Market Update

Keeping you updated on the market!

For the week of
January 19, 2008

· The percentage of households that could afford to buy an entry-level home in California stood at 53 percent in the third quarter of 2008, compared with 24 percent for the same period a year ago, according to the CALIFORNIA ASSOCIATION OF REALTORS®’ (C.A.R.) First-Time Buyer Housing Affordability Index (FTB-HAI). The FTB-HAI measures the percentage of households that can afford to purchase an entry-level home in California.

· First-time home buyers also can take advantage of the federal tax credit for primary residences purchased by July 1, 2009. The credit reduces the borrower’s income tax dollar for dollars as much as $7,500 and serves as an interest-free loan. The amount of the tax credit varies depending on the home’s purchase price.

· In California , the median price of an existing home declined to $285,680 in November 2008, down 41.8 percent from November 2007 when the median price of an existing, single-family home was $490,511.

· The average rate for 30-year, fixed-rate mortgages was 5.01 percent for the week ending Jan. 8, according to Freddie Mac. Lower interest rates coupled with lower home prices can lead to more affordable mortgage payments, enabling some homeowners to move up, and first-time home buyers to enter the market.

· To qualify for the record-low interest rates, borrowers will need a down payment of at least 20 percent and a FICO score of 700 or higher. In California , a 20 percent down payment on a median-priced home would be $57,136. Additionally, home buyers will need to pay for any closing costs not paid by the seller.

· The large number of foreclosures on the market also is presenting an opportunity to purchase a home at a favorable price. However, some foreclosed homes may be in disrepair and may require additional work to make the property livable. A program offered by the Federal Housing Administration, 203K Streamline, allows home buyers to borrow as much as $35,000 more than the mortgage to pay for certain renovations, such as new paint, carpeting and appliances that a foreclosed home may need.

· To calculate how much house is affordable, consumers should follow the general principle of dedicating no more than 28 percent of their gross monthly income to covering the monthly mortgage payment, including property taxes and homeowners insurance. All debt payments combined, including mortgage, credit cards, car payments, student loans, etc., should be less than 35 percent of the gross monthly income.

· Using a home-loan calculator also can be helpful to determine how much house is affordable based on a borrower’s income. Many Web sites offer home-loan calculators including www.ginniemae.gov, www.bankrate.com, and www.fhainfo.com/calculators.htm.

Will loan limits rise?
Congressional leaders from both parties have been lobbying President-elect Obama to increase the limits of conforming loans – mortgages eligible to be purchased by Government Sponsored Enterprises (GSEs), like Fannie Mae and Freddie Mac – in high cost areas from $625,500 to $729,750 as part of an economic stimulus package. Qualified borrowers with conforming loans receive the best interest rates, because many in the financial industry believe conforming loans carry less risk.

Last year, as part of the federal government’s economic stimulus package, the conforming loan limit was temporarily increased to $729,750 in high-cost areas. Beginning Jan. 1, 2009, the conforming loan limit was lowered to its original level of $625,500 for high-cost areas.

In California , the new conforming loan limits for metropolitan areas range from $474,950 in the Sacramento-Arden-Arcade-Roseville metropolitan area, covering El Dorado , Placer, Sacramento , and Yolo counties to $625,500 in the Los Angeles-Long Beach-Santa Ana metropolitan area.

Paying down mortgage faster can make sense – sometimes
Homeowners who find themselves with extra cash may be considering paying down their mortgage. While this can help some people in certain situations, like seniors close to retirement age or those with adjustable-rate mortgages, it may not be the best choice for all homeowners. Paying down the mortgage more quickly can save homeowners a significant amount in interest in the long run. However, some financial experts advise clients, especially those with fixed-rate loans at favorable interest rates, to use extra money to pay down high-interest debt and build up an emergency fund.

Mortgage rate relief might not last long
The Federal Reserve’s announcement that it’s purchasing up to $500 billion of securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae, has contributed to a reduction in mortgage rates to record lows. However, some mortgage experts warn that the low rates may not last long and could actually rise as early as this summer.

According to Celia Chen, senior director of housing economics at Moody’s Economy.com, in the second half of this year, the Federal Reserve’s program will have run its course and other issues will move to the forefront, which could push mortgage rates higher.

Lenders backlogged by refinancing rush
Lower mortgage rates have led to a flurry of homeowners seeking to refinance, but limited staff at many banks has resulted in processing and approval delays. Due to the large number of applications to refinance, Wells Fargo no longer is allowing its loan offers to lock in rates for less than 90 days. The 90-day lock is designed to allow enough time to close the loans.

The record-low rates that have led many homeowners to refinance are typically for 30-year, fixed-rate mortgages that meet the purchase requirements of Fannie Mae and Freddie Mac. Because so many factors determine the interest rate a borrower is actually offered, some banks may not post rates on their Web sites.

It is important to note that a lower rate accompanied by higher points and/or fees may not be the best option. Many times, a slightly higher rate with no points and/or fees is the better choice.

U.S. banks offer mortgages below 5% after Fed action
After the government started purchasing mortgage-backed securities, interest rates at some of the nation’s top banks started falling below 5 percent. On Jan. 8, JPMorgan Chase & Co. was offering 30-year mortgages as low as 4.75 percent on its Web site; Wells Fargo & Co. was advertising rates of 4.875 percent; and Bank of America Corp. at 5 percent. All posted offers were for borrowers with excellent credit – FICO scores of 720 and higher – and with a 20 percent down payment.

