Why real estate and home sales will rebound in 2015

home for saleThe recent stumble of the housing market recovery has been a head scratcher for many. Surely low interest rates and an abundant number of homes for sale should have been incentive for any home buyer. But alas, many have been disappointed by the 2014 housing trends; even with sparse anecdotes of quick sales and bidding wars. However, many are optimistic about the housing market for 2015 because of the combination of low mortgage interest rates, increased access to credit, and moderating home prices – which could transform reluctant “looky loos” into eager home buyers.

Don’t count on low mortgage interest rates, per se, to incentivize home buyers. Although interest rates have been historically low since shortly after the financial crisis, it seems to not have been an incentive on its own to purchase homes. Industry experts have tried to pinpoint the timing of rate increases since rates first dipped below 5% in 2010. And even though rates were anticipated to have jumped when the Fed tapered its asset purchasing program this year, rates continue to be relative to historical lows. The average mortgage interest rate according to the Freddie Mac Primary Mortgage Market Survey (freddiemac.com) is 4.01% (as of November 13th); yet home sale volume continues to lag behind 2013 figures.

Very low interest rates may continue into 2015. Back in 2012, the Federal Reserve Open Market Committee indicated that interest rates would remain “exceptionally” low through 2014. Fast forward to September’s Federal Reserve Open Market Committee meeting; the October Fed press release (federalreserve.gov) reported the FOMC maintaining the 0 to ¼ percent target rate, even for a “considerable time following the end of its asset purchase program…”

On the other hand, loosening mortgage credit underwriting could help some would-be home buyers; but it is unclear who would take advantage of such programs, and how it will help them. Tightened credit and underwriting standards that resulted from the financial crisis, along with government intervention in the form of the Dodd – Frank legislation, created regulation and stringent lending standards (such as comprehensive validation of financial standing and strict adherence to debt to income ratios); which critics point to as having hampered lenders from making loans. However, some lenders are beginning to introduce less restrictive mortgage programs, which may accommodate the self employed and those with high student loan debt.

Of course, home prices have been a point of contention between home buyers and sellers for a number of years. Home sellers seeking higher prices are sometimes thwarted by home buyers looking for affordability and value. The seeming home price tug-of-war that favored home sellers in 2013, appeared to turn back in favor of home buyers during late summer of 2014. The October 28th release of the S&P/Case-Shiller Home Price Indices (housingviews.com) reported further deceleration of home price appreciation. The National Index showed a 5.1% annual gain, which is lower than the 5.6% annual gain reported in July. The Washington DC region saw a 3.1% annual increase; but a 0% change in August, compared to the 0.1% change in July.

Additionally, the 15% increase in national foreclosure activity, as reported by RealtyTrac (realtytrac.com), could be a wildcard for home prices. It remains to be seen if the 26% increase in foreclosure activity in the D.C. metropolitan area from the previous year is a trend, or just a result of lenders clearing “shadow” inventory.

© Dan Krell
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Disclaimer. This article is not intended to provide nor should it be relied upon for legal and financial advice. Readers should not rely solely on the information contained herein, as it does not purport to be comprehensive or render specific advice. Readers should consult with an attorney regarding local real estate laws and customs as they vary by state and jurisdiction. Using this article without permission is a violation of copyright laws.

Rising mortgage interest rates – what that means for housing market

by Dan Krell © 2013
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Mortgage lendingOver the last few weeks, the 30 year fixed rate mortgage has slowly climbed from the historical low we have become accustomed over the last few years to well above 4%, as reported by Freddie Mac’s Monthly Average Commitment Rate as of July 3rd. And although it’s still relatively low and not bad as interest rates go; keep in mind that the mortgage rate averaged over the last 40 years is much higher – some report it to be 8.75%.

If you haven’t noticed, average mortgage rates have been below 7% for about ten years. And even when the housing market was bubbling, rates were not as low as where rates are today. After the financial crisis, mortgage rates were kept low by the Federal Reserve’s commitment to purchasing mortgage backed securities; which was an attempt to stimulate interest in real estate purchases at a time when the housing market all but screeched to a halt. Shortly after the Fed ended the mortgage backed securities purchase program, a broader securities buying program began with the intent to stimulate the overall economy; commonly called quantitative easing, this was considered the second round, which targeted the purchase of U.S. Treasury Bonds. The Quantitative Easing program was extended into a third phase (QE3) through 2013, which many are speculating will begin tapering off by end of the year.

