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How Low Will Mortgage Rates Go?

Posted: 08 Jul 2010 03:30 AM PDT

Mortgage interest rates have hit historic lows over the last few weeks. Will they continue to go lower? 


Irvine Home Address ... 155 CHURCH Pl Irvine, CA 92602
Resale Home Price ...... $649,000

How - low - can you go? How - low, can you go?
How - low - can you go? How - low, can you go?
How - low - can you go? How - low, can you go?
How - low - can you go? How - low, can you go?

Ludacris -- How Low

Mortgage interest rates have dropped sharply over the last few weeks, and they show no signs of bottoming. The stock market has been selling off and everyone is bracing themselves for a renewed recession as our economy double dips. 

Mortgage rates hit new lows but housing demand lags without tax credits

July 1, 2010 
A good news-bad news scenario continues on the housing front, with mortgage interest rates dropping again to record lows, according to the latest survey by home-loan buyer Freddie Mac.
The bad news: With the winding down of government stimulus programs, even fewer people are taking advantage of the eye-popping rates to buy homes.

Mortgage interest rates are determined by supply and demand like prices in any market. Right now, there are few investment opportunities in our moribund economy, so money is seeking the low risk of government-backed mortgages. Since the GSEs now carry the full faith and credit of the US government, GSE mortgage-backed securities are no different than 10-year Treasuries. Since yields on those securities have dropped below 3%, it is not surprising that money would seek a higher yielding alternative.

What is surprising is how weak the economy is. For mortgage interest rates to be this low and falling means that investors see no other viable investment opportunities. Why would you tie your money up in long-term mortgage debt -- especially if you thought inflation was coming? The only reason anyone would do this is because no other viable opportunities exist. The double-dip recession is on its way.  

The lenders that Freddie surveyed early this week were offering well-qualified borrowers 30-year fixed loans for up to $417,000 at an average rate of 4.58%, the lowest since the survey began in 1971.

For 15-year fixed-rate mortgages the average was 4.04%. Adjustable-rate loans with the first five years at fixed rates were being offered at an initial rate of 3.79%.

The borrowers would have paid an average of 0.7% of the loan balance in upfront lender fees and points, Freddie Mac said in its survey Thursday, and would have had 20% down payments or equity in their homes. 

For solid borrowers who shop around and pay 1% of the loan balance in fees, rates were lower yet, mortgage professionals said. The website, which tracks rates being offered through brokers, said 30-year funding was available at 4.25% for such borrowers and 15-year mortgages at 3.75%. 

Those rates are incredible. I wish I were in a position to buy rental properties in Las Vegas, Southwest Florida, parts of Arizona or even Riverside County where pricing is at or near the bottom. When inflation does come back, we could easily see inflation rates exceeding current mortgage interest rates. It's a shame prices are still so elevated here.

The bad news, of course, is that the rates are scraping bottom because of fears that the global economy is in terrible shape. And that has continued a pattern that economists are watching with mounting concern -- a mini-boom in refinancings coupled with lagging actual home purchases.

A Mortgage Bankers Assn. index released Wednesday showed applications for refinance loans jumped 12.6% last week from the previous week and were at the highest level since the week ending May 22, 2009.

An index of home purchase applications, by contrast, fell 3.3% from one week earlier. That left refis at 76.8% of total applications, the highest share since April 2009.

"The bad news is we're driving rates down and there's still nothing on the housing sales side," said Anthony Sanders, a senior scholar in real estate finance at George Mason University's Mercatus Center. "It's mostly refinancings, and 50% of the sales out there are foreclosures and distress sales."

Sanders noted that spooked investors worldwide are pouring funds into U.S. Treasury securities, still regarded as a bastion of safety. With the increased demand, the yield on Treasuries has dropped, dragging down the yield on Freddie and Fannie Mae mortgage bonds in the process.

The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgage rates, dropped below 3% this week for the first time in more than a year.

That ultimately means lenders can offer lower rates on the mortgages backing the bonds.

Loans insured by the Federal Housing Administration remain available with 3% down payments to those who can qualify and pay the premiums for the insurance.

But government-controlled Fannie Mae and Freddie Mac have tightened their lending standards after heavy losses left them wards of the U.S. government. Federal tax credits for home buyers ran out at the end of April, and unemployment remains distressingly high, Sanders said.

"The facts of the matter are that we've exhausted what the government can do for the housing market," Sanders said. "The tax credits were the last hurrah of the stimulus."

Not surprisingly, given his comments, he's expecting another dip in housing prices as "the subsidies go away, the Bush tax cuts wear off and healthcare costs go up."

--E. Scott Reckard

Ultimately, mortgage interest rates have to go up, but as long as the economy remains in the doldrums and there are few competing investment opportunities, mortgage interest rates can still go lower. Far from being a good thing, it is a sign of how bad things really are.

Market clearing rates? 

