There is no such thing as a "national real estate market".
Real estate is local.
We know this is true because even cities don't have their own real estate market.
This chart shows how home prices have diverged across adjacent zip codes over the last 12 months.
Some influencing factors:
Stories about "The U.S. Real Estate Market" are irrelevant. In each city in America -- and on a street by street level -- real estate markets can be vastly different.
(Image courtesy: Wall Street Journal)
Posted on March 14, 2008
Mortgage rates were up last week on weak housing data and a growing nervousness about mortgage bond quality.
Rates would have been up more if not for a tame inflation reading Friday.
The Personal Consumption Expenditures report fell Friday to 2.0% year-over-year, putting it back within the Federal Reserve's comfort zone of 1-2 percent.
PCE is the Fed's preferred inflation gauge and with inflation in check, Ben Bernanke & Co. can focus on other elements of the economy such as housing and employment.
Mortgage rates figure to be volatile (again) this week.
The first major event to strike markets is today's release of a 200-page, government-written plan outlining sweeping reforms for the financial industry.
If markets interpret the government's plan to be bad for bond markets, expect mortgage rates to rise as demand for bonds falls. Conversely, if the reforms are expected to benefit bonds, mortgage rates should fall.
Then, Wednesday, Fed Chairman Ben Bernanke testifies to Congress about the U.S. economy.
Expect the Fed Chief to stay on message, but mortgage rates will respond to his word choice and tone -- especially in remarks about large banks and their ability to survive the current market. Traders are already on edge and will take Bernanke's testimony very seriously.
And lastly, also moving markets this week is the March jobs report, due Friday.
Remember that job growth was negative in January and February so with a third negative month in March, the calls of recession will grow louder; the expectation is the economy shed 40,000 jobs last month. Whether a negative number will be good or bad for mortgage rates, though, will depend on the bond traders' mood come Friday morning.
Either way, though, if the actual jobs number deviates from the expected jobs number of 40,000, mortgage rates will swing wildly starting at market open Friday and continuing into the weekend.
(Image courtesy: The New York Times)
Posted on March 31, 2008
When mortgage rates change rapidly, it's a fiscal challenge to shop for a home and/or home loan.
Lately, mortgage rates have been especially volatile, mirroring the wild moves of the stock market.
Here's how up-and-down stock markets have been in 2008: Through last week, the S&P 500 Index changed more than 1 percent per day on 28 separate days.
This represents 52 percent of all trading days and is the most volatile measurement since 1938.
Mortgage financing is impacted by stock market changes because when money flows into stocks, it tends to come from bond markets. And, when money leaves stocks, it tends to "gets parked" in bond markets.
Because mortgage bonds set mortgage rates, you can understand how stock market volatility can make it difficult to predict what home loan payments might look like.
Volatility is expected to continue for the next several quarters so if you see a mortgage rate you like today, consider locking it right away -- it probably won't last long.
Source U.S. Stock Volatility Climbs to Highest in 70 Years, S&P Says Jeff Kearns Bloomberg, March 20, 2008 http://www.bloomberg.com/apps/news?pid=20601213&sid=av840GLwE4UA&refer=home
Posted on March 28, 2008
Each month, the Commerce Department and the National Association of REALTORS® release national housing data.
The former's release is called the New Residential Sales report and the latter's is called the Existing Home Sales report.
Both reports highlight the "median sales price", the point at which half of the homes in the U.S. sold for more, and half sold for less.
Last month, the median sales prices were as follows:
The very definition of "median", however, males this data point useless for national housing statistics.
If a large amount of homes are sold in regions where home prices are traditionally high, the median sales price will trend higher.
If a large amount of homes are sold in regions where home prices are traditionally low, the median sales price will trend lower.
Again, all that the median sales price tells us is the price point at which half the homes in the country sold for more, and half sold for less.
Real estate is a local phenomenon and so grouping the entire country's supply of homes together makes little sense. A home in San Francisco has little to do with a home in Omaha.
To get a true gauge of your local market, talk to a real estate agent that knows the local market well. You'll not only get meaningful statistics about a neighborhood, but you'll get good insights, too.
Posted on March 27, 2008
Consumer Confidence fell to its lowest point in three years and anybody who watches the evening news can understand why.
Each day, news programs barrage Americans with tales of economic woe and American Opinion is largely shaped by the media.
After enough time, the reporting becomes a self-fulfilling prophecy.
