Home equity is ‘not like bread,’ expert says — ‘It won’t go stale.’ Here’s when it makes sense to tap it

August 15, 2024

Home equity is ‘not like bread,’ expert says — ‘It won’t go stale.’ Here’s when it makes sense to tap it’

Ana Teresa Solá | CNBC

• Home equity is “not like bread,” said Greg McBride, chief financial analyst at Bankrate. “It won’t go stale if it just sits there,” he said.

• But if you do have major home improvements or repairs, tapping home equity is a viable solution, experts say.

Homeowners are sitting on $17 trillion in equity as of the end of the first quarter of 2024, according to CoreLogic. The average homeowner gained $28,000 in equity compared to a year earlier.

For many people, there’s no need to touch that money.

Home equity is “not like bread,” said Greg McBride, chief financial analyst at Bankrate. “It won’t go stale if it just sits there.”

There is one exception, however: If you need to make major home improvements or repairs, tapping home equity can be a viable solution, experts say.

Home equity is ‘a less expensive borrowing option’

Among polled homeowners, 55% see home improvements or repairs as a good reason to tap home equity, according to a new survey by Bankrate. The site surveyed 2,294 U.S. adults, including 1,133 homeowners, in late June.

Using home equity is “certainly a less expensive borrowing option than resorting to personal loans or credit cards,” McBride said.

As of Aug. 7, the current average home equity loan interest rate is 8.59%, according to Bankrate. The average HELOC interest rate is 9.37%.

To compare, the average personal loan interest rate is 12.38% , Bankrate found. The average credit card interest rate stands at 24.92%, according to LendingTree.

While cash from savings continues to be the most common way homeowners fund renovation projects, or 83%, credit card use has increased, according to the 2024 U.S. Houzz & Home Study. Houzz surveyed 33,830 homeowners of ages 18 and older from Jan. 19 to Feb. 27.

About 37% of homeowners paid for their repair projects with credit cards, up from 28% who did so in 2022, Houzz found.

While tapping equity is cheaper, it still has risks. Rates are higher given the Federal Reserve’s spate of rate hikes, and you need to go in with a plan to pay off the debt.

Remodeling can add value

Using home equity to invest in your home can make sense, said Jessica Lautz, deputy chief economist at the National Association of Realtors. Such projects not only help preserve the house, they may even enhance its value, boosting profits when you eventually sell.

The highest percentage cost recovered for exterior projects was from new roofing, at 100%, according to the latest Remodeling Impact Report by NAR. For interior projects, the highest percentage cost recovered was from refinishing hardwood floors, at 147%, and installing new wood flooring, at 118%, NAR found.

“We’ve found that hardwood floors have more universal appeal,” said Lautz. “For something like a roof, it’s a big project. … People may want to have that completed before they move into a home, make sure that the roof is in good working order.”

Tapping home equity for vacations, big purchases

More than 1 in 10 millennial homeowners said vacations or buying big-ticket items are good reasons to tap your home equity, according to Bankrate. But experts say this move is a “don’t.”

“If you have to finance the cost of your vacation, you can’t afford the vacation,” McBride said.

Plus, big-ticket items, such as a car or electronics, are depreciating in value from the point of purchase, he explained.

“You’re not only buying a depreciating asset, but you’re financing the purchase of that depreciating asset,” McBride added.

Mortgage demand drops, as homebuyers wait for lower rates

July 15, 2024

Mortgage demand drops, as homebuyers wait for lower rates

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.82% from 6.87%

• Applications for a mortgage to purchase a home still dropped another 4% last week compared with the previous week.

• Applications to refinance a home loan were essentially flat, up just 0.3% for the week.

Mortgage interest rates eased very slightly last week, but not enough to get today’s potential homebuyers off the fence.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) decreased to 6.82% from 6.87%, with points increasing to 0.59 from 0.57 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association. That is the lowest level since February of this year.