Recent Fed comments may have hinted to tapering off the QE program, which could have been the source of some Wall Street panic earlier this month that resulted in a volatile market; besides affecting your 401k, the result has been a jump in mortgage interest rates.

Of course, many experts are worried about mortgage rate increases and the effect on home buyers, citing a decreased home buying ability as well as the possibility of suppressing existing homes sales. For some home buyers, it might be true that increased interest rates could be a wrench in their home buying plans; however, the reality may be that increasing mortgage rates are a sign that the housing market is healthier than some think.

Although mortgage interest rates are just one aspect of a multi-factor dynamic housing market; housing demand is not necessarily gauged by mortgage interest rates alone. For instance, the height of the housing bubble, mortgage interest rates were much higher than they are today. One sign that slightly increased mortgage rates have not negatively affected the overall market is a recent report by the National Association of Realtors (realtor.org) that May 2013 existing home sales (completed sales) increased about 11.4% compared to May 2012. Additionally, the NAR reported that existing home sales are the highest since 2009.

There has been criticism that the “artificially” low interest rates have helped home sale prices jump, especially during a time when there has been little housing inventory; some are concerned that increases in mortgage rates will pressure home sale prices lower. But just like the housing demand concern, these factors alone are not in a vacuum; factors today may warrant mortgage rate increases to thwart abnormal housing price spikes (which are common in bubble markets).

Of course, rising mortgage rates and the thought of paying more for a mortgage is not always good news to home buyers. However, given the circumstances and looking at the broader perspective, the result may be much better than anyone could imagine – a stable housing market.  But that is yet to be seen.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published the week of July 8, 2013 (Montgomery County Sentinel). Using this article without permission is a violation of copyright laws. Copyright © 2013 Dan Krell.

“Exceptionally” low mortgage rates for buyers and owners

by Dan Krell
© 2012
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Last week, the Fed issued a statement from the most recent Federal Open Market Committee meeting indicating that the target rate was to remain between 0 and ¼ percent; and an “exceptionally” low rate is warranted through 2014. Although there were some bright areas of the economy, some sectors remain an obstacle- including housing (which was described as “depressed”).

The Fed’s estimation of the housing market appears contrary to the seemingly upbeat reports issued by the National Association of Realtors®, which recently revised downward several years’ worth of housing data. However, by keeping an ear to the ground, the Fed goes beyond the typical statistical analysis by collecting and analyzing anecdotal data from industry experts around the country. The anecdotes are compiled, analyzed and published eight times a year by the Fed as the “Beige Book.” Formally known as the “Summery of Commentary on Current Economic Conditions by Federal Reserve District,” the most recent report indicated an overall feeling that home sales are sluggish throughout the country. Furthermore, the report from the Richmond District (which covers MD, DC, VA) indicates that although there were a few pockets of “strength,” a softened housing market was depicted citing the sentiment of some local real estate agents.

Getting back to interest rates, the Fed’s monetary policy of “exceptionally” low interest rates for some time could mean cheap mortgage money for you. There’s no telling how much lower mortgage interest rates can go, as we are already seeing some of the lowest interest rates in several generations. The interest rate on your mortgage is tied directly to your monthly mortgage payment; a lower rate typically means a lower monthly payment.

For home buyers, “exceptionally” low interest rates could result in a more affordable home purchase; buying a home today may possibly be cheaper than paying rent. Even if home prices continue at the current level during the next few years, home affordability can drastically change if mortgage rates rise.

If you currently own a home, “exceptionally” low interest rates could mean that you could possibly reduce your monthly mortgage payment. However, refinancing is not for everyone. According to the Federal Reserve Board’s “A Consumer’s Guide to Mortgage Refinancings,” refinancing may not be for you if: you’ve had your mortgage for a long time, your mortgage has a prepayment penalty, or you plan to move in the next few years.

For a typical mortgage, the proportion of the mortgage payment that is applied to principal increases through the life of the loan. So, if you’ve had your mortgage for a while, chances are that you’ve been increasingly paying toward the mortgage principal (and building equity). However, if you refinance, the mortgage life cycle begins anew and much of your payment would be applied to interest.

If your mortgage has a pre-payment penalty, you can be charged for paying off your mortgage early. Any pre-payment penalty should be considered in the total cost of the refinance so as to consider how long it may take to “break even” based on your monthly mortgage savings.

In today’s market, many home owners are putting off a move and refinancing instead. However, if you’re planning to sell your home soon after the refinance, consider the “beak even” point of your monthly mortgage savings. Selling your home shortly after a refinance could make the short term mortgage savings seem short sighted.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 30, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.