buy, prices will continue up. By the way, if you have ever been interested in investing and have the credit to do it, this is a great time to put your money into real estate. (The stock market isn’t looking promising.)

Additional Interesting Facts:

Here are some other interesting facts to take into consideration about past recessions compared to today’s situation. These facts are again from Barry Habib’s Daily Market Update. but I have added some notes in places.

Prior to this year, the worst start over its first 13 trading days for the S&P 500 since 1950 was a 5.9% loss at the beginning of 1982. The first 13 trading days of 2008 (i.e., through last Friday 1/18/08) have lost 9.8%. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market (source: BTN Research).

NOTE

The low point of the S&P 500 during the recession of 2001 occurred on 9/21/01. In the 6-months that followed the bottom (to 3/21/02), the S&P 500 gained +20.4% on a total return basis (source: BTN Research).

The earning of the S&P500 companies are projected to grow +16.1% during 2008 over their 2007 levels (source: Thomson Financial, USA Today).

NOTE

The bond market historically has lower yields on treasury debt during a recession, i.e., the Fed lowers short-term interest rates to stimulate the economy and the treasury yields drop accordingly. The yield on the 10-year Treasury note as of 1/18/2008 (3.64%) is already lower than the lowest yield on the 10-year note (4.22%) during the last US recession, an 8-month downturn that ended on 11/30/01 (source: Treasury Department).

34% of the subprime adjustable rate mortgages that are in the foreclosure process nationwide are located in either California or Florida (source: Mortgage Bankers Association).

Note

Metrolina Statistics

The consumer price index was up +4.1% in 2007. In the last 25 years (1983-2007), there have been only 4 years (1987-90) when inflation was greater than +4.1%. The consumer price index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies (source: Department of Labor).

The average cost of 1-night in a semiprivate room in a Midwestern hospital (not counting doctor’s services) has soared from $809 in 1987 to $5,504 in 2007, an increase of +10.1% per year over the 2 decades. Inflation in the USA, as computed by the CPI, has increased by +3.0% per year over the same 20 years. (source: Medical Mutual of Ohio, Wall Street Journal, and Department of Labor).

Moody’s issued a warning on 1/10/08 to the United States regarding their AAA-rating on government-issued bonds. US debt, which has carried the top credit rating from Moody’s since 1917, was warned to cut back o Medicare, Medicaid and Social Security expenses over the next 10 years. Those 3 programs will consume 42% of all government spending in the current fiscal year (source: Financial Times, White House).

I hope that this information has been helpful and interesting to you. I am not a prophet so I do not know if we are heading into a recession or not. I do know that Psalm 23 is always a comfort for a believer.