Can we really see negative mortgage rates?

real estateSome speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year.

Can you believe that 30-year fixed rate conventional mortgage rates have been below 5% for about five years? Rates have essentially been hovering around 4% (plus/minus) for the last three years. To put it in perspective, you’d probably have to go back to the 1940’s to get a lower rate. To contrast, rates from 1979 through the 1980’s were in double digits; and according to Freddie Mac’s Monthly Average Commitment Rate And Points On 30-Year Fixed-Rate Mortgages Since 1971 (, the average mortgage commitment rate reached a peak of 18.45% during October of 1981.

With such low rates, it’s hard to imagine signing up for a mortgage at 18%, or 10%, or even 7% interest. Keep in mind that the consensus is that the average mortgage rate over the last forty years has been about 8.75%. And as economists have anticipated rising rates since 2011, rates have actually decreased.

Many thought that Fed would finally begin to raise the federal funds rate towards the end of this year. However, an interesting thing happened last week from probably the most anticipated Fed meeting ever. On September 17th, the Fed’s Open Market Committee issued a statement on the economy and monetary policy, and left the federal funds rate unchanged at a target rate of 0% to 1/4%. Although mortgage rates are not directly influenced by the federal funds rate, they are indirectly affected because the federal funds rate is the rate in which banks borrow money.

Initially it appears to be good news from the Fed’s September 17th press release, housing was described as improving, and it is felt that mortgage rates will likely to remain relatively low for the short term. However, in a press conference following the Fed statement, Fed Chair Janet Yellen referred to housing as “depressed.” Depressed is certainly not the description that anyone was expecting of a housing market that has seen slow improvement. Yet, it’s not the first time Yellen expressed concern for housing; she raised concerns about a housing market slowdown last year.

Should we also be concerned when others are optimistic? Maybe Yellen sees something that we do not. An August 16th 2013 Washington Post piece by Neil Irwin and Ylan Q. Mui details Yellen’s background and how she predicted the housing crisis and forecasted the following financial crisis (Janet Yellen called the housing bust and has been mostly right on jobs. Does she have what it takes to lead the Fed?). It’s not that Yellen is clairvoyant, as far as anyone knows, but rather her ability to connect the correct data points. In last week’s press conference she cited that housing was basically not improving in step with other economic indicators, such as employment.

So when will interest rates go up? Some speculate that it is possible for the Fed to set negative rates to stave off deflation; something that happened in Europe earlier this year. And in a couple of European counties, such as Spain, you could get a negative interest mortgage! CNN-Money reported on European negative interest rates, quoting Luca Bertalot (secretary general of the European Mortgage Federation) to say “We are in uncharted waters.” And described Spain’s Bankinter’s negative interest rate dilemma, saying that “they could not pay interest to borrowers, but instead reduced the principal for some customers (The crazy world of negative rates: Banks pay your mortgage for you?;, April 22, 2015).”

Copyright © 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.

How many more years for housing recovery?

moving dayA recent study may indicate that housing market may not fully recover for most cities until 2018.

The “long slog” housing recovery prediction appears to be relevant as a recent study published by the Demand Institute (DI) now estimates that the recovery may take several more years.  DI, a non-profit that studies consumer demand, suggests that home values may not rebound until 2018.

The DI study was reported by Realtor Magazine (Uneven Recovery to Continue for 5 Years; March 03, 2014) to be comprehensive and include 2,200 cities across the country and 10,000 interviews.  Overall, the report concludes that the recent sharp increase in home prices was mostly due to real estate investors who purchased distressed properties.  Now that distressed home sales are declining, values are not expected to increase as precipitously; the continued housing recovery is expected to be driven by new household formation.

The study reported the appreciation rate of the 50 largest metro areas in the country through 2018; home prices are estimated to appreciate about 2.1% annually.  However, the top five appreciating cities will average an overall increase of 32% through the recovery; while the bottom five will only average about 11% (Washington DC is listed among the bottom five).  Cities that experienced the highest appreciation and subsequently sharpest depreciation in home prices will likely have the longest and protracted recovery, and yet may only recover a fraction of the peak home values by 2018.