Fixed-mortgage rates fall below 5%
The average interest rate on 30-year, fixed-rate mortgages for the week ending Jan. 9, decreased to 4.89 percent from 5.07 percent, according to the most-recent survey from the Mortgage Bankers Association.

Credit restrictions, negative or minimal amounts of home equity, and high levels of outstanding debt have resulted in the denial of nearly 70 percent of borrowers’ applications to refinance.

Fewer apply for home loans; credit line delinquencies increase
A report by the American Bankers Association (ABA) said record numbers of borrowers missed payments on home equity lines of credit (HELOC) during the third quarter. Delinquencies on car loans that banks made indirectly through auto dealers reached the highest levels ever recorded by the ABA . However, according to the same report from ABA , fewer consumers missed payments on credit cards.

Mortgage giants extend suspensions of foreclosures
Fannie Mae and Freddie Mac last week announced they will extend the suspension of foreclosure sales and evictions from single-family homes through the end of January. The extension will allow borrowers facing foreclosure to remain in their homes while the companies work with mortgage servicers to find options for troubled mortgage holders under the Streamlined Modification Program.

This week (Jan. 15 - Jan. 21) the experts say: Rates are likely to remain flat.

Jan. 15 - Jan. 21

This week, almost half of the panelists believe mortgage rates will remain relatively unchanged (plus or minus 2 basis points) over the next 35 to 45 days. Another 31 percent think rates will fall, and the rest believe rates will rise. Panel: Up: 23% Down: 31% Unchanged: 46% Experts’ comments and Bankrate analysts Experts’ comments Panel After a volatile few weeks, mortgage bonds seem to be taking a breather. Continued negative economic data and the Fed purchases of mortgage-backed securities should keep rates in the sub-5 percent range for the near term. My advice to clients is to take advantage of the low rates today, rather than wait. If rates increase, you made a great decision. If they continue to decrease, it is simple and cheap (sometimes at no cost) to refinance again. David Kuiper, mortgage planner, First Place Bank, Holland, Mich. unchanged With retail numbers coming in low, consumer confidence still low, unemployment rising, we should see slightly lower rates. However, to make financial decisions based on speculation may prove costly. If it is cost-effective to buy or refinance, do it now. Don’t miss a great opportunity when it presents itself. Steve Levitt, vice president of mortgage lending, Guaranteed Rate, Chicago unchanged The 10-year Treasury is trading at 2.19 percent with almost no inflation component left in the equation. It is clear that the incoming administration will do everything in its power to keep rates low, including bringing 30-year-fixed rates to 4.5 percent or lower by purchasing securities and keeping liquidity in the market. There is also talk that Fannie and Freddie will increase their loan amounts to as much as $1 million. Mitch Ohlbaum, president, Legend Mortgage, Los Angeles unchanged I think we are at the bottom. Rates should stay flat for the next two months. Bob Moulton, president, Americana Mortgage, Manhasset, N.Y. unchanged The Fed and Treasury are continuing to buy Fannie Mae and Freddie Mac paper in an effort to drive mortgage rates lower. Despite those efforts, 30-year rates appear to have stabilized in the 5 percent range for borrowers with the best credit. I expect that will continue. Mike Larson, interest rate and real estate analyst, MoneyandMarkets.com, Jupiter, Fla. unchanged All economic reports indicate that rates should be going lower. However, lenders are managing volume by keeping rates artificially higher than where they should be priced and people continue to make application. Even with rates being propped up, they are still very attractive and near all time lows. If it makes sense to do something now, don’t wait as volatility remains a risk. If you are looking to refinance, do not risk taking a 30-day lock, take a 60-day lock and be safe. Jim Sahnger, mortgage consultant, Palm Beach Financial Network, Stuart, Fla. unchanged The Fed is deploying its $500 billion to manage mortgage markets. Dan Green, Mobium Mortgage, author of TheMortgageReports.com, Cincinnati unchanged Conforming mortgage rates are still too high. It is in the best interests of the U.S. economy if the Fed gets more aggressive about buying FHLMC/FNMA paper and drives the rate down and actually parks it at a fixed rate for several months. I would suggest two options: 1) peg the 30 year conforming at 4.5 percent with no points (retail) or 2) create the stimulus mortgage I suggested a couple of weeks ago which I will repeat: fixed at 3 percent for 2 years; then 4 percent for next two years; 5 percent for the remaining 26 years. This creates stimulus on the front end because homeowners would have more discretionary spending. If this were Fed-funded with increased money supply, the payments could go to reduce money supply. The eventual rate of 5 percent is designed to make this stuff marketable so it can get off the books of the government. Dick Lepre, senior loan officer, Residential Pacific Mortgage, San Francisco down Bankrate’s analysts Panel The 30-year fixed is at a record low in Bankrate’s 23-year-old survey. It’s never been lower, and that’s why I believe it will end up higher. Holden Lewis, senior reporter, Bankrate.com up Bernanke is intent on pushing mortgage rates down, and he is getting his way. Greg McBride, CFA, senior financial analyst, Bankrate.com