The Fed cut rates for the second time in nine days dropping the key overnight lending rate to 3%.
Stocks reacted positively, surging above 140 points after lingering in negative territory ahead of the decision.
Short term mortgage rates will look incredibly favorable in the coming weeks and months.
A detailed analysis will follow later today.
The Federal Reserve Board decided to cut interest rates again by an aggressive .5% only eight days after an aggressive .75% cut. While a lot of activity took place in the stock market, the Dow ended up only slightly better than it had been before the announcement - a 37 point loss. The key 10 year bond edged down two basis points in yield.
Housing and the credit markets are clearly a concern, but I believe the Fed is doing what it thinks is the best to restore confidence to the economy. Some complain the restored confidence comes at the cost of the value of the dollar. They re right to a certain extent, but a lower dollar presents opportunities in itself like higher foreign investment, lower trade deficits and increased exports for the United States. At the end of the day, what we need is confidence.
There are people in this country who are willing to blight their neighborhoods and get a foreclosure on their credit report, not because they don t have the money, but because they don t have the confidence to pay. There are people sitting on the sidelines who could qualify for a mortgage and afford the payments waiting for the housing market to bottom. Fear is an economic reality.
What the Fed has done since it boldly cut rates .5% in September is attempt to restore confidence to the markets. The potential for the downside of this credit crisis to be disastrous is unbelievably enormous. It is government s job to prevent disaster.
I remember during the recession of 01, it didn t really show itself in Utah until the following year, the State had a huge “rainy day fund” comprised of excess revenue it had taxed us during the boom. As things kept getting worse and worse, I kept wondering to myself, at what point will the Governor realize it s raining. To my knowledge, that fund was never utilized.
This time government appears willing to step in and stave off a crisis. Lowering short term rates to this level should prevent foreclosures and facilitate business spending. Further, the broader reaching portions of the proposed stimulus package should further reinstate confidence. For a while the situation looked bleak. I m beginning to feel hope again.
It will take time, probably the rest of this year, but I think hope and faith is being restored. Along with hope, true reform needs to take place as well. A federally mandated licensing system needs to be enacted by every state to restore faith at the retail end. Lenders must review loan packages more carefully for fraud. Lenders should package mortgage backed securities with the same care as if they were holding on to them. The different components of the real estate transaction should protect the consumer, not defraud them. The affiliated business model in real estate, regardless of disclosure, is unfair and dangerous for the consumer.
If we can learn from this failure, the entire country, economy and real estate industry will be better off.
I was waiting until 4th quarter numbers came out before I attempted to give some predictions on the future of real estate locally and nationally. Then last week happened.
With this amount of volatility in the world, there s no way anybody can accurately predict what s going to happen in real estate in 2008. Rogue traders upsetting world markets and dictating Fed policy? Give me a break!
I m going to pass on the predictions this year. Nobody even knows what the Fed will do to rates tomorrow. A .25, .5, .75 cut wouldn t surprise me. No action wouldn t surprise me either. An increase? That would be shocking.
There is one thing we can be sure of this year and that is short term interest rates are trending down. This will help some people with resetting adjustable
rate loans as some will be able to refinance. Should Congress get around to passing the stimulus package close to what has been proposed, that will help as well.
I believe these two actions will help the housing market, at least a little bit with sentiment. Some home owners are so down on housing they re burning their houses down or intentionally withholding their mortgage payments. I think that sentiment will shift. It s important that it does. Diana Olick wrote -
I continue to believe this is not entirely about mortgage rates and availability, or even affordability–it's all about consumer confidence. Until the numbers stop falling, nobody's going to want to get back in the game, but the numbers won't stop falling until people DO get back in the game.
While rates have been near historic lows for most of this decade, we re getting to the tipping point again. Mortgage activity increased last week and the questions and sentiment I saw around the blogosphere suggested buyers and owners were questioning if now was the time to make a move. Continued declines in short term interest rates, a wide selection of inventory and a little faith will go a long way in improving the housing market.
I think Utah s real estate market is going to feel some of the pain the rest of the nation has been feeling for a year and a half now. How bad it will get and for how long, I don t know and I m not willing to guess. We ll have to wait and see.
For the first time in about three months, I m feeling some confidence in the housing and credit markets recovering. Subsequently, I believe a severe recession will be avoided for now. I ve warned about anyone attempting to call bottom, but I definitely see a light at the end of the tunnel.
The Fed s rate cuts earlier this week and subsequent activity in the bond market have made both long and short term mortgage rates highly attractive, especially for refinances. The one missing ingredient to this formula was higher loan limits to help high cost real estate markets, chiefly California.
Today a bipartisan stimulus proposal was reached by Congress that besides sending out checks to most taxpayers, will provide a huge stimulus to the housing market by raising the conforming loan limit in high cost areas to $625,500 and make qualifying for FHA loans easier.
I believe this is exactly the right combination to revive the declining housing market and prevent additional foreclosures. Those homeowners who are simply walking away from expensive loans now have a real incentive to remain in their homes. This will reduce the number of foreclosures, thus preserving home prices and more importantly stave off job losses and a possible recession.