But, in the Consumer Confidence report, there was a choice piece of data that isn't getting reported by the news programs and it's a rather important piece.
Although fewer consumers expect to buy automobiles and appliances over the next six months, those with plans to buy homes is actually higher by 14 percent.
In other words, despite weakening confidence in the economy, an increasing number of Americans are planning to buy homes this season and next.
Consumers may be motivated to buy this year by a number of factors:
Regardless, the media is choosing to ignore this part of the story. Instead, the news programs are focusing on the negatives -- just look at the headlines.
It's no wonder that confidence is down -- bad news is all the American Public tends to hear.
Posted on March 26, 2008
Each quarter, the Census Bureau releases the Homeowner Vacancy Rate, a housing statistic the measures the percentage of homes for sale that are vacant.
A home listed for sale may be vacant for several reasons including:
In Q4 2007, the Homeowner Vacancy Rate matched its all-time high of 2.8 percent.
The statistic can be misleading, however, because Homeowner Vacancy Rates appear to be seasonal and the fourth quarter is more prone to high figures.
As evidence: In 6 of the last 7 years, Q4 posted higher vacancy rates than for the preceding three quarters.
Vacancy rates may increase in the fall because homesellers without a "need" to sell tend to take their properties off the market during the Holiday Season. That leaves an over-weighting of empty homes for sale -- precisely what the Homeowner Vacancy Rate measures.
For an interactive version of the chart above, visit the Wall Street Journal Online.
SourceHousing Markets: A Vacant LookThe Wall Street Journal OnlineMarch 21, 2008http://online.wsj.com/public/resources/documents/retro-VACANCY08.html
Posted on March 25, 2008
Conforming mortgage rates edged slightly lower for the second week in a row.
Mortgage rates fell for two main reasons:
These two actions combined to make mortgage-backed securities safer for mortgage bond investors and when mortgage bonds are safer, their required rate of return (i.e. interest rate) comes down.
This is the financial concept of Risk vs. Reward in action.
Expect mortgage rates to be in flux and highly volatile again this week, however.
Aside from housing and consumer confidence data, markets will respond to Friday's Personal Consumption Expenditures data. PCE is a "Cost of Living" index that the Federal Reserve watches very closely.
PCE is different from other Cost of Living indices because it accounts for "substitutes". For example, if beef is getting too expensive, PCE will substitute chicken -- much like a regular person would.
In this way, PCE better reflects the true cost of living for the average American.
PCE is expected to show 2 percent growth year-over-year. If the actual figure is higher, expect mortgage rates to rise on inflation concerns.
Posted on March 24, 2008
Since December 2007, mortgage lending guidelines have changed very quickly and often without notice.
Some of the more well-known changes include:
Some of the lesser-known restrictions relate to property type and occupancy status as well as debt-to-income levels and mortgage payment histories.
Because of the number of changes and their collective scope, home buyers should be prudent and get re-pre-approved for their home loan.
Even if you last spoke with your loan officer four weeks ago, it's important to know how market changes could ultimately impact your home loan approval.
The market really is that different. Talk to your loan officer about a re-pre-approval today.
Posted on March 20, 2008
The Fed lowered the Fed Funds Rate by 0.750% to 2.250% yesterday.
Because it is tied to the Fed Funds Rate, Prime Rate also fell by 0.750% yesterday. Prime Rate is now to 5.250%.
Holders of home equity lines of credit and credit card debt benefited from the change and will see lower interest costs in next month's statements.
Mortgage rate shoppers didn't.
In the statement above -- as explained by The Wall Street Journal -- the Fed expresses a growing concern of inflation from rising commodity prices such as oil. In part, this caused the mortgage bond market to sell off immediately following the press release's issue.
Mortgage rates rose close to a quarter-percent yesterday.
The Federal Open Market Committee's statement leaves the possibility of future Fed Funds Rate cuts open. The FOMC's next scheduled meeting is a two-day affair April 29-30, 2008.
SourceParsing the Fed StatementThe Wall Street Journal OnlineMarch 18, 2008http://online.wsj.com/internal/mdc/info-fedparse0803.html
Posted on March 19, 2008
When mortgages began to sour last Fall, Fannie Mae and Freddie Mac instituted "loan-level pricing adjustments".
The concept is basic: For mortgage applicants with less-than-ideal credit profiles, mortgage pricing is adjusted to compensate for the added risks.
It's still a conforming loan, but with adjustments.
