Stimulus Plan Finalized

Government announcements dominated the financial news this week. Updates on two major programs both were favorable for mortgage markets, and mortgage rates fell modestly during the week.

The most highly anticipated news concerned Tuesday’s speech from Treasury Secretary Geithner on the financial institution assistance plan. This “Financial Stability Plan” involves multiple programs to remove bad assets from banks’ books and to support new lending. It also contains funds to help prevent foreclosures. Investors were sorely disappointed by the lack of details about how the plans would work, however.  They responded to the uncertainty by purchasing relatively safer assets and the stock market plunged, while Treasury and mortgage-backed security markets rallied, pushing rates lower. Geithner suggested that more information about a plan to purchase troubled assets and a comprehensive housing program will be released in the next few weeks.

Later in the week, the House and the Senate agreed on a compromise $789 billion fiscal stimulus plan, which is expected to pass within days. The Obama administration estimates that the plan will create 3.5 million jobs. Both the House and the Senate had passed versions which were larger than the final compromise plan, and the reduction in scope helped mortgage markets. A smaller plan means that the government will have to issue less debt. Unfortunately, one of the spending cuts in the final plan was a provision for a $15,000 homebuyer tax credit, which came with an estimated price tag of $35 billion. Instead, the government will leave in place an existing $7,500 tax credit, applicable to only first time homebuyers. The primary change to the tax credit is that it will no longer need to be repaid. The estimated cost of this $7,500 tax break is less than $3 billion.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, corey@frontstreetmtb.com

Inflation Falls

Despite weak economic data and sizable Fed purchases of mortgage-backed securities (MBS), mortgage rates actually rose a little during the week. After falling by more than 1.0% since late November, mortgage rates have resisted any move lower over the last couple of weeks, even with extremely bond-friendly economic news. Still, mortgage rates remain near the lowest levels seen since the 1950s.

The tame inflation reports and weak economic growth data released during the week should have been favorable for mortgage markets. The December Consumer Price Index (CPI) declined -0.7% from November, mostly due to lower energy prices. The core CPI rate, which excludes food and energy, rose a scant 1.8% from one year ago. The December Producer Price Index (PPI) report contained similar results, and inflation concerns are low right now. Meanwhile, the economic growth indicators were much weaker than expected. Both Industrial Production and Retail Sales dropped significantly in December. In 2008, Retail Sales showed their first annual decline since the data began being tracked. Until the economy shows solid signs of improvement, we should see little inflationary pressure on mortgage rates.

Flex Your Buying Muscle

 

Regardless of the causes, most areas around the country are experiencing what is commonly referred to as a “buyer’s market.”  That term might make sellers squirm, but for those purchasing a home, lower prices are just the starting point for negotiation these days.

 

During the recent “boom” years, buyers often accepted a property “as is,” and asked for few concessions, even forgoing inspections and appraisals in an attempt to avoid being dumped for the next qualified buyer in the queue.  Now, however, buyers are in the drivers seat and they know it, insisting on a variety of terms in their offers.

 

The most popular demand now seems to be the “home warranty,” whereby the seller purchases a one-year service contract to cover any unexpected system and/or appliance repairs.  Of course, this is on top of insisting that sellers pay for all needed repairs exposed by an inspection before closing, or at least an allowance paid to the buyers to cover the expenses.

 

Just one inspector doesn’t seem to be enough, either.  Now buyers are looking more closely at lead and radon levels, roofs and foundations, and looking into inspectors who specialize in these areas.  Sellers find they need to be more flexible, or the buyers will simply move on to the next seller in the queue.  Now is the time to boost your purchase power.

TIME TO MAKE LEMONADE

 

When one hears the word “foreclosure,” images are conjured of families unable to meet their loan commitments, and forced to consider unpleasant options.  However, it’s not only homeowners that suffer from a foreclosure.  Renters can be “out on the street” if their landlord defaults on mortgage payments.

 

A report from the Mortgage Bankers Association states that nearly 20% of recent foreclosures have been against investors who did not live in the property, and even tenants in good standing face having to vacate the premises if they’re renting one of these properties.

