Things we’ll be talking about in 2010

2009 was a year when many home owners lost their homes to foreclosure, while other home owners could not move due to their depreciated home values. Let’s also remember that 2009 was also the time when many home buyers took advantage of home buyer tax credits and reduced prices from distressed properties (which helped boost home sales statistics).

As much as it felt that 2009 was the tear down year for the real estate industry, 2010 is promising to be a re-building year; the upcoming year will lay the foundation real estate markets to come. So, you might ask, “how will things be different?” This is what we may expect to see in 2010: a change in home buyer attitude; rising interest rates; and “Cash for Caulkers.”

More home buyers will be searching for homes in 2010. However, continued changes in mortgage underwriting guidelines will most likely limit the number of qualified home buyers. Mortgage underwriting guidelines have been tightening through 2009 and will continue into 2010. The trend of shrinking the pool of qualified home buyers due to mortgage guidelines requiring increased down payments, higher credit scores, and reduced debt ratios will most likely continue as FHA’s new underwriting guidelines are anticipated in 2010. New FHA guidelines are expected to increase the minimum down payment to 5% and restrict debt ratios below 45% (for FHA mortgages).

Additionally, the current home buyer incentives are likely to sunset without any further extension; it is doubtful that home buyer credits will continue in its current form. As a result of having more “skin in the game,” it is possible that home buyers will be more conscientious during the home buying process; home buyers will take more time and be more discerning in their home search.

Mortgage interest rates are likely to increase through 2010. Having been relatively close to historic lows for nearly a decade, mortgage rates will most likely steadily climb as current Federal Reserve programs are set to end (already evidenced by a consecutive 4 week rise in the average 30-year fixed rate as indicated by Freddie Mac’s Weekly Primary Mortgage Survey). The Fed’s current purchase program of mortgage backed securities and agency debt, that was meant to assist the housing market and facilitate mortgage lending, is committed through the end of the first quarter of 2010. The Fed has already begun slowing the pace of these purchases, so as to ease the transition in the marketplace (

The most anticipated news for 2010 is the “cash for caulkers” program, also known as the “Home Star” program. Although many have speculated about the program and its guidelines, legislation has yet to be passed. President Obama, in a speech given at the Brookings Institute on December 8th, called on Congress “…to consider a new program to provide incentives for consumers who retrofit their homes to become more energy-efficient…”, and to emphasize passing of such as legislation ( The plan is supposed to offer tax incentives to home owners for increasing home energy efficiency through home energy audits, system replacements, and weatherization; however, the final legislation (if any) may have variants of the current proposal.

In the near future it may seem as if home owners may be talking more about retro-fitting their homes than moving, while more home buyers will complain of the mortgage process. Regardless, everyone is looking forward with optimism to 2010.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Permission to use this article is by written consent only.

by Dan Krell. Copyright © 2009

How your interest rate effects you

Last week, I was in Starbucks talking about interest rates and the current real estate market. It was not unusual that I was in Starbucks nor conducting business there, as it seems that Starbucks, these days, maybe second to the golf course in the culmination of business. This day, I happened to be talking with Ken Cusick. Ken and I were discussing the vulnerability of those homeowners who purchased their home with adjustable mortgages, primarily interest only mortgages and their mortgage rates. Ken had a lot to say about this topic. Ken is the principal of Cusick Financial, LLC, a financial consulting firm located in Olney, MD specializing in residential and commercial financing.

Ken and I agreed that many homeowners have a great mortgage rate because of the historically low interest rates we have had recently. I expressed my concern about the many homeowners who have bought their home with an interest only or variable rate mortgage to either allow them to buy more home than they normally could afford, or to keep payments down. After all, the interest rates for these mortgages usually started between three to four percent. This cut the mortgage payment by at least a few hundred dollars a month, if not more.

Ken had a few things to say in response, as well as a few words of advice. First, Ken asserted that because the interest only and variable rate mortgages are tied to short term indices, they usually tend to be a better deal than 30-year mortgages (which are tied to long term bonds and indices). Depending on the type of index the mortgage is tied to, the interest rate can change annually or even as frequently as monthly. He stated that the unusually low interest rate environment we have had in the past five years has made housing more affordable, which paradoxically led to the significant increase in home prices we have experienced.

Second, Ken stated that those homeowners who have a fixed rate mortgage would always be able to afford their home as long as their income never decreases and they never need to sell their home. Even if there is a correction in the real estate market to lower home prices, these homeowners are in good shape.

Third, homeowners who have interest only or variable rate mortgages are subject to the volatility of the market as rates rise and fall, and are at significant risk. As interest rates rise, their monthly mortgage payments rise. Additionally, as interest rates rise, the cost of housing rises and housing demand decreases. This creates difficulty for those who were betting on interest rates to stay low because the affordability of the mortgage becomes an increasing burden on those who may not be able to afford higher payments. Add that to the possibility of their home being devalued increases the burden of loss.

Ken’s advice was simple. If the homeowner could not afford the mortgage payment with an increase of of interest by two to three percentage points, then they should refinance into a fixed rate mortgage. He admits the payment will be higher, but the comfort that the payment will not change should be peace of mind in an uncertain future.

If, however, the mortgage rate does not adjust in three to five years and the homeowner intends to sell in within that time period, Ken says to hang in there. The logic is that the only risk the homeowner takes is the possibility of the home depreciating in value. If the mortgage balance is 70% to 80% of the current home value, then the risk is much less.

To many, Ken’s advice would seem a bit too conservative. I, however, believe that this advice to be the consensus of good financial planning.

by Dan Krell © 2005

This column is not intended to provide nor should it be relied upon for legal and financial advice.