Rates have dropped over twenty basis points in the last few weeks, but applications for a mortgage to purchase a home still dropped another 4% last week compared with the previous week, on the MBA’s seasonally adjusted index. Purchase demand is now 15% lower than it was the same week one year ago. A basis point is one-hundredth of a percentage point.

“Purchase applications decreased as ongoing affordability challenges persist with rates at their current levels and with home-price appreciation still strong in many markets,” said Joel Kan, an MBA economist in the release.

Homebuyers are also likely waiting for interest rates to drop further. The expectation is the Federal Reserve will cut its rate in September. While mortgage rates don’t follow the Fed exactly (they follow loosely the yield on the 10-year Treasury), rates will come down if investors believe inflation is easing.

“I think affordability remains stretched,” said analyst Ivy Zelman in an interview on CNBC’s “The Exchange.” “We’d probably want to see mortgage rates come down 100 basis points, so I think if we had a five handle, even in the high fives, I think the market could see more momentum.”

Applications to refinance a home loan were essentially flat, up just 0.3% for the week. Demand is 38% higher than the same week one year ago, but it is coming off an extremely low level. Rates today are very slightly lower than they were last year at this time.

“Refinance applications were up, driven by conventional and FHA application activity, as some borrowers took the opportunity to act. Furthermore, the conventional refi index was at its highest level since September 2022,” added Kan.

Homebuyers take on ‘a lot more than a mortgage payment,’ expert says — ‘hidden costs’ average $18,000 a year

June 15, 2024

Homebuyers take on ‘a lot more than a mortgage payment,’ expert says — ‘hidden costs’ average $18,000 a year

Ana Teresa Solá | CNBC

• The hidden costs of homeownership add up to an average $18,118 annually, or $1,510 a month, according to a new report by Bankrate.com.

• “It’s just important to understand that you’re buying a lot more than a mortgage payment,” said Jeff Ostrowski, an analyst at Bankrate.com.

It’s no secret that buying a home has gotten more expensive in the U.S. But the cost of keeping and maintaining a home has gotten significantly pricier, too, which might come as a surprise to some buyers.

The “hidden costs” of homeownership add up to an average $18,118 annually, or $1,510 a month, according to a new report by Bankrate.com. The national figure includes the average costs of property taxes, homeowners insurance, and electricity, internet and cable bills. It also includes home maintenance, which was estimated at 2% a year of the value of a home.

The price tag of such hidden costs within a typical, single-family home in the U.S. is roughly 26% higher compared with four years ago, the report found. In 2020, the same expenses amounted to $14,428 annually, or $1,202 a month.

“It’s just important to understand that you’re buying a lot more than a mortgage payment,” said Jeff Ostrowski, an analyst at Bankrate.com. “You’re also buying all these additional costs that you’re gonna have to figure out how to pay for.”

The national median mortgage payment in April was $2,256, up $144 or 6.8% from a year ago, according to the Mortgage Bankers Association.

Older homes can require more repairs

Out of all the expenses used to calculate the national average, maintenance and repair costs often surprise new homeowners more because of how much repair costs can vary, depending on the age of the home, experts say.

“Because of the lack of building, we know that homes that are being purchased are older,” said Jessica Lautz, deputy chief economist at the National Association of Realtors.

“Homebuyers have to make a compromise along the way, and often it’s the age or the condition of the home,” she said.

While available supply on the market is increasing, many of those homes were built decades ago, according to the 2022 American Community Survey by the U.S. Census Bureau. The survey found that the median age of owner-occupied homes in the U.S. is about 40 years old.

A home around that age “may need system upgrades, so think about a new HVAC [heating, ventilation, and air conditioning] unit, or windows, or doors,” Lautz said.

A roof lasts about 30 years on average while vinyl siding may last three to four decades, according to Angi.com, an online marketplace that connects homeowners with professional contractors for home maintenance or renovations.

“Those are the kind of costs that can really add up quickly,” Ostrowski said.

