Friday, June 30, 2006

Interest rates up again

The Federal Reserve has raised short-term interest rates to banks another quarter point -- as it has for 17 straight meetings since June 2004. The lag effect on long- term interest rates, such as mortgages, is they also rise.
At least that's how it's supposed to work. It should cost more to borrow long-term money than short-term money costs banks. Lenders can only make money when they loan at higher rates than they pay.

While the rate hike was widely expected, this last rise brings real estate close to a key psychological and monetary test. According to Freddie Mac, the 30-year fixed-rate mortgage is now averaging 6.78 percent, which is the highest it's been since May 24, 2002, when it averaged 6.82 percent.

"Financial markets continue to expect more rate hikes by the Fed over the next six months, which has added upward pressure on mortgage rates," said Frank Nothaft, Freddie Mac vice president and chief economist. "With higher interest rate, the housing market has begun a gradual and orderly reversion towards historical norms."
The Fed's position is that "some inflation risks remain" even though there is other evidence, such as the rapidly cooling housing market and other signs of slowing economic growth, that inflation risks could be contained.

Housing which is judged by rising or falling inventories and prices has been slowing both in sales and prices. The California Association of Realtors reported sliding sales across the state between 20 and 25 percent lower than in May 2005. Home prices are holding in some areas, declining in others but no real increases in price.
Rising inventories nationwide average 6.5 months of inventory on hand, which is the tipping point for a buyer's market. In the Capital Region we have an eight month supply. Buyer's markets are characterized by rising inventories, longer days on market, price reductions, and seller concessions.

In May, David Lereah, chief economist for the NAR sounded his warning that the Fed should not raise rates much further or risk throwing the economy into recession. While rising interest rates could harm some markets, job growth in other markets is keeping housing balanced for the time being.

"Seven percent is not a key point," says Lereah. "The announcement today made it clear that the Fed is very concerned about the housing sector and the economy. The Fed took the Fed funds rate to 5.25 percent. I believe they will take it to 5.5 percent and stop. If they stop -- we will be okay. If they continue towards 6 percent -- mortgage rates will approach 7.5 percent, which is the tipping point for our interest sensitive markets."

Thursday, June 29, 2006

Big cars & homes

Cars.com has observed that consumers are dumping their SUVs in growing numbers. Will big homes be next? It's a good question as America posts a new record in home sizes.
According to Cars.com, large SUVs posted for sale have risen dramatically over the last several years and now make up a larger portion of the total number of ads listed. Since March of this year, SUV postings have increased more than 14 percent and are up a whopping 40 percent from March 2003. .
High fuel cost has been the primary factor driving the spike in consumer postings of large SUVs over the past several years, suggests spokespersons for the site, and perhaps there's a similar change in consumer behavior coming to the housing industry. Will energy cost curtail the super sized housing industry?
Homes are more expensive than ever before, costing more of the average borrower's income. One of the reasons is homes are larger. You get more, but you pay more.
Home sizes reached record highs in 2005, according to annual data on new home characteristics released recently by the U.S. Census Bureau. Living space, that is measured by the average floor area, in a 2005-built home was 2,434 square feet, up from 2,349 in 2004 and 1,645 in 1975. That's double the size of homes in the 1950s and in a current era when more households are forming, but the number of occupants is smaller due to the rising number of singles, couples without children, empty nesters and other non-traditional households.
According to the National Association of Realtors, less than 48 percent of homebuyers have children under the age of 18 living at home and non-traditional households are on the rise. For several years, single women have constituted nearly 20 percent of homebuyers.
The median price of a new home has dropped 4.3 percent from April and down 3.1 percent from May 2005. “The latest results of NAHB's builder surveys indicate weaker demand for homes coinciding with higher interest rates, deepening affordability issues and a retreat of investors-speculators from the market," said National Association of Home Builders (NAHB) Chief Economist David Seiders. "We don't think the cooling process for housing is over yet, and we wouldn't be surprised to see a downward revision to May's numbers as well as some decline in coming months."

Monday, June 26, 2006

Builders under investigation

Most large builders in the Capital Region have their own in-house lender that they either own or control. It is difficult for me, acting as a mortgage broker, to compete with generous incentives -- thousands of dollars worth of upgrades, closing cost contributions and other financial goodies -- provided buyers agree to use the builder's affiliated or controlled mortgage company? Are these come-ons legit?

The federal government is concerned by these questions too. HUD's Real Estate Settlement Procedures Act (RESPA) investigative staff is interested in possible violations of federal rules in the builder-incentives field.

Brian D. Montgomery, federal housing commissioner, issued this statement on the issue: "Often consumers feel compelled to use a builder's hand-picked mortgage company because they feel they've been offered an incentive they can't refuse." But to comply with RESPA, he said, "these incentives (must) be legitimate and not built into the price of the house or the cost of the loan," and they must be voluntary to the consumer, not coerced.

Marc Savitt, chairman of the National Association of Mortgage Brokers' consumer protection committee, has been investigating home builder loan pitches for more than a year, and has presented top HUD officials with a dossier of alleged violations. Savitt even posed as a buyer in new home subdivisions in Florida and elsewhere, then turned around and delivered evidence of what he described as illegal and unfair tie-ins and marketing practices to HUD.

In some cases, according to Savitt, builders stated openly that buyers could not purchase a house unless they also financed their mortgage with the builder's affiliated or controlled lender. In other cases, builders' lenders routinely charged interest rates and fees substantially higher than the going market rate -- clearly "making up the discounts with higher costs to the consumer on the mortgage and settlement side," said Savitt.

In one recent case he outlined in an interview, Savitt said a major builder told a home buyer customers in Arizona that unless they financed through the builder's affiliate, their contract would be rejected. Two customers refused to go along, and signed up with a lower-cost mortgage provider, believing the builder would back off and not endanger the sale. But the builder played hardball, failed to show for the settlement, refused to refund the buyers' $11,000 good faith deposit, and threatened to sell the house to other, more compliant purchasers.

The Arizona mortgage broker the buyers chose to finance their house was incensed. He contacted Savitt, who in turn contacted HUD's RESPA staff. Though officials at the department would not discuss the case, Savitt says RESPA officials warned the builder that mandatory use of affiliated mortgage lenders is illegal, even if the builder claims that it's offering an enticing package of upgrades or other financial incentives. According to Savitt, "the builder got the message loud and clear," allowed the buyer to use the independent broker, and proceeded to settlement.
Savitt says "mortgage brokers around the country see this sort of stuff every day.

Builders are misleading consumers by waving imaginary savings and upgrades in front of them, and are either tacking the 'savings' onto the price of the house or into the cost of the mortgage."
The practices may also violate federal anti-trust and fair trade statutes, according to Savitt. Under those laws, mandatory tie-ins are illegal when they hinder competition, "which is what builders are doing when they are stealing (loan applicants) from brokers and lenders" using intentionally misleading claims of discounts.