Inflation moves interest rates

After slipping last week, mortgage rates moved up this week better reflecting the trend borrowers can expect in the coming months. That means iron-clad mortgage rate locks and speedy loan closings should be the strategy of choice for home buyers as well as refinancing and equity-tapping home owners

Inflation was brisk in May spurred by higher housing, gasoline and energy costs. The seasonally adjusted Consumer Price Index rose 0.4 percent in May, representing a 5.2 percent annual rate. For all of 2005 the rate was only 3.4 percent. That kind of inflation erodes consumer-spending power by making prices move faster than wages. To curb inflation, the Federal Reserve raises the cost of money.

And that's just what analysts say the Fed will do on June 29 for the 17th consecutive time, this time raising the benchmark short-term interest rate from 5 percent to 5.25 percent. When the fed increases the cost of money to curb inflation, short-term consumer borrowing costs for credit cards, home equity loans and adjustable rate mortgages likewise take a hike.

Mortgage interest rates have fallen eight times this year, but during the first 24 weeks in 2006 they've risen twice as often, according to Freddie Mac's Primary Mortgage Market Survey. Last week, Freddie reported the 30-year fixed-rate mortgage (FRM) averaged 6.62 percent, down from the previous week’s average of 6.67 percent, exactly one full percentage point higher than they were one year ago.

Still, there has been no drastic movement in mortgage rates and we see nothing on the horizon that would bring about any extreme rise or fall in rates going forward. Still, the pinch is on. From May 2005 to May 2006 inflation is up 5.7 percent.

Consumers pay $3 a gallon for gasoline, transportation costs are up nearly 21 percent and business is passing onto consumers energy costs they have soared by 35 percent. Housing costs keep going up too and rental rates are scheduled for a long overdue increase.

With so much inflation, higher mortgage rates, perhaps moving higher faster, aren't far behind. The economic fundamentals apply.

Enjoy your weekend. We have family coming in from Alaska for a visit and so will probably stay close to home. Remember to call Dad on Sunday if you can. If not remember the good times.

Ken Calhoon, Broker
Your friend in the foothills
530-885-9590
cpilothill@aol.com
http://www.kencalhoon.com/


When I was a boy of fourteen, my father was so ignorant I could hardley stand to have the old man around. But when I got to be twenty-one I was astonished at how much the old man had learned in seven years."..........Mark Twain

Homeowners & contractors

Choosing the right contractor for a remodeling job can present a dilemma. A good referral from a contractor’s previous customer is one of the best solutions. But even if your contractor comes with the most impeccable credentials and solid recommendations, there are going to be times that the two of you aren't going to get along.
The reason: You as a homeowner are handing a perfect stranger thousands of dollars to take control of your life for anywhere from three days to six months or longer. Wouldn't that make you less than accommodating? Kimberly-Clark financed a couple of surveys by Opinion Research Corp. to try to gauge what contractors and consumers really think about one another.
For homeowners who have used a contractor in the last few years, the worst fear is shoddy workmanship. Four of 10 respondents who had work done in their homes in the last few years chose this over other unpleasant possibilities, such as contractors who make romantic advances, break things, talk all day, or even use the bathroom without flushing.
By contrast, a contractor's worst nightmare was the customer who continually asks for work to be changed or redone. This was followed by customers who don't pay on time. Lower down on the contractor's nightmare meter were customers who talk too much, who ask for work that doesn't conform to building codes, and even those who threaten to sue.
What were the top three complaints that contractors and customers had about each other? For customers: Work isn't started on time, when the price of the job is increased after it's been started or completed, and contractors who leave a mess and don't clean up.
For contractors: Customers who try to get them to do more work without additional compensation, customers who don't pay on time, and customers who try to renegotiate the price after the job is completed.
How are contractors picked? Sixty-four percent of home improvement customers cited a personal recommendation from someone they trust as the key determinant for selecting a contractor. Seventy percent of contractors said they believed customers chose them because of quality workmanship or work experience with the
For customers, negotiating prices and "feeling weird about having a total stranger in their homes" tied for the least favorite aspects of hiring a home improvement contractor. For contractors, customers who change their minds took the top spot, followed by constant complaints and nitpicking, having to negotiate prices and feeling like they're being watched.