Not highlighted, and not yet expected to be an impact on the housing recovery,  is the move-up home buyer.  The typical move-up home buyer is sometimes characterized as a home owner who decides they need more space, which results in the sale of their smaller home and the purchase of a larger home.  Similar to previous recessionary periods and real estate down markets, the move- up home buyer was the missing piece to a housing recovery; the move-up home buyer provides much of the housing inventory that first time home buyers seek.  However, it seems as if psychological barriers hold back many move-up buyers today as it did in past recoveries.  During the current housing recovery, many potential move-up buyers have remained in their homes.  And until the move-up home buyer presence is felt in the marketplace, we may yet to endure a few more years of “recovery.”

Much like the DI study, there has been a lot of discussion and debate about the effects (on housing) of the lack of housing formation during the recession and in the subsequent recovery.  Andrew Paciorek, an economist at the Federal Reserve Board of Governors, described household formation during a presentation given at the Atlanta Fed’s Perspectives on Real Estate speaker series (June 2013); “Think of the unemployed or underemployed college graduates living in their parents’ basements instead of renting or buying their own place. When a person establishes a residence, whether that’s an apartment or a house or another dwelling, that person is forming a household. Mainly because of a weak labor market that held down incomes, the rate of household formation cratered during the recession and subsequent recovery…

To give perspective to the issue, the rate of decrease of household formation during the great recession was significant (an 800,000 per year decrease compared to the previous seven years).  Additionally, household formation between 2007 and 2011 was at the lowest level since World War II, and was 59% below the 2000 to 2006 average.  Most significantly: during 2012, 45% of 18 to 30 year olds lived with older family members; compared to 39% during 1990, and 35% during 1980.  He described the household formation crash as an indirect contributor to declining home prices, which diminished household wealth linked to home values.

Although household formation continues to be a concern as the labor participation rate has decreased, Paciorek points to improvements in the job market as the spark to increasing household formation.  He forecasts that household formation should increase to 1.6 million over the next several years, and could possibly exceed the pre-recession average due to pent up demand of those who waited to form a household during the recession.  However, a disclaimer was provided saying his forecast is “based on assumptions that could prove overly optimistic;” and has “lots of caveats and lots of uncertainty” – much like the housing recovery.

by Dan Krell
Copyright © 2014

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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.

Are rising interest rates helpful?

After much speculation, mortgage interest rates appear to be on the move. Even with rising interest rates, rates are still relatively low. Some economists expect that when the Fed’s Quantitative Easing program begins tapering, mortgage interest rates may jump due to financial market volatility.

Many fear that rising interest rates could derail the recovering housing market. In an August 19th news release (, Chief NAR economist Lawrence Yun stated that although the pace of home sales are at its highest since February 2007, the market could be experiencing a “temporary peak” due to home buyers’ seeking to close deals before interest rates rise significantly. Looking ahead, Dr. Yun expects that rising interest rates and limited inventory could create an imbalanced market due to inconsistent home sales.

Home sale prices also have been rising, prompting bidding wars, as the median home sale price was reported by NAR to have maintained nine consecutive months of double digit year over year increases. However, Dr. Yun stated, “Limited inventory in some areas means multiple bidding remains a factor; 17 percent of all homes sold above the asking price in August, although 63 percent sold below list price.”

This week’s release of July’s S&P/Case-Shiller Home Price Index ( also revealed that home sale prices were still holding onto the double digit annual rate of gain over 2012 levels, as the 10 city and 20 city composites posted about a 12% year over year increase for July. However, it is pointed out that home price are still “far below their peak levels.”

The sharp increases in home sale prices sparked fears of another housing bubble. But price gains only increased about 2% from June to July. Monthly price gains have lessened, and the gradual slowdown of home price gains may indicate that home prices may be peaking. Chairman of the Index Committee at S&P Dow Jones Indices, David M. Blitzer, stated, “Following the increase in mortgage rates beginning last May, applications for mortgages have dropped, suggesting that rising interest rates are affecting housing. The Fed’s announcement last week that QE3 bond buying will continue for the time being may have only a limited, though favorable, impact on housing.”