For first-timers, repairs are ‘part of the learning process’

First-time homebuyers especially don’t realize the true cost of maintenance and repairs because such expenses are “part of the learning process of becoming a homeowner,” Ostrowski said.

“Once you’ve been a homeowner for a while, you realize everything that can go wrong,” he said.
A mistake, however, is spending your entire reserve of savings for the down payment and ending up “house poor,” Ostrowski said.

“Then you move in, and you don’t really have any money left for repairs and maintenance, so you wind up running up credit card debt or taking out some kind of higher interest debt to pay for that,” he said.

In 2023, 46% of homeowners used cash from savings to cover home improvement projects, according to Angi.com. About 20% used credit cards, while 7% refinanced an existing loan and 5% used a home equity line of credit loan, the site found.

Don’t waive a home inspection

In the past few years, many homebuyers on the market waived home inspections, as competition among other buyers was high, said Ostrowski. In many cases, people who were already homeowners and could make cash offers were more likely to waive a home inspection.

“They’re not in the same sort of vulnerable position as a first-time buyer,” or somebody who’s never gone through the process, he said.

Competition is still hot in some areas.

On average, there are three offers for every home that’s listed for sale, Lautz said.

In April, around 19% of buyers waived the home inspection, down from 22% one month prior and 21% a year earlier, according to NAR data.

But waiving the inspection is risky and not something to do lightly. An inspection is an important safeguard that can help you go into the purchase understanding some of the maintenance tasks and repairs that may be on the horizon.

Otherwise, it can be a factor that can inflate the ongoing costs after you close on a house, Ostrowski said.

“That definitely raises the risk of somebody moving into a house and not realizing that the [air conditioning] was about to go, or the water heater was on its last legs, or the roof needs to be replaced,” he said.

Demand for riskier adjustable-rate mortgages hits highest level of the year, due to rising rates

May 15, 2024

Demand for riskier adjustable-rate mortgages hits highest level of the year, due to rising rates

Diana Olick | CNBC

• The share of ARM applications rose to 7.8% of mortgage demand last week, according to the Mortgage Bankers Association.

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.29% last week from 7.24% the previous week.

• The average contract interest rate for 5/1 ARMs decreased to 6.60% from 6.64%.

When mortgage rates rise, consumers look for any way to lower their monthly payments, and that often leads them to adjustable-rate mortgages. These loans offer lower interest rates than their fixed-rate counterparts but are considered riskier. While they can be fixed for up to 10 years, they eventually adjust to an unknown future market rate.

The share of ARM applications rose to 7.8% of mortgage demand last week, according to the Mortgage Bankers Association. That is the highest level of the year. When mortgage rates hit record lows in 2021, the ARM share of applications was in the 3% range.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 7.29% last week from 7.24% the previous week, with points decreasing to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. Meanwhile, the average contract interest rate for 5/1 ARMs fell to 6.60% from 6.64%.

“Inflation remains stubbornly high, and this trend is convincing markets that rates, including mortgage rates, are going to stay higher for longer. No doubt, this is a headwind for the housing and mortgage markets, with the 30-year fixed mortgage rate increasing to 7.29 percent last week, the highest level since November 2023,” said Mike Fratantoni, senior vice president and chief economist at the MBA.

Overall mortgage demand dropped 2.3% last week compared with the previous week, according to the MBA’s seasonally adjusted index.

Applications to refinance a home loan fell 3% for the week and were 1% lower than the same week one year ago. With rates 79 basis points higher than a year ago, homeowners have little incentive to refinance. Those wanting to take out home equity are more likely to do that through a second loan or line of credit, rather than give up their current low rate.

Applications from potential homebuyers fell 2% for the week and were 14% lower than the same week one year ago.

Mortgage rates rose further to start this week and will likely make a more significant move, higher or lower, depending on interest rate commentary from the Federal Reserve, which ends its meeting Wednesday.

