Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

Each month, the National Association of Realtors^® releases a study called the Existing Home Sales report. It’s a detailed look at “used” home sales data from all four regions of the country.

One of the key findings in each Existing Home Sales report is something called the “median sales price”, the statistical price point at which half of the homes in the U.S. sold for more, and half sold for less.

Last month, the median sales price in the United States fell to $215,100, off 6.1 percent from a year ago.

But, just because the median sales price is falling doesn’t mean that housing is necessarily in the doldrums. Real estate is tied to local markets and the national statistics rarely make sense when applied to any given city.

For example, the $215,100 median sales price for the nation is as outrageously inappropriate as a sales price to New York City as it is to Minot, North Dakota. In fact, it’s the very definition of “median” that discounts its ability to reflect the health of the national housing market.

If large numbers of homes are sold and the price tags are high, the median sales price will trend higher. Conversely, if large numbers of homes are sold and the price tags are low, the median sales price will trend lower.

The median is just the middle point.

The falling median home sales price in June may indicative of first-time home buyers outnumbering luxury ones, or banks successfully unloading homes in foreclosure. And this idea may be supported by the data which shows that the West and Northeast led the decline.

So if you’re trying to gauge the health of your local real estate market, consider asking a local real estate agent for help. A skilled agent’s analysis will be infinitely more practical and useful than the national data pumped out by the industry trade group.

The connection between the world’s political events and mortgage rates here at home is not always clear, but Russia’s invasion of Georgia provides a strong working lesson.

Georgia is a former Soviet republic on the eastern shores of the Black Sea. Oil pipelines within its territory supply about 1 percent of the world’s daily oil needs, mostly to ports in Western Europe.

Last week, Russia bombed Georgia’s oil and natural gas transport systems. None of the bombs struck the pipelines, but several exploded close to it. Pipeline part-owner BP shut down two of its oil lines as a precaution, but Russia is reported to have struck one of BP’s other pipelines this morning.

The cost of oil is generally based on the normal economics of supply and demand so when oil supplies are threatened, damaged, or shutdown — because of war, weather or otherwise — oil prices respond by moving higher.

Higher oil prices, of course, are considered inflationary and that causes mortgage rates to rise here in the United States. High oil prices, for example, are one reason why mortgage rates spiked throughout June and July of this year. And as oil prices have settled, rates have calmed a bit, too.

It’s easy to ignore politics and news when it’s not happening in your own country, let alone your own hometown. But that doesn’t make it any less important.

When you’re buying a home, or thinking of refinancing one, you’ll likely need a mortgage and the rate you pay on that mortgage will be influenced by every geopolitical event in the world.

Especially when the event involves oil.

Source
Russia-Georgia conflict raises worries over oil and gas pipelines
Elizabeth Douglass
Los Angeles Times, August 13, 2008

It’s not your imagination — getting approved for a home loan is becoming increasingly more difficult.

Taken from the Federal Reserve’s quarterly survey of 84 banks, it illustrates the changing dynamic of mortgage guidelines.

Most notable is the steep curve for “prime” mortgages, a type of home loan given to applicants exhibiting:

• A well-documented credit history
• High credit scores
• Low debt-to-incomes

Americans have come to expect sub-prime loans to be tougher, but it’s the sharp tightening of prime guidelines shows us that nobody is exempt from the newfound underwriting prudence that banks are exhibiting right now.

If you plan to buy or remortgage a home over the next year, consider a popular expression in financial circles — the trend is your friend.

Know that mortgage guidelines will get tougher before they get easier and applicants on the cusp of being approved today will almost certainly be denied a mortgage three months down the road.

Owning real estate and making sound financial decisions requires a tremendous amount of advance planning and, sometimes, looking at the past is the best way to prepare for what’s coming ahead.

According to the Federal Reserve’s survey, what’s coming ahead more mortgage application scrutiny.

When home sellers accepts a contract on MLS-listed property, the property’s official status changes from “Active” to “Pending”.

By measuring the number of “Pending” homes nationwide, the National Association of Realtors^® publishes its once-monthly Pending Homes Sales Index.

The real estate industry group positions the report as a predictor of future home sales activity, stating that 80 percent of homes under contract will “close” within 60 days, and most others will close within 120 days.

