Rates likely headed up. More importantly, when will then be now?

All home buyers have different questions, but everyone always wants to know: where are rates headed? Movie clips make everything better, so today’s discussion kicks off with a classic clip from Space Balls:

When Will Then Be Now?

Unfortunately, I can’t fast forward to the exact moment when interest rates will go up (if I did, I’d pay someone else to write my blog). What I can tell you is what we know right now.

Fixed mortgage rates are likely to rise, somwhere between .375% and 1% depending on which source you trust, once the Federal Reserve stops its purchase of mortgage-backed securities (MBS) on March 31st. The Fed has kept rates low since the world nearly exploded in 2008 by purchasing over one trillion dollars of these securities, which guarantee investors income from principle and interest repayments made by home owners. By purchasing such a large amount of these securities, they’ve artificially influenced the interest rates yielded on these securities.

The fear is that when the Fed stops buying, the rest of the investing world (foreign investors, banks, private equity firms, etc) won’t step in to fill the void. To attract investors, MBS issuers will need to raise rates.

Is it possible rates stay the same, or go lower? Unlikely, but possible. If not, how much will rates go up? No one knows for sure. When will then be now? Soon(er rather than later).

The Super Bowl is Sunday…Home Buying Season starts Monday!

In the real estate world, it’s an unwritten rule that home buyer activity tends to pick up after the NFL’s biggest game. There are a number of reasons why — the most obvious being that husbands are more easily dislodged from their sofa grooves when names like Peyton, Drew and Brett are replaced by Ernie, Vijay and Jesper.

Not a fan of football or golf? Here’s another way to think about it. Remember the opening scene from Animal House where Kent and Larry go to the rush event at ultra popular Omega house? Fast forward to 3:15 in the clip below to understand.

http://www.youtube.com/watch?v=F1-jHRB2iiU

Where before the Super Bowl a seller (Omega House) may have fielded offers from every Jugdish or Clayton that showed up at the door, now they may hold out for a stronger offer (Kevin Bacon). There’s more interest from buyers, sellers are more emboldened about offers they consider, and as more uncertainty creeps in about rates and home prices in general, a sense of urgency is tangible.

Basically, if you want to get into Omega, be ready to pledge February 8th.  Otherwise, you may have to settle for Delta Tau Chi.

Need more info…sign up for the next Boot Camp! I promise, we won’t call you Flounder.

Conflicting Data on Rental Costs…Up Or Down?

This is an interesting article about data that just came out on rental pricing.

http://www.mortgagenewsdaily.com/channels/voiceofhousing/129657.aspx

---

Lost amid the much higher visibility mortgage crisis and the all too common foreclosure stories is the state of affordable rental housing in America.

While the housing and economic downturn has slowed the development and construction of both single- and multifamily residential housing available to families earning 80% and above of area median family income (AMFI), that is not to imply an ample supply of affordable housing exists (especially for those earning less than 80% of AMFI).

According to the most recent Joint Center for Housing Studies report, vacancy rates for multifamily housing rose slightly in 2009.  However, the same study indicates that condo conversions to rental housing may be the likely reason for the increase in housing units.

On the surface this rising vacancy number appears to be good news for working families with incomes at or below 80% AMFI as it suggests a housing oversupply.  Reality is quite the contrary.

For one, the demand for the housing tax credit, which for more than 20 years has helped produce hundreds of thousands of affordable housing units, has stagnated.  In an effort to help fill the obvious financing gap and to off-set the drop in demand for credits, the Administration created the TCAP and Housing Credit Exchange programs.  However, it remains to be seen what positive effect the two programs will have in producing additional units of affordable housing.

Drilling deeper down the income strata, the picture looks far bleaker for those families earning below 40% of AMFI who more than likely require some sort of housing subsidy.  Even though the amount of funding for HUD Project-based Section 8 housing has grown over the last several years, they are basically helping the same number of people as rising rents and operating expenses have largely consumed the additional funds.  The same holds true for the sections 202 (elderly) and 811 housing programs (persons with disabilities).

