A cool new term economist are using is “negative feedback loop”. Great phrase to throw out at a cocktail party. This is a behavioral pattern that is dampening both the housing market and the economy. When prices fall, buyers become apprehensive, creating less demand, further reducing prices. This is magnified by an increase in foreclosures which increases the supply of homes, and tightening credit standards by banks which creates a smaller qualified buying pool, again reducing demand. The result is further downward pressure on home prices, and increased consumer negativity – creating another loop.
In reality, while home prices are falling the perception of a horrendous market may be worse than the reality for most of us. Perhaps it is because of the election year that we are hearing so much about foreclosures and people loosing their homes. While we keep seeing headlines of huge percentage increases in foreclosures, it is an increase of a very small percentage to begin with. Therefore, the actual percentage of homes being foreclosed upon is very small, particularly if you take into consideration that it has been reported that 30% of homes are owned outright with no mortgages.
For the great majority of us, it is the tightening of credit markets due to the foreclosures and sub-prime mess which effects us most – in the form of consumer confidence and reluctance to spend that effects the overall economy, and more difficulty refinancing or purchasing a home. The biggest change in the mortgage credit market has been in loan to values. For a Jumbo Loan (>417,000) banks are requiring between 10% and 15% equity.
So what does the credit and housing markets hold for you in the coming months? Both uncertainty and opportunity.
1. Home buyers. If I was buying a home, I would be thrilled. I believe the national average is now a decline of over 10% since market highs. I equate this to entering the stock market at a time when the stock averages were off their record high points. Just like a stock investor, I would look for value, and a long term hold. For most of us, a house should be a home first and an investment second.
2. Refinancing. I expect continued volatility in the interest rate markets over the next several months. To continue the analogy of the stock market, instead of an investor, I would be a trader – looking for a quick profitable trade. Volatility creates opportunity. During the month of January, I was able to refinance many of you who joined my “rate watch” program into lower rate programs with no points and no closing costs – essentially giving you free money. Many of you hesitated, expecting the anticipated Fed rate cuts to also have a correlating effect on mortgage rates. I do not understand this hesitancy.
With a no point no closing cost loan, there is nothing to lose and everything to gain by refinancing. There are no prepayment penalties, so if rates go down further, you can refinance the very next month after closing into a lower rate – again at no cost. If rates go down prior to closing but after you lock, we have a very generous renegotiation policy to lower your rate – again no risk.
I have also come to realize that the general population has a belief that there is a direct correlation between the Fed lowering its overnight rate, and mortgage rates. There is not! Particularly with long term fixed rates. The Fed rate cuts only have a direct correlation to the interest rates on credit cards, and most Home Equity Loans which generally are tied to Prime rate which follows the Fed rate.
Mortgage rates, particularly the 30 year rate, is more closely correlated to the 10 Year Treasury Rate. Mortgage rates are driven by the demand for the “risk free” 10 Year Treasury, and the relative risks associated with mortgage backed securities compared to the 10 Year Treasury. In a strong economy investors are willing to take more risk and therefore the rate needs to be higher for the 10 Year to attract investors. In a weak economy, investors worry, and seek safety in the 10 Year, reducing the yield or interest rate. When the Fed starts talking about rate cuts, they are usually doing so because the economy is weak. It is during this time of talk and confirmation of a weak economy that rates are lowest. If the actual rate cut serves to stimulate the economy and investor confidence, the 10 Year (and interest rats) will go up after the Fed cut. This has happened with the last 3 Fed rate cuts.
Following you will find a graph of the 2 weeks prior to and after the last rate cuts. The graph contains the rates of the 30 year fixed, 5 year conforming ARM, and 5 Year Jumbo ARM. As you can see, the rate on the 30 year fixed decrease prior to the Fed emergency .75% rate cut on January 22, and went up thereafter, decreased in the days leading up to the monthly January 30 meeting where they cut the rate by a further .5%, and then went up thereafter.
3. Current Interest Rates – While rates are at historical lows, they are being pressured by the fear or inflation creeping into the market on the latest reports, creating an upward surge in recent weeks. As I have stated many times over the past several months, inflation has been my biggest concern as to rates. It continues to be an ongoing battle between a weak economy that will help lower rates, and the presence of inflation that will hurt them. The pull between the two of them is why I expect volatility in the market.
4. Rate Watch: For those of you who are on my rate watch list, I encourage you to provide me a contact phone number to go along with your email information. One the day of the severe rate drop in mid January I contacted those who could benefit by email with an analysis of their savings, and by the time over 30 of you replied back, the opportunity was missed. Although there is no cost to locking a rate, I will not lock a rate for you without a predetermined target rate ahead of time, or permission by email or phone call.
Those of you who are not on my automated “rate watch” list, I urge you to join. It will only take you a few minutes to provide me with the information I need that may literally save you thousands if not tens of thousands over the life of your mortgage. For the uninitiated, I have developed an automated system for keeping track of my clients’ current rate vs. market rate, and alerting them with a detailed analysis of their savings when rates are at a level to refinance with NO CLOSING Costs. It is effort free, and alleviates the need for you to keep track of interest rate changes and current no cost rates. The information I need, which can be emailed, is as follows:
- Estimated value of your current home;
- Property type (condo, single family etc);
- Occupancy type (owner occupied, second home, rental, etc.);
- Balance on your current mortgage(s);
- Rates on your current mortgage(s);
- Mortgage Product(s) – 30 year fixed, 5 Year Adjustable, HELOC, etc. If variable, when d0es your mortgage adjust?
- Rate and Term or cash-out refinance. If you have a first and second mortgage and you would like to consolidate them, it is considered a cash-out refinance unless you acquired the mortgages at the same time, or you have not drawn down against the second mortgage in the last 12 months.
- Estimated credit score.
- Any other factor that you think is important that I know.
As always, please feel free to pass this email along to any friends, family or co-workers who you feel may benefit from the information. And please feel free to contact me with any questions and comments.
Regards,
- Greg
greg.d.dwyer@chase.com
800442-7343 x262
Disclosure: The opinions expressed are my own and do not represent the positions, strategies or opinions of JPMorgan Chase.
