The Subprime Market Fiasco Part XVII

Happy New Year. The beginning of 2010 finds us with stable home prices in most real estate markets, a decline in the volume of new home sales, and the continuation of a low interest rate environment.

The Real Estate Market. – After several months of gains, the S&P composite index of home prices in 20 metropolitan areas was flat in October, falling short of expectations for a 0.2 percent rise. Only seven of the 20 cities in the composite index had month-over-month gains in prices in October, lead by Phoenix, San Francisco and San Diego. Those with the biggest declines were Tampa, Chicago and Atlanta.

Overall, most believe that there is a growing stabilization in house prices, even if it is at a slow pace. However, one overhang on the market is the record high level of foreclosures that have not yet been rectified or put on the market.
The annual rate of price declines improved, with the 20-city index dropping 7.3 percent from a downwardly revised 9.3 percent in September. All 20 metropolitan areas and both the 20-city and 10-city indexes showed smaller rates of decline in October compared with September. As of October 2009, average home prices across the United States are at similar levels to where they were in the autumn of 2003. From the peak in the second quarter of 2006 through the trough in April 2009, the 10-City Composite is down 33.5% and the 20-City Composite is down 32.6%. With the relative improvement of the past few months, the peak-to-date figures through October 2009 are -29.8% and -29.0%, respectively.

This last statement shows the potential adverse effect of leverage for many borrowers. While many of us suffered similarly large percentage declines in retirement and brokerage funds when the stock market declined in 2008 and 2009, most of those accounts did not use "margin" of borrowed money in our accounts. Therefore, to paraphrase Bill Belichick, the losses "were what they were". However, for homes purchased at the hight of the market, or refinanced with cash out, quite likely the average decline of 29% was magnified by 3, 4 or 5 times in a decline of equity due to the leverage of borrowing. If you purchased a home for $500,000 and put 20% down, your $100,000 of equity is lost, plus $45,000 more. If you put down less, the effect is more significant. This effect is dampened for many of us who were fortunate enough to also enjoy the run up in real estate prices, but is very real for those who were first time home buyers, 2nd home buyers or investors. It also has a very real effect on refinancing those homes and meeting tighter underwriting criteria.

Interest Rates – As mentioned in my last report, rates did begin to tick up. This was due to a combination of positive news in the economy, and bond investors fear of rising rates and inflationary pressures. Rates are still low, but the probability of a climate of rate increases is likely.

Many borrowers are using the opportunity of lower rates to convert to shorter term maturities - 15 year or even 10 year fixed vs. a 30 year amortization. These rates are typically several basis points lower than 30 year amortization and provide significant interest savings over the life of the mortgage. This tactic also provides a known rate of return over other investment opportunities, and dove tails with my strategy for many borrowers of picking a date they wish to be mortgage free by and tailoring the mortgage to such.

Rates with no points for borrowers with excellent credit and good Loan to Values are in the low 5% range for the 30 year fixed, the mid to upper 4% range for 20 and 15 Year Fixed, and the low to mid 4% range for the 10 year Fixed.

Some of the above rates can be provided with a discount to closing costs as well.

What this means to you.
• Purchases - If you are thinking about purchasing a home, real estate prices have shown stabilization in most areas. Do your research on your particular local. In my opinion, the cost of higher interest rates in the future is more significant than the threat of fallen prices due to more foreclosures.
• Refinances – Act now. As predicted last report, rates are beginning to increase. You should always know your options. Look at the difference in interest savings and payment with different amortization options.
• Contact me – I am happy to provide you a pre-approval letter or prepare a refinance analysis for you.


Please feel free to forward this newsletter to anyone you would like. I would also be happy to hear your opinions or answer any questions you or your colleagues may have. I can provide mortgages in any state but Texas, but I would be happy to offer a reference there.

Kind regards,

- Greg