The rapid increase in home prices has affected potential appreciation for many home owners who waited to sell their homes. And the increased inventory provided additional housing stock for eager home buyers. Given the recent increases in home sale prices, the expectation of an uncertain real estate market may not be welcome news by home buyers and sellers.

But home price increases have not only helped the housing market, but the economy as a whole. CoreLogic ( reported that the housing sector contributed about 17% to GDP growth during the first quarter of 2013. However, CoreLogic predicts that increasing mortgage rates will directly affect the housing market, and indirectly affect the overall economy: Single family housing starts (new homes) are thought to be declining because of increasing mortgage rates; and CoreLogic estimates that long term GDP growth to be about 1.75%.

It remains to be seen if modest increases in mortgage interest rates have been beneficial to stave off another housing bubble. However, given that the indicators and experts point to a housing recovery peak; increasing mortgage interest rates could suggest caution for the housing market.

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By Dan Krell
Copyright © 2013

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

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 ( 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.

Will mortgage loan-limits increase?

by Dan Krell

Are you planning to buy a home this year? If you are planning to purchase a home that is priced more than $417,000, you could get a lower interest rate-if Congress raises conforming loan limits.

First, a very basic primer in mortgage jargon: “Conforming” refers to mortgages that correspond to Government Sponsored Enterprises (GSE) guidelines. GSE refers to those quasi-government enterprises that include (among others) Fannie Mae and Freddie Mac. Conforming guidelines include underwriting criteria that lenders use so they can sell the loans to Fannie Mae and Freddie Mac. The guidelines have strict borrower criteria as well as loan limits. The loan limit is set annually as a reflection of changes to the national average single family home price as determined by the Federal Housing Finance Board’s Monthly Interest Rate Survey. A “jumbo loan” is a mortgage that exceeds conforming loan limits; and usually has higher interest rates because of the higher risk involved.

Two large associations advocating for higher loan limits include the National Association of Realtors (NAR) and the National Association of Home Builders (NAHB). Both the NAR and NAHB argue that increasing conforming loan limits would solve liquidity problems in the jumbo loan market, which would make lending for loans up to $625,000 easier for home buyers who are looking to purchase a home over the current loan limit of $417,000. The NAHB suggest that loan limits be raised temporarily while secondary markets normalize, and be re-evaluated after a two year increase. The NAR cites the need for stimulation of the housing market and the lowering of interest payments to those obtaining loans over the $417,000 limit.

The issue of raising GSE loan limits is not as simple as stimulating a sluggish housing market; as Federal Reserve Board Chairman, Ben Bernanke, made clear to Congress in September 2007. His statement to Congress implied that any increase in loan limits could provide false security to investors on the secondary market – increasing risk to those investors, their companies, and the government. Additionally, Dr. Bernanke implied that if Congress is inclined to increase the loan limits that it should be done quickly, temporarily, and ensures that any increase will function as intended.

What’s the risk? A recent report from the Office of Federal Housing Enterprise Oversight ( (the government entity whose mission is to ensure the safety and soundness of Fannie Mae and Freddie Mac) entitled “Potential Implications of Increasing the Conforming Loan Limit in High-Cost Areas” reports that any loan limit increase would only help those in high cost areas as most jumbo loans tend to be geographically centered (California had almost forty-nine percent of the jumbo loans originated in 2007). One unintended consequence from raising loan limits to lower mortgage interest payments may be that home prices will increase to make high-cost areas actually cost more. Additionally, anticipated savings benefit may not be achieved as Fannie Mae and Freddie Mac have to charge for taking any increased risk.

As for now, it appears that loan limits for 2008 will remain the same as 2007. It is clear that although there are benefits, there may also be too many questions left unanswered before Congress can act quickly to raise GSE loan limits.

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 21, 2008. Copyright © 2008 Dan Krell.