 

Why mention this gloom and doom scenario?  Because home values have declined, and buyers are seeing the best deals in many years.  While unpleasant for sellers, price declines increase affordability for buyers, so if you’ve been renting, now is a fantastic time to turn that monthly payment into equity.

 

Interest rates have inched up, but still-historically low rates combined with very affordable housing yield a formula that should put you in a home that you own for the same amount you are now paying for rent.  Not to mention that at a lower purchase price, you’ll enjoy some great appreciation over the coming years.

 

Just because you’re renting now, you’re not necessarily safe from suffering the consequences of a foreclosure.   Take matters into your own hands and buy yourself some peace of mind.

Inflation Tame

As the stock market fell to five-year lows during the week, investors moved to less risky investments. Treasury markets were the primary beneficiary of the flight to safety, and Treasury yields reached the lowest levels in decades. Mortgage rates fell during the week as well, but to a much lesser extent.

The news during the week on inflation pointed to lower future levels. The October Consumer Price Index (CPI) inflation report showed a large monthly decline in the overall index due to lower oil prices. The core rate, which excludes food and energy, saw its first monthly decline in over 25 years, and the annual rate fell to 2.2% from 2.5% in September. Oil prices have continued to move even lower this month, which will be reflected in the November data. Lower expected inflation is almost always a good thing for mortgage rates.

In the housing sector, October Housing Starts fell to a record low, and Building Permits, a leading indicator, fell 12%. These were weak numbers, but a decline in new home building will reduce the number of unsold homes on the market, which should help to stabilize home prices sooner. The recent decline in home prices has one bright spot. Combined with relatively low mortgage rates, homes have reached their highest level of affordability in four years, according to the National Association of Home Builders (NAHB). The NAHB index compares the cost of paying for a home, based on average home prices and mortgage rates, to the median household income. Increased affordability allows more people to participate in the housing market and should boost demand.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email corey@frontstreetmtg.com

AND NOW, THE GOOD NEWS

Consumer Reports recently published a survey, and the results indicate that there is, in fact, some good news in the real estate industry!  While foreclosures and other economic factors still exert some negative impact, those buyers and sellers who have worked with real estate professionals expressed a high degree of satisfaction, both with their representatives and with their bottom line.

 

Nearly 10,000 consumers were surveyed, and nearly three-quarters of those buyers and sellers reported that they were very or completely satisfied with their agent.  More good news: 86 percent of sellers who listed with a professional made the sale!  (Many of the remaining percentage still had their homes on the market at the time of the survey.)

 

Other results showed what all agents already know, because over four-fifths of consumers who listed through a broker netted an average of only $5,000 less than their asking price.  On the flip side, two-thirds of buyers who used a representative paid about $5,000 less than their purchase’s original listing price. (The remaining third, who negotiated on their own, ended up paying very close to the asking price.)

 

So what do all these statistics mean to you?  Regardless of your market’s conditions, when you face the need to buy or sell your home, you’ll get the best results when you seek the representation of a qualified real estate professional!

 

Rescue Plan Changes Direction

For mortgage markets, the biggest news of the week came from Treasury Secretary Paulson during an update on the $700 billion TARP rescue plan. Paulson surprised investors with the news that the Treasury has scrapped the original plan to purchase troubled assets from banks and will use the funds in other ways to support the still “fragile” financial system. Lawmakers and investors were provided few details about the anticipated future use of the funds, and this abrupt shift in plans added to the uncertainty confronting investors in recent weeks.

While mortgage rates ended the week nearly unchanged from the prior week, daily volatility remained high. During October and November, movements in mortgage rates have been much larger than usual, primarily due to the high degree of uncertainty facing investors. Will there be a second major government stimulus package and what form will it take? What will be the impact of the extra debt issued to fund the government programs? Will other countries such as China have less money available to invest in US bonds, including mortgage backed securities, while they stimulate their own economies? Finally, how will the Treasury use the remaining funds from the $700 TARP rescue plan (discussed above)? Once investors have answers to these and other questions, we should see less volatility in mortgage rates.