I’m the founder of real estate giant RE/MAX. These are the 4 things to know if you want to buy a house now

April 15, 2024

I’m the founder of real estate giant RE/MAX. These are the 4 things to know if you want to buy a house now

Alisa Wolfson | MarketWatch

For over 40 years after co-founding global real estate franchise RE/MAX with his wife Gail in 1973, Dave Liniger held the title of CEO until he retired in 2018 and began his role as the chairman of the board. The company now has over 140,000 agents working in the United States and 110 countries. So, as RE/MAX embarks on celebrating their 50th anniversary this year, we asked Liniger what people should know about the housing market right now.

Stop thinking of the national housing market as a single unit

“One major thing people should understand about the real estate market is that there is no national market or national statistic. The United States is made up of vastly different regions and metropolitan areas that have differentiating factors that can affect the regional markets,” says Liniger. See the best mortgage rates you may qualify for here.

Indeed, “currently, for the first time in history, there are price decreases occurring in the western regions, whereas the eastern southern regions are experiencing an increase in prices,” says Liniger.

As sister publication The Wall Street Journal reported: “In all of the 12 major housing markets west of Texas, plus Austin, home prices fell in January on an annual basis, according to mortgage-data firm Black Knight Inc.’s home-price index. In the 37 biggest metro areas east of Colorado, except Austin, home prices rose year-over-year.”

So what happened on the west coast? “Mass tech layoffs have the potential to dampen the current market and crime rates in some of the major cities like Los Angeles and Seattle can result in a net loss of population,” explains Liniger.

Liniger also notes that taxes have a huge impact on the market: “[Take] Texas and Florida compared to states like New York. The NY metro area markets have gotten tougher because of the loss of high income people, similar to Washington DC, Baltimore and part of New Jersey. People are generally leaving those areas and moving to the south for a better climate.”

So what does this all mean for buyers? “It’s extremely important that people research the markets they are located in to best know what to look for.”

Pay attention to what interest rate you can get

“It’s crucial that people take a close look at interest rates [as] there’s still a shortage of houses and remember, 35% of houses are cash purchases, that hasn’t gone away. It’s [also] important to note that interest rates for cash purchases are not accurate,” says Liniger.

Because interest rates essentially determine how much a home buyer’s borrowed money will cost over the life of a loan, paying attention to interest rates can help factor in affordability as well as the value of real estate. As cash buyers aren’t subject to paying interest rates, taking into account how many home buyers are paying cash can also influence the market. See the best mortgage rates you may qualify for here.

Ask your real estate agent these questions

“[Find] someone who knows the market inside and out and has credible experience. Here are some important questions to ask when interviewing agents: How long have you been in the business? What price range do you work in? What’s the average transaction cost that you work on? Do you have any professional designations? How long is your average listing staying on the market,” says Liniger.

Pay attention to timelines

“Look at how long houses are staying on the market in your regional area. Focus on how fast or slow properties are currently moving in your price range as this can give an accurate read on what to expect from that specific market,” says Liniger.

Homebuyers need to earn 80% more than in 2020 to afford a house in this market. It’s not just due to high mortgage rates

March 15, 2024

Homebuyers need to earn 80% more than in 2020 to afford a house in this market. It’s not just due to high mortgage rates

Ana Teresa Solá | CNBC

• Factors beyond high mortgage rates are affecting housing affordability for many Americans, according to experts.

• The connection between housing costs and wages has been gradually separating over the years, according to C. Kirabo Jackson, an economist and member of the White House Council of Economic Advisers.

• Similarly, the number of new housing units built throughout the years has been declining, and the low supply is rooted in restrictive land-use and zoning regulations, according to experts.

Factors beyond high mortgage rates are affecting housing affordability for many Americans, according to experts.

Almost four years ago, a household earning $59,000 annually could afford a new mortgage without spending more than 30% of their monthly income and with a 10% down payment, according to a recent report by Zillow Group.

That is no longer the case today.

While the typical household in 2024 makes about $81,000 a year, up from $66,000 in 2020, wages have not kept up with housing costs.

