40 year loans

The Treasury Department's resumption of the 30-year bond sales and Fannie Mae's post-pilot program decision to purchase longer-term mortgages from private lenders is pushing the niche market 40-year mortgage into the mainstream.
That's good news for potential home buyers, especially those in high-cost housing markets like Northern California, who need the extra door-opening leverage of lower payments offered by a 40-year mortgage. Borrowers are demanding cash flow and lenders are accommodating in anyway they can.
That doesn't mean the longer term loans are for everyone. Even those who use them should be aware of their minuses as well as their pluses.
Previously Fannie Mae would not purchase loans with terms longer than 30-years, except from credit unions in the pilot program, leaving the loans on lenders books tying up the money for long periods. The loans big draw is the long term. A longer term means lower monthly payments. However, the devil is in the details.
To examine those details consider the March 3, 2006 Freddie Mac survey which said the average fixed interest rate was about 6.25 percent for conforming loans, loans no more than $417,000 for a single-family home.
Using self-help independent publisher Nolo.com's online calculator to calculate payments on a 30-year maximum conforming loan results in a $2,567 interest and principal payment. For a 40-year loan of the same amount, with the same interest rate, the monthly payments would be only $2,367. A $200 difference can be more than enough to qualify a borrower who couldn't afford to buy with a fixed-rated 30-year mortgage. But then there's that devil.
Those cheaper monthly payments are virtually erased, over the long haul, by the real cost of the loan. The 30-year loan would cost $507,315 in interest over the life of the loan. The 40-year loan would cost $719,393 over 40 years. Total payments for the 30-year mortgage would equal $924,315. For the 40-year mortgage, $1,136,393.
And the comparison isn't a real world comparison because the 40-year loan likely comes with an interest rate higher than the 30-year mortgage to offset the lender's longer term risk. Fannie Mae estimated lenders in the pilot program were charging from 0.25 to 0.375 percent more in interest for the 40-year loan, than for a 30-year loan.
Tack just 0.25 percent on the cost of a 40-year loan and at 6.5 percent the monthly payment jumps to $2,441, the total interest cost to $754,859 and total payments over the life of the loan to $1,171,859. In this example, the real monthly savings, when comparing a 40-year conforming loan level mortgage with a 30-year deal, is closer to $126.
Don't forget, if home equity is an issue, 40-year loans also build payment-related equity slower than 30-year fixed rate mortgages or even 30-year adjustable rate mortgages (ARMs).
Because many home owners historically don't stay put more than five to seven years or so (that could change as interest rates rise), if monthly savings is the leverage sought, an ARM could be a better deal for other reasons but considering ARMs' rate change risk, the 40-year loan can be an option for those who want to assure a monthly mortgage payment locked in at a lower level for a long time.
For the greater overall cost, the longer term gives the buyer more flexibility -- and perhaps more sleep at night -- in terms of when to decide if refinancing is a viable option. In the end, all loans can be a gamble. Risk varies from one to another. It's up to consumers to determine the level of risk they can accommodate.

Profit is in the land

The most important key to a builder’s profitability lies in land acquisition and development, according to on-going research.

Nearly two-thirds of the 400 or so large, medium and small companies participating in the Harvard Joint Center for Housing Studies survey rank land costs and their ability to control large blocks of it as most important to their profitability. It's no wonder, then, that the nation's largest builders hold gobs and gobs of ground.

At their current production levels, Tolls Brothers has enough lots under its control to remain in business for more than nine years; Pulte Home, almost nine, and Centex Homes, almost eight. Big builders like these firms and Lennar, K. Hovnanian, NVR and D.R. Horton have other advantages over their smaller competitors.

One is their size, which enables them to raise money in the capital markets. And as a result, they can, in effect, buy at today's relatively low rates what they need to build houses well into the next decade. According to Colton, more than half the top builders have debt that doesn't mature until as far out at 2020.

Big builders also have reduced their construction cycles. On average, they can build a house in 110 days, from slab to done. And they have a price advantage over their smaller competitors because they can buy materials at volume discount or even directly from manufacturers. But their profits come from the land.

The nation's largest builders told the Joint Center that they need at least a seven or eight-year supply of lots going forward, either owned directly or as options under their control. Interestingly, the survey also found that builders' gross margins are greatest in places where the time required to entitle land is the greatest.

In Texas, for example, where it is relatively easy to get property permitted, builders are happy with a 10-15 percent gross margin. But in California, where the process can take five or six years, their gross margins are sometimes as high as 50 percent, which is one big reason big builders are there in spades and one of the reasons new homes cost so much.

It's not that builders are charging more because the entitlement process is so difficult. Rather, it's that the long, drawn-out process enables them to take advantage of rising land values. In other words, just like any other seller, they are able to charge today's lot prices on property purchased years earlier.

Declining rate of growth

The state’s population increased to 37 million on July 1, 2005 according to the State Department of Finance in their annual report released last week. Most of that growth was the result of 557,000 births and 178,000 new residents who migrated here from other states or other countries. Not everyone who was counted in 2004 was still around in 2005. We lost 237,000 people who died here and 29,000 who moved out of state permanently.
Our rate of growth is slowing. During the past 5 years the state grew by 2.9 million people for an overall rate of growth of 8.5 percent. Last year we gained a net increase of 500,000 people for a rate of 1.3 percent. It was the fourth year in a row that growth had slowed in Sacramento County, and the fifth consecutive year growth had slowed statewide.
Sacramento County reflected the state’s slower increase with only a 1.6 percent increase in population. It was the slowest rate of increase in the last 10 years according to the demographic research. Placer County reported a 3.43 percent increase and ranked third in the state for the rate of growth while El Dorado County had a 2.22 percent bump in population. Riverside County experienced the most amount of in-state growth with a 4.41 percent increase followed by Yuba County at 3.85.
Researchers are not sure why the rate of increase in population is declining. Our economy is booming, jobs are plentiful for those who want to work. Our weather is more temperate than most of the country. We have a beautiful ocean and majestic mountains. We have Hollywood and Disneyland and Napa and Yosemite. So why are not more people moving to the Golden State in search of gold?
Migration patterns follow the food source and while jobs have been plentiful in California so have they all over the country. The declining rate of population growth is not only occurring in California but across the entire country. As the county matures (average national age increases) there are fewer births and more deaths occurring.
It rained on our Rose Bowl Parade and fewer people are watching the Oscars. California has lost much of the glitz and glamorous mystic associated in the past. We are also getting a bad rap for congestion, traffic and pollution. And then there is San Francisco. When many people think of California they think of San Francisco or other great attractions like Los Angeles. It is frightening.
Our high housing prices doesn’t entice people to move here. It is having the reverse effect and causing many to move out of our state. The average price for a home in Sac is $350,000 in Dallas it is $250,000. Drive a few miles outside Sacramento to Placer or El Dorado County and the average price of a home goes up $150,000. Drive outside Dallas and the price of a home declines $100,000.
A slower rate of growth isn’t all bad. It allows us to catch up on a few things that need to be done like plug the leaking levees and fix a few pot-holes. Economic opportunities have been driving the rate of growth in California since gold was discovered down the road in Coloma in 1849. Wouldn’t it be wonderful if in the future it was the quality of life that attract people to move here and not just the quantity? Let’s all work on that.