Effective March 6, though, Fannie and Freddie's definition of "high-risk" changed and the adjustments got much more expensive.
Some of the more impactful changes include:
If your mortgage application is a conforming loan destined for Fannie Mae or Freddie Mac, these adjustments may already be on your loan officer's rate sheets but be sure to ask.
If the adjustments are built-in yet, consider whether your should lock your mortgage rate right away.
So, even though mortgage rates fell Wednesday, new Loan-Level Pricing Adjustments pushed the underlying payment higher for a lot of Americans.
Posted on March 13, 2008
The Unemployment Rate fell to 4.8 percent in February.
This is 0.1% lower than from January and that's confusing to a lot of people; it's been highly publicized that U.S. companies shed 63,000 jobs last month.
Americans are losing jobs at the same time that the Unemployment Rate is falling. Seem strange?
Well, it's possible because the Unemployment Rate measures workers unemployed versus workers in the workforce.
The "jobs number", by contrast, measures active workers collecting actual paychecks.
So, when the government reported that Unemployment Rates fell in February, it happened because the "workforce" figure used to calculate the unemployment was 644,000 less than the workforce figure from January.
644,000 people have left the workforce entirely. This not only includes those retiring, but the government specifically excludes Americans from the workforce that:
And that's why the Unemployment Rate fell in February even as companies were laying off workers -- the total workforce size was reduced by more than the total number of jobs lost.
On paper, it looks like the jobs market may be improving but after a closer look, the opposite may be true.
Similar to mortgage-related stories, there is always more to know than just the headline -- you have to dig deeper to find out what the news really means and how it applies to you.
Gasoline prices reached an all-time, inflation-adjusted high yesterday, averaging $3.23 per gallon nationwide.
According to GasBuddy.com, this represents a 25% increase in the last 12 months.
Higher gas prices are leaving Americans with fewer discretionary dollars to spend and that is playing a role in the U.S. economy's slowdown. It's one reason why mortgage rates have stayed low despite steady upside pressure from inflation.
High gas prices are also a reason why Thursday's Retail Sales data will be closely watched; markets will gain insight into whether Americans are cutting back on personal spending because of rising energy costs.
Retail Sales are expected to have risen by a slight 0.1%. If the actual number is lower, mortgage rates should fall on recession fears. If it's higher, rates should rise.
(Image courtesy: GasBuddy.com)
Posted on March 11, 2008
Between Tuesday and Thursday, mortgage rates rose as much as during any three-day period in recent memory before settling back a bit on Friday's jobs data.
Fourteen speeches from members of the Federal Reserve were partly to blame for the mortgage rate chaos, but several other factors played a part, too.
One of the biggest other factors last week was that multiple big-name investors were "margin-called".
Now, margin is a basic financial concept, but to do a good job explaining it requires a lot of numbers and math. So -- if you're curious -- visit Wikipedia for the complete run-down.
Or, just know that last week's margin calls forced the investors to sell ther mortgage bond holdings into a falling mortgage bond market. This accelerated the mortgage bond markets freefall for home buyers and rateshoppers alike.
The extra supply from the margin calls created a stronger push downward on mortgage bond prices than markets would have seen without the margin calls.
This, of course, caused mortgage rates to rise faster than they would have without the margin calls, too.
Only after February's weak job numbers were reported Friday did mortgage rates recover. Overall, rates were higher on the week and -- at one point Thursday -- touched their highest levels in several months.
This week will be fairly light on data and lacking of Federal Reserve speakers. Therefore, watch for momentum trading to take hold.
The two data points to watch this week are:
Both are reasonable gauges of inflation in the U.S. economy and both are expected to show slowing from their previous readings. Strength will be interpreted as inflationary and should cause mortgage rates to rise.
Posted on March 10, 2008
"Foreclosure" is the legal process by which a bank repossesses a home from a borrower and, according to RealtyTrac, 1 out of every 100 homes were in some stage of the foreclosure process in 2007.
This figure is astounding because foreclosure is expensive to both homeowners and banks. Both parties have an interest in avoiding foreclosure but the process has to start with the homeowner -- banks are just too big to start it themselves.
Every mortgage statement has a 1-800 phone number on it. If you're about to fall behind on your mortgage payments, make a phone call first. When you call the toll-free number, a customer service representative talk about your repayment options, or help you design a work-out plan to get your mortgage back to current.
Banks know that more than 80 percent of all foreclosures result from one of the following:
These are life events that draw compassion from banks. They understand that bad things can happen to people.