Markets generally seek an equilibrium of supply and demand known as the market clearing price

For 150 years (from approximately 1785 to 1935), the vast majority of economists -- the classical or neoclassical school -- took the smooth operation of this market-clearing mechanism as inevitable and inviolate, based largely on faith in Say's law. But the Great Depression of the 1930s caused many economists, including John Maynard Keynes, to doubt their classical faith. If markets were supposed to clear, how could ruinously high rates of unemployment persist for so many painful years? Was the market mechanism not supposed to eliminate such surpluses? In one interpretation, Keynes identified imperfections in the adjustment mechanism that, if present, could introduce rigidities and make prices sticky. In another interpretation, price adjustment could make matters worse, causing what Irving Fisher called "debt deflation". Not all economists accept these theories. They attribute what appears to be imperfect clearing to factors like labor unions or government policy, thereby exonerating the clearing mechanism.

Most economists see the assumption of continuous market clearing as not very realistic. However, many see the assumption of flexible prices as useful in long-run analysis, since prices are not stuck forever: market-clearing models describe the equilibrium towards which the economy gravitates. Therefore, many macroeconomists feel that price flexibility is a good assumption for studying long-run issues, such as growth in real GDP. Other economists argue that price adjustment may take so much time that the process of equilibration may change the underlying conditions that determine long-run equilibrium.

There is no question that the housing market has been manipulated by government intervention and lenders refusal to foreclose on squatters. This has created circumstances were prices are artificially supported at levels where market clearing has been greatly delayed. However, since housing markets are nearly completely dependant upon borrowed money, perhaps the market can be cleared by lowering the cost of financing so much that the inventory of distressed properties can be cleared by low interest rates rather than low home prices. At least, that is what our government and banks hope will happen.

I don't think it works that way. I believe we can find a temporary equilibrium where low mortgage interest rates can support prices, but at some point, competing demands for capital will force interest rates to go higher, probably long before the inventory of distressed properties has cleared the market, particularly in the hardest hit markets. As interest rates go up, the amounts financed will go down and prices will enter a long period of slow decline.

I am very bullish on real estate in beaten down markets because the price-to-rent ratio is so favorable. I am not bullish because I believe resale prices will go up because they probably won't. I am bullish because owning for positive cashflow is a superior method of investment, and opportunities in many markets are the best they have ever been, and if safe-haven investors are willing to put money into mortgage debt at rates likely to be below future inflation rates (something I consider foolish), taking on mortgage debt for investment properties -- mortgage debt held to a 15-year maturity -- is a great idea.

The old notion of speculating on resale price is dead. The new real estate market is about buying for future cashflow.

100% financing implosion

Those with the least in the transaction are generally the first to give up. We used to see many 100% financing deals gone bad, but this is the first I have seen in a while. I thought we had flushed most of them out of the system, but apparently a few have held on.

Today's featured property was purchased for $710,000 on 4/13/2005. The owner used a $567,920 first mortgage, a $141,980 second mortgage, an a $100 down payment... I guess, technically, it isn't 100% financing, but the amount put down is less than a rental deposit.

These owners gave up earlier this year.

Foreclosure Record
Recording Date: 06/09/2010
Document Type: Notice of Default


Irvine Home Address ... 155 CHURCH Pl Irvine, CA 92602

Resale Home Price ... $649,000

Home Purchase Price … $710,000
Home Purchase Date .... 4/13/2005

Net Gain (Loss) .......... $(99,940)
Percent Change .......... -14.1%
Annual Appreciation … -1.7%

Cost of Ownership
$649,000 .......... Asking Price
$129,800 .......... 20% Down Conventional
4.80% ............... Mortgage Interest Rate
$519,200 .......... 30-Year Mortgage
$131,339 .......... Income Requirement

$2,724 .......... Monthly Mortgage Payment

$562 .......... Property Tax
$117 .......... Special Taxes and Levies (Mello Roos)
$54 .......... Homeowners Insurance
$0 .......... Homeowners Association Fees
$3,457 .......... Monthly Cash Outlays

-$462 .......... Tax Savings (% of Interest and Property Tax)
-$647 .......... Equity Hidden in Payment
$238 .......... Lost Income to Down Payment (net of taxes)
$81 .......... Maintenance and Replacement Reserves
$2,667 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$6,490 .......... Furnishing and Move In @1%
$6,490 .......... Closing Costs @1%
$5,192 ............ Interest Points @1% of Loan
$129,800 .......... Down Payment
$147,972 .......... Total Cash Costs
$40,800 ............ Emergency Cash Reserves
$188,772 .......... Total Savings Needed

Property Details for 155 CHURCH Pl Irvine, CA 92602
Beds: 4
Baths: 2 full 1 part baths
Home size: 1,750 sq ft
($371 / sq ft)
Lot Size: 3,254 sq ft
Year Built: 1999
Days on Market: 170
Listing Updated: 40308
MLS Number: S10000806
Property Type: Single Family, Residential
Community: West Irvine
Tract: Ol
According to the listing agent, this listing may be a pre-foreclosure or short sale.

Great Irvine location, best city, best neighborhood, great house.


real estate home sales


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