Friday, September 25, 2009

Mortgage rate update--the deal of a lifetime

Rates on 30-year fixed rate mortgages are only 0.5% above their all-time lows, and the Fed recently reiterated its intention to buy another $700 billion of agency and mortgage-backed securities over the next six months. (They've already bought about $800 billion this year, and plan to buy up to $1.45 trillion by March of next year.) Whether Fed purchases of MBS are causing borrowing rates to be lower than they otherwise might be is an issue over which reasonable men can disagree (I don't think they do, but there are many who would disagree with me). Regardless, the Fed's actions promise to ensure that there will be no shortage of money available for those wanting to finance the purchase of a home at historically low interest rates, at a time when prices in many areas of the country are sharply lower.

If this isn't nirvana for homebuyers, I don't know what is. Interest rates are virtually at rock-bottom lows, money is plentiful*, and prices in many areas are back to levels we haven't seen for over six years, according to the Case-Shiller home price indices.

Yet many people are still worried about a coming wave of foreclosures. I don't get it. I think the public is smart enough to figure out that we have the makings here of the deal of a lifetime. It's not at all surprising to hear of bidding wars for foreclosed properties. And it's not surprising that homebuilders' stocks have more than doubled from their lows, and that existing home sales have risen to a 2-year high.

* Jumbo mortgages are not as easy to get these days as they used to be, because banks are requiring down payments of up to 30%. But if you can meet the down payment requirement, you should have no trouble getting a loan.

UPDATE: This is completely anecdotal, but very interesting: On Friday I spoke with a good friend who is one of the heads of a well-known design/construction firm specializing in remodels in the San Gabriel Valley, and he mentioned that his business turned up significantly starting about 8 weeks ago. A lot of customers had put things on hold last year due to all the uncertainty, but now with the economy doing a little better and the market up, people are reconsidering. Business had brightened so much, in fact, that he had just rehired the two architects he laid off last year.


Public Library said...

You know what they say about "too good to be true"

MW said...

"...another $700 billion of mortgage-backed securities over the next six months."

IIRC, they're buying 1.25tn of MBS and 200bn of Agencies, so your numbers would be slightly out.

Bill said...


Isn't the problem that many of these loans have "teaser" rates or did not require the repayment of principal for several years. Once those terms change, the borrower faces much higher monthly payments and then tries to refinance at these historic low rates but finds that he can't because the balance of the loan exceeds its fair market value?

Scott Grannis said...

MW: Thanks for the correction. It's not an egregious mistake, though, since the 200 billion of Agency debt supports the mortgage market indirectly.

Scott Grannis said...

Bill: I don't think you'll find many teaser rate loans these days. My understanding is that the vast majority of new loans are of the conforming variety and are being underwritten by the FHA with down payments of only 3.5%. If prices fall further, this will be a problem. But if prices are bottoming (as seems to be the case), then the buyers will be in good shape.

CFP, EA said...


Don't forget that this is also nirvana for homeowners/homebuyers looking to protect themselves from possible inflation in future years.

Real estate tends to track inflation over time, so a home is a great medium term inflation hedge. But an equally - if not better hedge - is the 30-year fixed mortgage, which, as you mention, is near all-time lows. Given that mortgage payments are often in the ball park of 20-25% of many people's budget, a 30-fixed immediately insulates that portion of their budget against inflation. Indeed, if inflation hits, either your salary or your investments through higher interest rate should increase proportionally while your mortgage payment stays fixed, thus allowing you to actually gain from inflation.

Many people try to protect themselves from inflation through TIPs and other investments. While that's fine and they do work, most people simply don't have large enough portfolios to hold that much money in TIPS - especially given that they shouldn't put all of their money in one basket. For your average family - and really for everyone other than very wealthy - their best protection against inflation is literally right under their feet (plus the mortgage). And now is likely the best chance in a generation to get that protection.

Scott Grannis said...

CFP: Thanks for expanding on and clarifying my assertion that this all represents the deal of a lifetime.

Cabodog said...


Another factor in support of existing home prices is replacement value.

While the cost of labor and materials required to build a home have fallen, the cost to develop new land -- especially System Development Charges paid to municipalities -- has not fallen by much. In many cases, local municipalities have raised SDCs by applying the misguided logic of "our overhead is now spread over fewer development permits, therefore, we must raise SDC (and other) fees."

I doubt if many builders today can develop land, build a structure and turn a profit for what many homes are selling for today.

With few homes being built, eventually supply and demand will equalize and prices will reverse direction. California has always exhibited a boom/bust scenario with regard to housing and I fail to see any difference this time. In the near future, I expect to begin hearing about shortages of available housing for sale.

Public Library said...

"By the end of the year the federal government will stand behind 59% of the mortgage market, says Edward Pinto, an industry consultant, more than double its exposure after similar interventions during the Depression (see chart).

True, its share of the market was not much lower in 2003. But since then property values have tumbled and the average loan now stands at 90% of the home’s value, up from 66% then.

Mr Pinto predicts that the federal government will sustain $300 billion in credit losses on mortgage loans between now and 2012, and that the FHA will need a bailout.

The agency dismisses such talk but concedes that its reserves are about to fall below its statutory minimum.

Apart from their direct costs, loan guarantees have other damaging effects. Michael Pomerleano, an economist who studied their use in the wake of the 1997-98 Asian crisis, says they lessen pressure on banks to dispose of bad assets.

America’s growing entanglement with the mortgage market also risks aggravating overinvestment in housing. The government should explain how it will withdraw its support before another crisis germinates."

Cabodog said...

California: 4.3 month inventory, down from 7 months a year ago.

With the only "new" product coming onto the market being foreclosures (not new construction), where are prices headed in the next 12-36 months once the supply of foreclosed properties dries up?

Scott, this only goes to confirm your thesis of the "deal of a lifetime."

“The statewide median price rose for the sixth consecutive month in August,” said C.A.R. Vice President and Chief Economist Leslie-Appleton-Young. “Recent price gains are consistent with the low inventory levels of the past few months. Levels of distressed properties remain high, but have declined compared with earlier in the year, and are one reason why inventory levels are running below the state’s long-run average of 7.2 months.

Scott Grannis said...

Public: no doubt the government's support of the housing market will create difficulties of some form down the road. But for now I think such meddling is overwhelmed by the larger story of a recovering economy. And to the extent the economy recovers and housing prices turn up, the issue of the loan guarantees will fade in importance. Until the next crash, of course, but that could be many years in the future.

Scott Grannis said...

Cabodog: Good points, this dovetails with the update I just added to the post. Things are looking much better here in So. California.