The deal also includes a short-term increase to $625,500 from $417,000 in the size of mortgages that can be purchased and guaranteed by government-sponsored mortgage finance firms Fannie Mae (FNM) and Freddie Mac (FRE, Fortune 500). Those increased limits would expire on Dec. 31.
In addition, it would include a reform of the Federal Housing Administration.
The proposal would lower home-buyers down-payment requirements when getting FHA loans, increase the cap on loans eligible to be FHA-insured and lower origination fees It is believed those changes could help lenders make loans to risky borrowers who have found it difficult to arrange for home financing since the collapse in the market for subprime mortgages last summer.I ve always said there were “outs” to a housing collapse and government intervention was one of them. Some people on the Internet have harsh criticism for raising loan limits. I believe if the market supports higher limits, government shouldn t place an artificial ceiling on them.
Whether today s stimulus package gets approved into law is still up in the air a little bit, but I think it will receive wide support and it will be effective if it s implemented in time. It s definitely a shot in the arm for California and other high priced real estate markets.
Struggling homeowners who can now refinance due to favorable short term interest rates can thank French fraudster J
Fourth quarter statistics are out for the Wasatch Front and while the number of homes sold is down, the prices are still seeing gains. However it is very clear that no area of the country will be immune from the credit crisis.
The Deseret News reports -
Despite the steep drop in sales, the prices of houses along the Wasatch Front held their value, with the median price rising 1.7 percent over the same 12-month period.
Specifically, house prices in Northern Utah went up in the fourth quarter -
The median single-family home price in each county, however, went up. Weber had the highest median-price appreciation, at 11.4 percent, followed by Tooele County at 8.6 percent, Davis at 3.3 percent, Salt Lake at 1.7 percent, and Utah County at 1.3 percent.
Every zip code in Salt Lake City saw appreciation for the year, save one - 84103 (-7.5). The zip codes that saw the greatest year over year appreciation were also the ones with traditionally lower prices. West Valley City (84128) and Magna (84044) led Salt Lake County for the year with 23.9% and 20% appreciation respectively.
Affordability is clearly in question. Wells Fargo economist Kelly Mathews said in a Tribune article -
“Housing prices are out of whack with incomes and there needs to be price adjustments,” Matthews said. “There s no way we are going to be able to work our way out of this situation without having some price adjustments. We re just too far out of line.”
House prices are just one part of the equation. Interest rates and accessibility to credit are other major factors. Consumer sentiment is another point to consider.
This week has been quite volatile. I ve turned very bearish on housing because of the credit crisis. If it s too expensive to own in comparison to rent, demand will dry up. However, Government and the markets have shifted interest rates and lending guidelines to the point housing is starting to look good again. Coupled with low consumer demand, I think some deals can be had. Super low interest rates and expanded qualifying criteria will stave off many of the foreclosures queued up to hit the country. So my inner bull returned.
Then we found out the Fed rate cut seemed due to a rogue trader at a big French investment bank. Will the Fed continue to cut rates? It s so volatile, there is little that can be done to make accurate projections.
What I do believe is low interest rates are a boon. Using FHA financing is a boon. When the stimulus package is enacted, a lot of families will be empowered to buy homes they can t currently buy. The stimulus package will stave off foreclosures, therefore keeping house values at their current level or more. Unemployment has improved with four consecutive weeks of lower claims.
With improvements in lending, increasing monthly payment affordability and expanded approval criteria, I wouldn t be surprised to see a mini-boom return by the end of the year.
Angelo Mozilo s behavior concerning his severance package from embattled mortgage lender Countrywide (CFC) reminds me of a toddler caught stealing candy from a store. Somehow Mozilo thinks that if he puts back the money, nothing bad will happen to him.
If you recall, Mozilo was slated to receive $115 million in cash and stock plus perks after selling the troubled lender to Bank of America (BAC). The outcry of the largess in the face of the credit crisis prompted The House Committee on Oversight and Government Reform to “invite” the CEO to testify about - tens of millions of dollars in severance payments and other compensation. I request that you be prepared to provide your perspective on this reported pay package.
I suppose Mozilo thinks that if his pay package disappears,
there will be nothing to testify about. The question of his sudden stock sales all last year in the face of mounting company losses seem like an interesting topic to me and I d love to hear what the House committee thinks about it.
Reports today also suggest Mozilo still stands to receive other accrued retirement benefits outside of the severance package.
Mozilo, however, will still retain retirement benefits and deferred compensation that he has already earned, Countrywide said in a statement released Monday.
The CEO isn t giving up his $36 million without a fight. He s blaming the media for overstating his compensation package. It wasn t $115 million, it was only $36 million - He stressed in Monday's press release that media estimates of his severance package have been overstated.
It was a nice try, but I think Mozilo will still be in trouble if he doesn t show up in Washington D.C. on February 7th.
