Mortgage/Real Estate Market Remains Strong September, 2004 By Jim Woodard Despite mortgage rates creeping slowly upward, sometimes fluctuating up and down, new and existing homes sales have both shown incredible resilience, according to a report from The Meyers Group, a noted real estate consulting firm. The key reason is probably that homebuyers want to obtain the most affordable financing possible before rates begin their inevitable rise in future months, the report stated. While home sales may moderate from peak levels during the second half of this year, they will likely remain historically high. That should equate to this year being another record breaking year for the housing industry. The median price of a new home, nationally, is now about $210,000. But that varies tremendously from market to market. The median is several million dollars in some super high priced markets, like Beverly Hills, Calif. and Aspen, Colo. Rising prices of existing homes have had a substantial impact on affordability. Today, only about 47 percent of households (nationally) can afford a median priced home financed with a conventional fixed-rate mortgage. It’s the first time in nearly four years existing home affordability has dropped below 50 percent, and it’s possible for this to become a trend as mortgage rates rise later this year, the Meyers report said. * * * Market Activity Surprises Experts The mortgage market has been much stronger this summer than was expected during the spring. The average interest rate has held to a level a bit under 6 percent for a 30-year, fixed-rate mortgage (5.75 percent at this writing). That surprised analysts at the Mortgage Bankers Association. “The market is doing better than we expected,” said Jay Brinkmann, with the Mortgage Bankers Association. “We had been thinking there would be sort of a peaking in purchase activity and that new home starts would recede back to where we thought would be a more normal level.” Total existing home sales during the second quarter of this year reached the highest pace on record, according to the National Association of Realtors. Sales rose by double-digit rates in 34 states, compared to the same quarter of last year. * * * Refi Mortgage Applications Up Today’s low mortgage interest rates are creating something of a renewed boom in refinance applications. “The jump in refinance loans comes after a fairly steady drop in rates over the last month,” said. MBA’s Jay Brinkmann. “More importantly, rates are now about half of a percentage point below where they were this time last year, creating a refinance incentive for many borrowers who have taken out home loans since the middle of last summer.” The refinance share of mortgage activity has increased to nearly 41 percent of total application. Adjustable-rate mortgages (ARMs) account for 33 percent of total mortgages, it was reported by MBA. The average interest rate for 30-year, fixed-rate mortgages has dropped to 5.8 percent. Economists now expect the Federal Reserve to boost its target overnight lending rate to at least 2 percent by the end of this year, up from the current 1.5 percent. That would be the highest level since 2001. * * * Consumers Benefiting from Low Interest Rates Positive developments are taking place in the home mortgage field, and they’re directly benefiting homeowners and home buyers. Mortgage interest rates have been declining in recent weeks. The average rate as of Sept. 1 is down to 5.75 percent for a 30-year, fixed-rate mortgage. And, of course, the rates for 15-year loans and adjustable rate mortgages (ARMs) are substantially lower than that. Hybrids, combinations of above features, are also available at low rates and are increasing in popularity. Today’s rates are near the historically lowest level. For the sake of comparison, the average 30-year rate in August, 1996, was 8.06 percent. In August, 1990, it was 9.98 percent. The current low rate is primarily driven by a generally healthy economy, a low rate of inflation, and rising consumer confidence. It is motivating more people to apply for a mortgage now, before the rates again start to rise. Most analysts predict increasing rates in future months, probably rising to about 6.5 percent by the end of the year. “Most of our recent applicants are well aware of the current `window of opportunity’ to obtain a low interest mortgage, and they’re taking advantage of it,” said Michael Levy, president-CEO of Home Savings Mortgage, a multi-office mortgage banking firm in California. * * * Good News in Mortgage Market There are two major “good news” factors in today’s mortgage market, viewed from the consumers’ perspective. First, interest rates are still down to near historic low levels. Second, there is an increasing number of special mortgage plans to meet the needs and financial capabilities of individual borrowers. The special plans are structured and offered by major mortgage funding organizations, such as Fannie Mae and Freddie Mac, and by key mortgage-related firms. A recent example is a plan called SingleFile, introduced on August 19. It’s designed especially for home buyers with little cash for a down payment but who have an exceptionally good credit record, with a credit score above 700. Applicants also need a total monthly household installment debt-to-income ration no higher than 45 percent. The plan is structured