However, the other 20 percent of foreclosures are the result of an inability to sell, an unwillingness to pay, and budget mismanagement. These reasons are not as acceptable to the banks.
But when a homeowner fails to forewarn his lender of a missed payment, the lender assumes the worst. It puts the homeowner in the 20 percent category. This makes a work-out plan much less likely and can quickly lead to foreclosure and a loss of the home.
Lenders want to avoid foreclosure as much as homeowners do. If you're a homeowner and you're facing trouble with your mortgage payment, give your lender a call in advance and try to work it out.
If you never call, you can't possibly get help.
(Image courtesy: Countrywide Financial)
Posted on March 07, 2008
One of the most popular questions that home buyers ask real estate and mortgage professionals is "How much home can I afford?"
It's a normal question to ask, but it's not the most effective way to plan your finances.
Banks will almost always approve you for a home loan in excess of your household budget.
The more appropriate question is: "How much do I want to spend on housing each month?"
By focusing on a home's payment instead of its list price, home buyers exert more control over their short- and long-term financial goals. List price is only one piece of the monthly payment puzzle.
The cost of owning a home month-after-month is the sum of multiple expenses:
In other words, because monthly payments are combination of costs, buying a home based on its list price does very little to help plan a budget. A home selling for $300,000, for example, may cost a homeowner anywhere from $1,800 to $3,000 monthly.
This is why "How much do I want to spend on housing each month?" is a better starting point than "How much home can I afford?".
Home affordability comes from more than just the list price.
Posted on March 06, 2008
With Friday's jobs report looming, mortgage markets are especially skittish about whether the economy is in a recession, or facing inflation.
Four Fed speakers Tuesday did little to quell the debate:
Four speeches, four different perspectives.
The speakers' mixed messages confused market participants and, as a result, mortgage rates varied wildly from hour to hour.
The confusion was so great that several mortgage lenders had to shut down their rate lock desks on three separate occasions Tuesday to re-price rates to the "new" market.
That's a highly unusual occurrence and the market's volatility underscored the uneasiness exiting in mortgage markets lately. Without a clear picture of where the economy is headed, investors are left to guess (and they're not very sure of themselves).
Friday's job report may add some clarity, but until Friday comes, consider locking a mortgage rate if you see one you like -- it probably won't stick around for very long.
Posted on March 05, 2008
After briefly exceeding its all-time high, oil closed Monday at $102.45.
Rising energy costs can lead to inflation because American Business eventually passes on its higher costs to American Consumers.
When consumers have to spend more money for the same amount of product, it's called "inflation".
Another way to look at inflation is like an erosion in the value of a dollar.
The presence of inflation causes mortgage rates to rise because mortgage debts are repaid in dollars. If those dollars are losing their value, the rates tied to those debts have to increase to "cancel out" the erosion.
This is why mortgage rates spiked Monday. As oil prices rose, the fear of inflation grew larger.
Over the next few weeks, expect mortgage rates to be highly sensitive to oil prices. As oil prices rise, mortgage rates should, too. As oil prices fall, mortgage rates should follow.
(Image courtesy: New York Times)
Posted on March 04, 2008
Mortgage rates edged lower last week but it was another wild ride. Market players continue to deal with competing economic forecasts.
When the economy shows signs of brightness -- like it did Monday and Tuesday -- mortgage rates tend to rise.
This is because markets are currently equating growth with inflation and inflation pressures mortgage rates higher.
But when the economy shows signs of darkness -- like it did Wednesday, Thursday and Friday -- mortgage rates tend to fall. The sudden absence of inflation reverses the upward pressure and mortgage rates adjust downward.
The major reversal last week started with Federal Reserve Chairman Ben Bernanke's testimony to Congress.
The chairman made three important points, and repeated them throughout his two-day affair.
Chairman Bernanke implied that the Federal Open Market Committee will stimulate the economy as needed at its next meeting, March 18.
Markets are anticipating another half-point drop in the Fed Funds Rate.
This week, there are 14 separate speeches being made by various members of the Federal Reserve.
Markets will react any deviations in these remarks as they relate to Bernanke's testimony. Mortgage rates will move accordingly. Fewer worries of recession will prop mortgage rates up; Fewer worries of inflation will pull rates down.
Also hitting the wires this week is February's jobs report.
This is a major market mover because employment is closely tied to spending which is closely tied to economic growth.
Posted on March 03, 2008