Look at the headline New home sales: Biggest drop ever. Now look at the market s reaction. Stocks up sharply. This was after weekend futures pointed to a bad, bad day today. Bonds reacted in a way that should be expected with yields dropping and prices increasing. Oil was up slightly and the dollar dropped slightly.
What does Wall Street know that we don t? Bad housing news should send the markets tumbling, but it didn t. The Fed meets to discuss rate policy on Wednesday and Thursday after last Tuesday s surprise 3/4 point cut. It was widely expected the Fed would cut more this week, but the revelation of a rogue trader at a French investment bank as the real source for last week s world market woes may leave the Fed holding instead of cutting. Wall Street is still betting on another cut of .25 to .50.
One day does not a trend make, but I find today s market activity very puzzling. It s obvious that short term rates will trend down this year. The Fed has shown a willingness to step in that creates confidence in equities, though many question what that policy will do to the dollar. It s going to be a wild and crazy ride this year so be sure to keep your arms and legs inside the vehicle at all times!
You remember the childhood story of Goldilocks and the Three Bears, right? For a while economists were comparing the American economy to that fairy tale and many of us believed them. When you get to the end of the story, it s important to remember the bears come home and Goldilocks runs away.
That is the part of the story the American economy is currently in. Due to deteriorating financial conditions, the Fed held an emergency meeting and cut the key overnight lending rate by .75% and the discount window rate by the same amount.
American markets were closed yesterday for the Martin Luther King holiday, but the world s markets got a chance to respond to the stimulus plan proposed last Friday. Overwhelmingly they didn t like it and most foreign stock exchanges suffered losses. A huge loss for the Tuesday s open of the stock exchange was forecast and so far the market is down nearly 2%.
The Fed still meets at the end of the month and the markets have already priced in an additional half point cut which will move the prime rate to 3%, down from its high in August 2007 of 5.25%. Let s not forget this rate only impacts short term lending rates especially for auto loans, credit cards and home equity lines. The 10 year bond yield is the key metric for long term mortgages and it too has dropped as bonds become perceived as safer bets. Bond prices and yields move in opposite directions.
Yesterday s emergency meeting by the Federal Reserve Board resulted in a 3/4 point cut in short term rates and has a lot of people thinking about possibly refinancing. I want to use this article to point out a few misconceptions, but indeed, now is a good time to refinance.
First of all, the Fed rate cut only affects short term lending rates. For homeowners with home equity lines, they ll see their payments drop. For most homeowner s with a so called “exploding ARM,” the Fed s move won t directly help. Most adjustable rate mortgages are tied to other indexes, most notably LIBOR which is controlled by the Central Bank of England or COFI (Cost of Funds Index) which lags the Federal Funds Rate by 90 days or so. However, England s Central Bank is lowering rates in tandem with the U.S. and some relief may be coming to those facing higher resets.
Despite the Fed decision not having a direct impact on long term mortgage rates, those have dropped significantly as well. The volatility of the stock market, both in America and abroad, has raised investment in the U.S. bond markets which are considered to be very safe investments. Demand for these instruments has forced down yields (bond prices and yields move in opposite directions) which has forced down long term rates. When I checked my rate sheets this morning and saw a 4.75% 30 year fixed available, I knew a new refinance boom is on the way.
Now before we talk about rates, let s talk about who qualifies these days. I ve been reading around the real estate blogosphere and a lot of people are asking the same question, “Should I refinance into a below 6% rate now?”
The 4.75% rate is a conforming rate, meaning the loan amount must be less than $417,000, no cash out, credit score above 679 and a loan to value less than 70%. This rate also involves paying a 3% origination fee. For borrowers that don t meet this criteria, the minimum add is .75% and can go up to 2% depending on the credit score.
For those borrowers whose loan amount fits within FHA criteria, that program is looking awfully attractive. This morning for someone fitting the conforming criteria listed previously, the rate for a 30 year fixed was 4.875% with the same origination fee and can go up to 97% LTV. The only adds to rate would be mortgage insurance if the LTV exceeded 80%. Mortgage insurance is now tax deductible and currently runs .5% monthly with 1.5% upfront. The monthly ends when the LTV reaches 79%.
Let s look at subprime rates as well. First of all, subprime loans are still available, but many of the qualifying options once available have been tightened up. Lenders want to know they ll be paid back. Subprime rates don t move as quickly as FHA and conforming. A quick glance at my rate sheet tells me rates have dropped by about 1% since I last looked at it, but as you ll see, they are higher than the others. I can still go to 100% LTV for 11.05%. A closer comparison to the other loans would be the 90% LTV which is 8.95%.
Rates appear to be trending down. The Fed is widely expected to cut another .5% next week at its regularly scheduled FOMC meeting.
Homeowners in Utah are in a special situation right now. Home values have topped the nation in 2007 and expectations remain level for the coming year. Now is an excellent time to chop your mortgage repayment time in half by refinancing to a 15 year loan or cutting your payments if you bought in the past two years when rates were higher. It is also an excellent opportunity to investigate converting a subprime loan to an FHA or fixed rate loan and save on your monthly payments.
If you have questions about any of these options, feel free to call me.