But, although using the Pending Home Sales report as a crystal ball may be its intended use, it may not its best use.

This is because of the index’s methodology:

1. It doesn’t measure new construction homes
2. It doesn’t track For Sale By Owner properties
3. Its sample set covers just 20 percent of MLS transactions

In addition, in a tough mortgage climate such as the one we’re in now, a greater percentage of pending sales will fail to close at all because of lack of financing.

The Pending Home Sales Index still has its place, however — it’s a terrific look at the buy-side demand for homes.

When the Pending Home Sales Index is rising, we can infer that more buyers in the market for homes and this is a signal of market strength. After all, pending sales can’t happen unless there are buyers out there. And with more buyers competing for homes, home prices tend to rise.

This is why the June’s Pending Home Sales report is so intriguing.

In June — for the second time in three months — the Pending Home Sales Index posted a large gain even as economists were calling for a loss. The inference here is that buyers are not only finding good value in all four regions of the country, but are willing to make bids on homes listed for sale.

Now, again, the uptick doesn’t mean that the pending sales will necessarily close, but it does tell us that more home buyers are finding “now” to be a good time to buy real estate.

That sort of insight is what make the Pending Home Sales Index worth tracking. When buyer demand is rising, the real estate market isn’t usually far behind.

In a week packed with mortgage news and economic data, mortgage rates swung hard in both directions last week before settling into the weekend slightly higher across the board.

Adjustable-rate mortgages worsened more than their fixed-rate counterparts and both broke a two-week streak in which mortgage rates had improved.

But, if we look at all of the big stories of last week, there was a dramatic overweight of news that is usually “good for rates”.

Those stories included:

• The Federal Reserve saying that inflation should moderate soon
• Oil prices falling 20 percent from July’s highs
• Home buyers propping up home sales levels
• Foreign investors wanting to buy long-term U.S. debt
• The U.S. dollar strengthening versus foreign currencies

In the end, it turned out that the news was so good, investors decided to jump back into the stock market, propelling the Dow Jones 3.6 percent to a 6-week high. This fevered trading action drew investor money away from the bond market — including bonds of the mortgage-backed variety — and that pressured mortgage rates higher.

And, of course, it didn’t help rates when the two biggest insurers of mortgage-backed debt posted large quarterly losses and warned of more delinquencies ahead.

Turning our attention to this week, make note that it is back-heavy on data. Therefore, expect the positive momentum of Thursday and Friday to carry through Monday and possibly Tuesday.

By Wednesday, however all bets are off — that’s when July’s Retail Sales data is released. Furthermore, Retail Sales is backed up Thursday by the Consumer Price Index, a Cost of Living measurement.

Both data points are correlated with inflation so higher-than-expected readings may cause mortgage rates to rise.

Regardless, given that mortgage rates are now moving more in a hour than they used to in a day, be prepared to get your mortgage rate quotes quickly and be ready to act on them.

Just 90 minutes later, the quote could be expired.

The next time you think you may have outgrown your home, consider what it would be like living in The Little House.

Barely bigger than a school bus, the 312-square-foot home featured by CTV News occupies land once reserved for a city alleyway. When the alley went unfinished, a contractor decided to buy and build on the lot.

The home is so small that an adult with outstretched arms can touch the opposite walls inside of it.

But, of all things little about The Little House, it’s sale price is not one of them. Well-decorated and recently renovated, the home at 128 Day Avenue recently sold for the U.S.-equivalent of $159,300, or $511 per square foot.

Fannie Mae announced a new risk-based pricing model and additional mortgage delivery fees this week, adding to the cost of buying or refinancing a home.

Risk-based pricing was first introduced by Fannie Mae this past April. It added new, mandatory loan fees for high-risk borrowers while rewarding a small group of low-risk borrowers with fee credits.

In the updated model, even 720 credit scores with a 20 percent downpayment won’t protect mortgage applicants from the risk-based fees and they can range as high as 2.750 percent, depending on credit scores and loan-to-value.

Fannie Mae will continue the practice of rewarding low-risk borrowers with fee credits.

Fannie Mae’s second pricing change involves the Adverse Market Delivery Charge and it is not risk-based — it applies to all applicants equally.

