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Irvine Housing Blog

Irvine Housing Blog

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Bond Market Selloff Makes Mortgage Rates Rise

Posted: 24 Nov 2010 02:30 AM PST

A global sell-off of American Debt would be a disaster for the United States in general and the housing market in particular. Could it happen?

Irvine Home Address ... 5152 Yearling Ave Irvine, CA 92604
Resale Home Price ...... $545,000

Delivered from the blast
The last of a line of lasts
The pale princess of a palace cracked
And now the kingdom comes
Crashing down undone

Smashing Pumpkins -- The Beginning is the End is the Beginning

A sharp sell-off in the bond market has caused a sudden rise in mortgage interest rates. This kind of market action happens occasionally, and it may signify nothing; however, there are forces at work that may signal and end to super low mortgage interest rates.

Mortgage applications are down and rates are up

November 17, 2010 | 1:00 pm

Applications for mortgages fell last week as interest rates jumped -- both bad signs for the housing market as it struggles to gain momentum in a lackluster sales environment.

The Mortgage Bankers Assn. said Wednesday that its market composite index, which measures the weekly volume of home loan applications, fell 14.4% on a seasonally adjusted basis last week compared with the week before.

Applications for mortgage refinances fell 16.5% and purchase applications fell 5%, the group said.

Reports of low sales volumes are mirrored in the mortgage volumes. You know rates have been low a long time when the refinance business is slow as well. Usually low interest rates spur refinances, but everyone who could refi has, and there are few qualified customers for loan products.

Mortgage rates were up, as a sell-off in the bond market pushed up longer-term interest rates across the board. The average rate for a 30-year fixed-rate mortgage jumped to 4.46% from 4.28%, with points increasing to 1.13 from 1.04 for loans that would cover 80% of the value of a home.

The average rate for a 15-year fixed-rate mortgage increased to 3.87% from 3.64%, with points falling to 0.91 from 1.08.

Michael Fratantoni, the bankers assocation's vice president of research and economics, said the increase in rates was due to stronger economic data and rising concern over the Federal Reserve’s "quantitative easing" program, under which the Fed plans to buy $600 billion worth of Treasury bonds by mid-2011.

-- Alejandro Lazo

Those rates are both very low. I hope interest rates stay low over the next year so I can take advantage of it to buy inexpensive cashflow properties. If rates go up while the sales volume is weak, prices may drop beneath the current trading range and take a step down.

The story within the story is the happenings in the bond market that caused this sudden spike in mortgage interest rates.

BOB RUBIN: "US In Terribly Dangerous Territory," Bond Market May Be Headed For "Implosion"

Aaron Task -- Nov. 17, 2010, 11:24 AM

Warning of the risk of an "implosion" in the bond market, former Treasury Secretary Robert Rubin says the soaring federal budget deficit and the Fed's quantitative easing are putting the U.S. in "terribly dangerous territory."

Speaking at an event at The Pierre Hotel in New York City honoring Sen. Kent Conrad (D-N.D.), Rubin joined the growing number of current and former officials (foreign and domestic) to criticize QE2. The Fed's plan to buy $600 billion of Treasuries "has a lot of risk," he said, calling the international reaction "horrendous."

This statement sounds more like political posturing rather than sound financial analysis. It depends on what you believe about quantitative easing.

To recover from its concurrent financial bubbles in stocks and real estate, Japan has been printing money for decades, yet its government can continue to borrow at very low rates. If you believe that Bernanke is combatting deflation in the United States by reprinting the money vaporized by losses from real estate loans, then there is no real danger of a huge sell-off of American debt by foreign countries. Everything is okay.

However, if you believe expanding the government debt and printing money will be punished by the foreign debt markets by a massive sell-off, then (1) the bond market will implode, (2) interest rates will double or triple in a short period of time, (3) and we will have a major economic crisis -- worse than 2008.

Rubin, who issued a similar warning about the bond market at The FT's "Future of Finance" conference in October, said Congress' vote on raising the deficit ceiling next spring could be the "trigger" for a rout in the Treasury market. Several Republican and Tea Party candidates vowed to not increase the government's debt ceiling unless Democrats agree to sharp cuts in spending that may not be politically tenable.