by Mortgage Guaranty Insurance Corporation (MGIC), a major mortgage insurance firm. For those who qualify, this plan will reduce their down payment requirements (to nothing in some cases) and will substantially reduce the monthly payments, compared with other plans, according to MGIC. “SingleFile is an option offered by MGIC that makes homeownership more affordable for the consumer and provides necessary insurance protection for the lender and investor,” said Patrick Sinks, MGIC executive vice president. “Today, many borrowers with strong credit profiles are choosing piggybacks because of the lower monthly mortgage payments and enhanced tax deductibility. SingleFile will be of particular interest to many of these borrowers because it will result in the same tax benefits and even lower monthly mortgage payments and allow them to maintain financial flexibility and certainty.” The piggyback mortgage is one in which the borrower obtains a second mortgage when purchasing a home, thus reducing the first mortgage loan-to-value ratio to 80 percent, eliminating the need for mortgage insurance. In recent years, piggybacks have been marketed to consumers as a way to minimize monthly mortgage payments by eliminating mortgage insurance payments, and maximize the mortgage interest deduction. This system has grown in popularity, but it involves the origination and servicing of two separate loans. The new SingleFile plan eliminates the need for two loans. The plan is available on consumer-friendly loan products, such as fixed-rate mortgages and adjustable-rate mortgages with limited rate adjustments, according to MGIC. By comparison, piggyback plans can include second mortgages that sometimes require balloon payments (pay-offs after a specified number of years) and interest rates that can adjust up or down. The new plan includes mortgage insurance, but it’s paid by the lender. Lender-paid insurance differs from traditional borrower-paid insurance in that the lender pays the premium, but the mortgage loan interest rate is slightly higher. Also, when the borrower pays the premium it’s paid separately through a monthly escrow. The SingleFile plan lowers the overall cost of mortgage insurance while providing the protection from default losses often needed to enable lenders to make low-down-payment mortgage loans to home buyers. “Lender-paid mortgage insurance has been around for years,” Sinks said. “But the higher interest rate associated with it has presented a marketing challenge for lenders. With the new SingleFile plan, that interest rate differential has been reduced.” The plan is not a panacea for all home buyers. Indeed, most of them will not even qualify for the credit requirements. And remember, the overall interest rate will be a bit higher (typically about a quarter of a point) than traditional mortgages. But it is an option that can potentially benefit some buyers. The SingleFile plan is now offered by a few lenders. But its availability is subject to the approval of state insurance regulators. * * * About Property Value and Supply Bubbles Are we about to hear the loud pop of a deflating “housing bubble” or is there no such inevitability on the horizon? That’s a question that perplexing many of today’s prospective home buyers. This is one of the most controversial subjects among real estate analysts. Some say a home value bubble burst is just around the corner. Others insist there is no such thing as a bubble in today’s housing market. Many current factors will sustain and continue to increase values in the foreseeable future, they say. Still others take a position between these opposing opinions on the subject. One of the most carefully thought out reports on the subject was from John Burns, a noted real estate consultant – owner of Real Estate Consulting, Inc. It provides a good perspective on the overall “bubble” question. In past years, the housing industry has been prone to two types of housing bubbles – price bubbles and supply bubbles, he said. Price bubbles usually occur in the very expensive, supply-constrained markets, such as California and states in the Northeast. These areas can’t meet the demand for housing, so surges in consumer demand tend to create rapid price acceleration. “Rising prices often happen too rapidly because home buyers incorrectly assume that what happened last year will happen in perpetuity,” Burns said. “Price bubbles can be fueled by declining mortgage interest rates. That’s what major publications have warned about for years.” Supply bubbles generally occur in the inexpensive, supply-plentiful markets. In many cases, home builders in these markets have grown their businesses too fast during strong economic times, eventually resulting in oversupply. Some markets, like Las Vegas and Denver, can show signs of both overpricing and oversupply. In Las Vegas, the median home price has appreciated about 45 percent in just the past year, and it’s one of the most rapidly growing housing markets in the nation. “I have heard more than one home builder state that the housing market is no longer cyclical – that somehow disciplined capital sources and builders have created an environment where home prices can only go up,” Burns said. “While builders are much better managed than ever before, optimistic consumers can push prices beyond what is reasonable, and builders can