Harvard Housing Report

Good Morning,
"The State of the Nation's Housing 2006," one of the most anticipated annual housing reports, has just been released by the Harvard Joint Center for Housing Studies.
The report overall is positive on the housing market -- that "the housing sector continues to benefit from solid job and household growth, recovering rental markets, and strong home price appreciation," and as long as these remain in place, "the current slowdown should be moderate."
Households are expected to accelerate from about 12.6 million over the past ten years, to 14.6 million over the next ten which combined with projected income gains and a "rising tide of wealth" should "lift housing production and investment to new highs." On the strength of this growth alone, housing should reach new all-time records, predicts the Center.
However, affordability will also intensify, as the economy is generating many low-wage jobs and land use restrictions are driving up housing costs. Incomes are rising much faster in the top ranges than in the bottom ranges for homebuyers. From 2001 to 2004, the number of households paying more than half of their incomes for housing shot up by 1.9 million, says the Center, bringing the number of low and middle-income households with severe housing cost burdens to 15.6 million.
Homebuyers increasingly turned away from fixed-rate mortgages to adjustable-rate mortgages and other products to afford their homes. In just two years, the interest-only loan which defers principal payments to lower immediate monthly costs, shot from relative obscurity to 20 percent of the dollar value of all loans and 37 percent of adjustable-rate loans originated in 2005. Payment option loans, those that allow borrowers to make minimum payments while the balance balloons, accounted for nearly 10 percent of 2005's loan originations.
As bad as that sounds, the report says that only three percent of owners had equity less than five percent in their homes, and 87 percent had a 20 percent or higher equity stake in 2004.
Housing gains are continuing even while home sales are softening. Driving housing will be the ever-dependable baby boomers who will boost markets for senior housing and second homes while their children, along with second-generation Americans and immigrants will buoy demand for starter homes and apartments.
It was an optimistic report by Harvard in contrast to the UCLA housing forecast that has been predicted collapse of and recession for years.

Excess of new homes in region

In 1996, the 8,000 new housing starts in Sacramento, Placer and El Dorado County, amounted to a record number of newly built homes for the region. New construction continued to grow and hit a peak in 2004 of nearly 20,000 newly built homes. In 2005 the number dropped to 15,000 and this year it is expect to drop to 12,000. That’s probably a good thing in a market where we have more supply than demand.

New home builders are not only competing with a leftover standing inventory but a glut of existing resale homes is contributing to their problem. In May there were 11,500 existing homes for sale in the region. Jim Eggleston, president of The Sign Post, that installs 90 percent of the region’s For Sale signs said, “We put up 900 more signs than we took down in May.” That’s not a good sign.

If that seams like a lot of existing homes for sale at the same time, it is but there have been more. In 1992 there were 13,500 existing homes for sale. So what’s a major difference? In 1992 there were less than 2,000 new single-family homes for sale. It was a better market for new homes than resale. Things change.

While offering new homebuyers unprecedented incentives to buy a new, homebuilders are curtailing their future building plans for 2007 and 2008. Expect to see builders dropping land options and reducing their planned number of new homes until their existing commitments are off the books.

Landowners should expect to see a drop the value of their property. Builders with unsold inventory will not close on over-priced lots in order to build more unsold standing inventory. A receding tide lowers all ships.

The art of the deal

Your home is still not selling and you can’t understand why. You followed your agent’s advice and spent weeks de-cluttering, painting, and getting your home in tip-top condition. The house is staged like a Hollywood set and always available for showings. You’re getting tired of living in a fish bowl and have already reduced your original listed price. Still there have been no offers and no serious buyer interest. So now what?

Adjusting to a buyer’s market isn’t easy for sellers or their agents. It requires serious pricing strategy and creative thinking. While price is important in attracting homebuyers, so are the often-overlooked terms of the deal. Often buyers will pay a higher price for a home if the seller is offering other incentives.

Have your agent take another look at comparable properties and update your market analysis. New listings have likely come on the market and others recently sold or went into escrow. In a market with more inventory than buyers, it is important for your home to be priced within 2 percent of the current pending sales and priced in the lower half of all comparable homes currently listed. If the current listing price is within those parameters and your home is still not attracting any offers, it’s time to consider some serious buyer concessions. Before reducing the listing price, however, try offering to pay the buyer’s closing costs.

During the last bear housing market (1992-1996) the largest factor in preventing buyers from buying a home was the downpayment and closing costs. Today, many lenders no longer require a down payment as a prerequisite for a mortgage. Qualifying for one of the many loan programs is also easier than it was 10 years ago with limited or no verification of the applicant’s income. Closing costs continue to remain a large obstacle in the home buying process. Eliminating or substantially reducing the amount that a buyer will need to pay will provide an advantage in selling your home.

Closing costs for a homebuyer is usually 2.5 to 3 percent of the loan amount and will include title and escrow fees, lender fees, interest and tax adjustments and impounds for property taxes and insurance. As an example, I am currently working with a couple that are first time homebuyers. Their good credit will allow them to qualify for a no-down-payment loan on a purchase price of $450,000. The closing costs, however, will be $12,000, which includes: lender fees in the amount of $5,600, title and escrow $1,800, impounds for taxes and insurance $4,000 and interest and tax adjustments of $600. In addition most lenders require that the borrower have some cash reserves remaining after closing.

So while my clients can easily qualify for a $450,000 home without any downpayment, they will need $15,000 for closing costs, impounds and cash reserves. Pretty easy for a Bay Area buyer who just sold their million dollar home but less so for a first time home buyer. Sellers who can offset part or all of that expense will have a competitive advantage.

There are limits to how much credit a seller can provide to a buyer. Lenders will usually limit seller’s credits to 3 or 5 percent of the loan amount. The home’s value must also be substantiated by an appraisal.

Crediting a buyer for part or all of their closing costs will not sell an over-priced or poorly conditioned property. It will, if marketed correctly, attract additional interest from first time buyers and buyers with limited cash reserves. So before reducing the price in a race to the bottom of the market, sellers should look for alternatives. Paying the buyer’s closing costs is only one.