The families and elderly residents who rely on this subsidy have few other choices when it comes to finding safe, sanitary, and decent housing as their incomes do not support the higher rent levels synonymous with most urban centers.  The discrepancy between real wages and what is necessary to afford a two-bedroom apartment in almost every major urban market continues to be dramatic.

For example, in more than 30 states, two full-time minimum wage jobs are required to afford the fair market rent for a two-bedroom apartment.  And according to the 2009 National Low Income Housing Coalition (NLIHC) Report “Out of Reach,” the number of housing units affordable to families making less than $16,000 shrank by 17% between 1995 and 2005. The struggling economy and on-going housing crisis have exacerbated the problem as even more families are having difficulty making ends meet.

Overlay on this burgeoning crisis is the need to preserve the existing supply of affordable rental housing.  To paraphrase the immortal Frankie Valli “let’s hang onto what we’ve got.”  According to the National Housing Trust, over the next five years, the contracts on more than 900,000 Section 8 units are scheduled to expire.  While very few owners typically opt out of the program, the number of those who are able to opt out will inevitably increase when real estate prices return to a higher level.  And it is estimated that another 200,000 existing affordable units will be at risk of conversion to non-affordable rents over the next 10 years as those contracts expire.

FHA ANNOUNCES MAJOR CHANGES

For anyone considering — or more importantly, in need of — an FHA-insured loan, look out below:

WASHINGTON, Jan 20 (Reuters) – The U.S. Federal Housing Administration said late Tuesday it was increasing borrowing costs for homeowners getting loans backed by the government, in an effort to shore up the agency’s finances and avoid a taxpayer bailout. The FHA said it would increase the up-front mortgage insurance premium, which is paid by the borrower when the loan is made, to 2.25 percent from 1.75 percent. And it would raise the minimum down payment required to secure an FHA-backed mortgage for less creditworthy borrowers.

Why is the FHA making this move?

In late 2009, an independent auditor found that the FHA’s capital reserves were below the 2 percent required by Congress. In fact, the FHA has capital reserves equal to just 0.53 percent of the value of the thousands of outstanding U.S. home mortgages it insures. So, the agency is trying to increase the quality of its borrowers in order to reduce the number of loans that end up in default. But it doesn’t want to seriously impact the ability of borrowers to get FHA-backed loans, which now make up half the market. So it is tweaking the rules around the edges.

What does the FHA decision to raise borrowing costs mean?

The biggest immediate change is the increase in the up-front mortgage insurance premium. For a loan of $100,000, the mortgage insurance premium would be $2,250, up from the current $1,750. A $500,000 loan would therefore be $11,250 instead of $8,750. Those fees can be rolled into the loan. The FHA also said it was cutting the amount of aid sellers could provide buyers to 3 percent of the purchase price from 6 percent. That’s designed as a counterweight to inflated house prices stemming from borrowers just tacking on the closing costs to the purchase price of a home. FHA is also asking Congress to increase its second premium, the so-called annual premium which is paid over the life of the loan. FHA Commissioner David Stevens said the FHA plans to lower the upfront premium after it gets approval to raise the annual premium, currently capped at 0.55 percent of the loan amount.

How many borrowers will be affected by this decision?

Stevens told reporters on Wednesday that he couldn’t answer that question. And some analysts say that’s because it’s almost none. The FHA is raising its minimum credit score for a 3.5 percent down payment to 580 while scores below that level would be required to have 10 percent down. But most FHA lenders won’t lend to anyone below 620 so it’s unclear how many borrowers would really be affected by the down payment change. And the other changes might cause some borrowers on the margins to be unable to get loans as a result of increased up-front costs but most borrowers will just have to scrape up the extra cash. FHA says that’s by design. The FHA faced some pressure to raise the down payment minimum to 5 percent, but FHA says that would go against the agency’s mandate to bolster housing finance for needy borrowers.

David Berenbaum, chief program officer at the National Community Revinvestment Coalition said the FHA has a difficult task of navigating its competing goals. “The burden to the individual borrower is modest and should ensure, overall, that borrowers have access to responsible credit,” he said.

(Reporting by Corbett B. Daly; Editing by W Simon )