Compliments of Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

Fed Cuts to Stimulate Economy

This week’s economic data and comments from Fed officials confirmed the economic outlook shared by most investors, namely that the economy is slowing sharply. Wednesday, the Fed cut the target Fed Funds rate by one half point to 1.00%, as widely expected. The vote was unanimous and followed a coordinated half point rate cut on October 8. Investors believe the statement left the door open for further rate cuts and have priced in another half point rate cut before the end of the year. The Fed appears to be most concerned with boosting near-term economic growth. While aggressive short-term stimulus is good for the stock market, mortgage investors are worried about its impact on long-term inflation, and those concerns helped pushed mortgage rates higher during the week.

 

A second factor also contributed to this week’s rise in mortgage rates. The federal government’s takeover of Fannie Mae and Freddie Mac in September left mortgage investors with the impression that there was explicit government backing of the debt and guarantees issued by Fannie and Freddie. Government officials have been sending mixed messages, however, raising some concern about whether the two companies really will have the long-term backing of the government. Due to the uncertainty, investors, particularly important foreign investors, have been reluctant to invest in Fannie and Freddie guaranteed mortgage backed securities. Yields required by mortgage backed security investors directly affect most mortgage rates. If the government were to unambiguously convince investors that it will stand behind Fannie and Freddie guarantees, then mortgage rates could be expected to move lower.

 

Thanks to Corey Phelps, Front Street Mortgage, (231) 360-7283, email: corey@frontstreetmtg.com

 

Congress Passes Rescue Plan

All eyes were on Congress this week as they debated the financial rescue plan. Fed Chief Bernanke and Treasury Secretary Paulson proposed the $700 billion plan to purchase troubled mortgage assets from financial institutions, providing the institutions with much needed capital. The expectation is that the institutions will use the freed up capital to make credit more readily available. On Monday, the House unexpectedly voted against the plan, and the stock market plunged. A revised plan, which retained the core of the original plan, passed by a wide margin in the Senate on Wednesday and passed in the House on Friday. Despite the historic events this week, mortgage rates ended the week nearly unchanged.

 

In the shadow of the debate over the rescue plan, the economic data released during the week continued to highlight the weakness in the economy. The monthly Employment report showed that the economy lost -159K jobs in September, worse than the consensus forecast of -105K. The economy has lost jobs for nine straight months, which is the worst performance since the period following 9/11. The Unemployment Rate remained at 6.1%, which was up from 4.7% one year ago. Exports have been a source of strength this year, but economic weakness around the world has hurt in this area as well.

 

It is hoped that the rescue plan will be a strong first step in boosting the economy, and other actions are also expected to help. Falling oil prices and low wage inflation have eased inflationary pressures. This will allow the Fed more flexibility to cut rates and stimulate the economy. Investors have priced in a half-point cut in the Fed Funds rate by the end of the year.

 

Thanks to Corey Phelps, Front Street Mortgage, email: corey@frontstreetmtg.com, (231) 360-7283

Congress Debates Rescue Plan

Credit markets are dragging down the economy, and the basic problem is clear. Many financial institutions hold large quantities of complex mortgage securities which have declined in value. The precise value of these securities is difficult to determine, since there are few buyers and the market is not functioning efficiently. Amid the uncertainty, it’s very difficult and costly to raise additional capital, so financial institutions are conserving their remaining capital. These institutions are very reluctant to make new loans of any kind. If businesses have no capital to grow and consumers have trouble purchasing homes and cars, the economy suffers and jobs are lost.

 

Fed Chief Bernanke and Treasury Secretary Paulson spent two long days this week presenting a $700 billion rescue plan to Congress. Much of the testimony noted that the rescue plan would be an acquisition of assets. Mortgages and mortgage backed securities will be purchased at a significant discount to the face amount of the underlying mortgages. Many of the mortgages will be performing, while some will not, and they will have houses as collateral. Ultimately, the orderly liquidation of the acquired assets should recover most, if not all, of the purchase price, and the taxpayer might come out ahead. The plan would provide much needed capital to institutions, which is expected to be used to make more loans.

 

Heading into the weekend, lawmakers will continue to work on the details of the plan and will explore alternatives, such as an insurance solution. For mortgage markets, expectations that funding a rescue plan will increase the supply of debt pushed mortgage rates a little higher during the week.

 

By Corey Phelps, Front Street Mortgage, email: corey@frontstreetmtg.com, (231) 946-6321