build more homes than are needed. These are risks of being in the home building business.” * * * Condo Boom One segment of the home sale marketplace is booming with exceptional gusto at this point – the sale of condominiums, townhomes and cooperatives. If sales of these units continue at their present pace, the number sold this year will nearly reach a million sales. That would be an all-time record. There’s a strong demand for these units from both ends of the housing market -- young first-time buyers and seniors. “First-time buyers and baby boomers, the bookends of the housing market, are driving condo sales,” said David Lereah, NAR’s chief economist. “While affordability is a factor for entry level buyers, changing lifestyles are a major reason that condos are a bigger market share today than in past years.” Condo sales accounted for 9.6 percent of all existing-home sales in 1993. Last year, condos commanded 12.8 percent of the market. That’s a 33 percent rise in the portion of sales over the last decade, according to NAR figures. One key factor in the robust sales of condos is, again, the low mortgage interest rates. The fact that rates are slowly rising with predictions of continued increases is also pushing prospective home buyers to take action now. “Even if there were some fence-jumping, mortgage interest rates and the costs of servicing a loan are so low in historic terms that the rate increase may not be as big a factor as in years past,” said Walt McDonald, NAR president. “The demand for housing from growing and aging population segments, and improvements in the economy, are bigger factors in record condo sales. The rise in market share and values also shows condos are a good investment.” The median price of existing condos is now about 12 percent higher than the median price a year ago. Surprisingly, the national median price of condos is now higher than the median price of single-family detached homes. That’s because the greatest concentration of condos is in expensive housing markets. * * * Smart Bricks What new trends will next surface to today’s high-tech real estate market? How about “smart bricks” as a basic building material for homes and other buildings. These bricks are equipped with sensors and other electronic components designed to make the structure safer. The sensors track temperature, vibration and movement, employing wireless technology to deliver the data to a remote computer. The system was invented by researchers at the University of Illinois Center for Science and Technology. “We are living with more and more smart electronics all around us, but we still live and work in fairly dumb buildings,” said Chang Liu, one of the researchers. Walls comprised of multiple smart bricks could monitor a building’s structural stability during a fire, earthquake, or other disaster, as well as identify walls in need of repair. Before the smart bricks make it into residential and commercial buildings, researchers want to compress the components onto a single chip adhered to flexible plastic to achieve versatility and resilience. * * * Response to Hardship Situations Real estate and mortgage organizations are quick to respond to homeowner hardship situations in today’s marketplace. This includes hardships resulting from natural disasters, such as hurricanes and earthquakes, or personal financial problems. For example, the Department of Housing and Urban Development (HUD) has sent a mandate to all approved mortgage lenders to implement a 90-day freeze on foreclosures for homeowners affected by Hurricane Charley. HUD will also offer government-backed loans for repairs, provide mortgage insurance to those whose properties were destroyed as they rebuild or purchase another home. And they will locate empty public housing units to serve as temporary quarters for those left homeless by the storm. Another dramatic example of help extended to Hurricane Charley’s victims comes from Fannie Mae, the nation’s largest buyer of existing home mortgages. This agency quickly gave lenders the discretion to help borrowers in several ways, including suspending mortgage payments for up to three months, or reducing the payments for up to 18 months. In some cases, Fannie Mae approves longer loan payback plans. All changes are made on a case-by-case basis. Fannie Mae’s business guidelines also advise lenders to counsel borrowers on all possible mortgage payment work-out options, and inform homeowners of disaster relief available from federal agencies. Payment relief is available for single-family home mortgages (including condos) serviced by Fannie Mae lenders in areas affected by the hurricane. The basic guidelines for relief used by lenders working with Fannie Mae include uninsured losses, extended unemployment, and extraordinary expenses related to storm damage. Freddie Mac, another major buyer and owner of home mortgages, also has a relief program in place for borrower-homeowners who are hurricane victims. This organization will reduce or suspend mortgage payments for up to 12 months for borrowers whose mortgages are owned by Feddie Mac. They will also waive the assessment of penalties or late fees against borrowers with disaster-damaged homes, and will not report forbearance of delinquencies caused by the disaster to the nation’s credit bureaus. Again, each case is evaluated on its own merits. | 