First introduced in December 2007, Adverse Market Delivery Charges are mandatory surcharges on all conforming mortgages. The fee was initially a quarter-percent. It’s now doubled to 0.500 percent.

Combining risk-based pricing and delivery fees, mortgage applicants have two choices to pay them:

1. As a one-time fee, paid at closing, payable to the lender
2. As an interest rate increase, payable month-after-month to the lender

The one-time fee is calculated by multiplying to fee amount by the applicant’s loan size and dividing by 100. The interest rate increase is calculated as a general rule, where each 0.500 percent in fees can be substituted for a 0.125 percent increase to a mortgage rate.

The fees become “official” October 1, 2008, but lenders are expected to deploy them much sooner.

For the second consecutive meeting, the Federal Open Market Committee left the Fed Funds Rate unchanged at 2.000 percent.

In its press release, the Federal Reserve addresses inflation, saying that it “has been high”, fingering energy and commodity costs as culprits. The Fed does expects inflation to moderate later this year, however.

Regarding recession, the Fed addressed softening labor markets and tightening credit, and said that high energy prices may slow down economic activity in the months ahead.

The key comment, repeated from the June statement, was this:

Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth.

Translated, it reads:

The Federal Reserve expects that its policy changes to-date will help the markets find balance and order.

In other words, the Fed is biased towards a Fed Funds rate pause at its September 16, 2008, meeting barring new developments.

Stock markets are reacting favorably to the FOMC statement, bouncing higher after the 2:15 PM ET release. This movement is pulling money away from mortgage bonds and, as a result, rates are at their worst levels of the day.

Source
Parsing the Fed Statement
The Wall Street Journal Online
August 5, 2008
http://online.wsj.com/internal/mdc/info-fedparse0808.html

The Federal Open Market Committee meets today and is widely expected to hold the Federal Funds Rate at 2.000 percent.

This does not mean that mortgage rates will stay flat, too, however.

The Fed Funds Rate is a different type of interest rate from the ones charged to American homeowners for their mortgages.

The Fed Funds Rate is an interest rate paid for an overnight loan between banks; it’s the shortest-of-short-term loans made to borrowers with exceedingly deep reserves.

By contrast, mortgage loans are borrowed over 30 years and are offered to borrowers of all credit types.

If the direction of the Fed Funds Rate and of mortgage rates were truly related, the chart above wouldn’t show mortgage rates rising throughout the 12 months ending February 2008 while the Fed Funds Rate fell by 2.250 percent.

So, just because the Fed Funds Rate may remain on pause today doesn’t mean that mortgage rates will, too. Mortgage rates are notoriously volatile post-Fed announcements.

Mortgage rate shoppers may be prudent to lock in ahead of Ben Bernanke and Company’s 2:15 P.M. ET press release.

In a week in which stock markets moved 1 percent or more on four separate days, mortgage markets displayed a relative calmness that helped pull rates lower.

It was the second consecutive week that mortgage rates improved.

Last week’s biggest story came Monday when the housing bill was passed into law. The new law provides lifelines to the housing market’s far-reaching corners including to homeowners, to lenders, and to mortgage-bond securitizers like Fannie Mae.

To the mortgage markets, the law adds stability to the system. Because the severity of losses is likely to reduce, mortgage debt is suddenly more attractive to global investors which includes pension funds, hedge funds, and other nations.

With fewer mortgage-related losses expected, demand for mortgage debt increased and that helped pressure mortgage rates lower.

There was other big news last week, too, and it came in the form of employment data.

For the seventh straight month, the economy lost jobs and it has now shed close to a half-million jobs so far this year — a minuscule one-third-of-one-percent of the entire U.S. workforce.

Despite that smallness, though, unemployment among Americans is a trend worth watching.

When fewer Americans are working, fewer Americans are spending and that can slow down the U.S. economy. For now, this sort of mild slowdown appears to be leading mortgage rates lower but too many lost jobs could reverse the trend.

This week, there are two big events on the calendar — Monday’s Personal Spending and Personal Income figures, and Tuesday’s Federal Open Market Committee meeting.

The Fed is widely expected to hold the Federal Funds Rate at 2.000 percent but — as is always the case — it’s not what the Fed does, it’s what the Fed says. If the Fed talks tough against inflation, expect mortgage rates to rise.