A Congressional standoff on the debt ceiling could spook international investors, Rubin said, alluding to a market event similar to the Dow's 778-point plunge on Sept. 29, 2008, when the House initially voted no on TARP.

While most pundits worry about the potential for China to dump its Treasury holdings, the former non-executive chairman of Citigroup said a financial version of the Cold War concept of Mutual Assured Destruction will likely prevent them from doing so. But he is worried about selling by the government's of Singapore, Hong Kong and Malaysia. "They could say ‘the Chinese are stuck but we're not,'" Rubin predicts.

Rubin's comments came during a panel discussion that also featured Sen. Conrad, chair of the Senate Budget Committee, former Nebraska Senator Bob Kerrey and former U.S. Comptroller General David Walker. The panel was moderated by former Commerce Secretary Pete Peterson, the senior chairman and co-founder of The Blackstone Group as well as founder of the Concord Coalition.

Aaron Task is the host of Tech Ticker. You can follow him on Twitter at @atask or email him at altask@yahoocom

Do you think there is any real danger of a massive global sell-off of American debt?

Another long-term owner goes Ponzi

The stability of our housing market depends on borrowers making their loan payments. When borrowers start going Ponzi -- borrowing more money to pay debt -- it is only a matter of time before delinquency leads to foreclosure and the collapse of pricing.

  • The owner of today's featured property paid $220,000 on 12/30/1994. The owner used a $198,000 first mortgage and a $22,000 down payment.
  • On 8/23/1999, he refinanced with a $232,000 first mortgage. From that point on, he had his original investment out of the deal, and any remaining borrowing was free money.
  • On 12/20/2001 he refinanced the first mortgage for $260,700.
  • On 6/7/2004 he opened a HELOC for $150,000.
  • On 2/6/2006 he obtained a $417,000 first mortgage.
  • On 2/13/2007 he opened a $200,000 HELOC.
  • Total property debt is $617,000.
  • Total mortgage equity withdrawal is $419,000.

After owning a property for 16 years, he is about to go through foreclosure due to excessive borrowing. What else is there to say?

Irvine Home Address ... 5152 Yearling Ave Irvine, CA 92604  

Resale Home Price ... $545,000

Home Purchase Price … $220,000
Home Purchase Date .... 12/30/1994

Net Gain (Loss) .......... $292,300
Percent Change .......... 132.9%
Annual Appreciation … 5.8%

Cost of Ownership
$545,000 .......... Asking Price
$109,000 .......... 20% Down Conventional
4.55% ............... Mortgage Interest Rate
$436,000 .......... 30-Year Mortgage
$107,138 .......... Income Requirement

$2,222 .......... Monthly Mortgage Payment

$472 .......... Property Tax
$0 .......... Special Taxes and Levies (Mello Roos)
$91 .......... Homeowners Insurance
$0 .......... Homeowners Association Fees
$2,785 .......... Monthly Cash Outlays

-$372 .......... Tax Savings (% of Interest and Property Tax)
-$569 .......... Equity Hidden in Payment
$185 .......... Lost Income to Down Payment (net of taxes)
$68 .......... Maintenance and Replacement Reserves
$2,097 .......... Monthly Cost of Ownership

Cash Acquisition Demands
$5,450 .......... Furnishing and Move In @1%
$5,450 .......... Closing Costs @1%
$4,360 ............ Interest Points @1% of Loan
$109,000 .......... Down Payment
$124,260 .......... Total Cash Costs
$32,100 ............ Emergency Cash Reserves
$156,360 .......... Total Savings Needed

Property Details for 5152 Yearling Ave Irvine, CA 92604
Beds: : 4
Baths: : 4
Sq. Ft.: : 1808
Lot Size: : 5,227 Sq. Ft.
Property Type:: Residential, Detached
Stories:: 2
Year Built: : 1971
Community: : Irvine
County: : Orange
MLS#: : 100044467
On Redfin: : 118 days
This is a short sale. Subject to lender approval. Property will be sold as is 4 bed rooms 3 baths in good condition includes pool, well maintained. good size lot. Buyer to verify all condition, dimensions n infor before COE. Great family neighborhood. Close to shopping centers schools and freeway. Includes award winning schools Fax all offers. School district is irvine district.


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