“Since January of 2020, the typical mortgage payment on the typical home in the U.S. has nearly doubled,” said Orphe Divounguy, a senior economist at Zillow.

Nowadays, potential homebuyers need to make about $106,500 a year in order to afford the typical home today, an 80% increase from January 2020, according to Zillow.

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The connection between housing costs and wages has been gradually separating over the years, according to C. Kirabo Jackson, an economist and member of the White House Council of Economic Advisers.

“Around the mid-’90s, you start to see housing prices sort of separate from median wages in a way that kind of made housing less and less affordable for people who are in the market,” Jackson said.

More supply ‘helps keep prices down’

Tight supply is another reason behind unaffordability. Fewer homes available on the market for would-be buyers keeps real estate prices elevated and, in some local markets, the shortage makes prices climb higher.

The number of new housing units built throughout the years has been declining, and the low supply is rooted in restrictive land-use and zoning regulations, according to experts.

“If we have a supply problem, we really need to have a supply solution,” Divounguy said.

Land-use and building regulations across the country make it difficult in some markets to build new homes, Divounguy said.

And the most important way to improve affordability is to construct more housing in the U.S, he said.

To increase housing supply, local policymakers would need to lower the barriers for builders by easing land-use and zoning regulations, which determine factors like the maximum height of a building or the minimum size of a lot, Jackson said.

For example: Some local areas may say you can’t construct buildings more than three stories high in a particular area, which means high-rise buildings that could house about 100 people are out of the question.

“Instead, you have to have a house that maybe has five people,” Jackson said. “The more supply you have helps keep prices down. So the more housing that you make available, the more that’s going to sort of ease price pressures.”

While increasing the housing density in an area can boost affordability, land-use and zoning regulations, which inherently determines an area’s housing supply, is often decided at a local level, he said.

“If you really wanted to expand the supply of housing, one of the most immediate ways one could do that would be to ease up on these zoning restrictions and allow the construction of affordable housing in areas that currently would not be allowed under local land-use rules,” Jackson said.

Some areas have already begun to see a boom in new housing inventory due to relaxed zoning rules, according to Divounguy. Markets that allow builders to make smaller, attached homes as opposed to detached, single-family housing are seeing a surge in new construction, like markets in the South.

“Markets that have more restrictive land-use, regulations, zoning rules are markets where you’re not seeing the type of new construction necessary to keep up with demand for housing,” Divounguy said.

While local zoning rules are not under the federal government’s control, the administration is working toward local areas to be more flexible by providing financial incentives to help developers build more affordable housing, said Jackson.

“We have a growing economy, we have a growing population. As your population grows, you have to build more housing to accommodate the growth and population,” Jackson said.

Mortgage rates surge higher again, causing homebuyers to pull back

February 15, 2024

Mortgage rates surge higher again, causing homebuyers to pull back

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 6.87% last week from 6.80% the week before.

• Applications to refinance a home loan fell 2% for the week but were 12% higher than the same week one year ago.

• Applications for a mortgage to purchase a home dropped 3% for the week and were 12% lower than the same week a year ago.

After a brief reprieve in December and January, mortgage rates are moving higher again, and that is taking its toll on mortgage demand.

Total mortgage application volume fell 2.3% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) increased to 6.87% last week from 6.80% the week before, with points rising to 0.65 from 0.59 (including the origination fee) for loans with a 20% down payment. That is the highest rate since early December 2023.

Applications to refinance a home loan, which are most sensitive to weekly rate changes, fell 2% for the week but were 12% higher than the same week one year ago. Rates are still about one-half a percentage point higher now than they were a year ago, but the recent drop in rates from a 20-year high last fall has brought more borrowers out looking for any savings they can get. The vast majority of current borrowers, however, have loans with rates far lower than those available today.

Applications for a mortgage to purchase a home dropped 3% for the week and were 12% lower than the same week a year ago.

“Purchase applications remained subdued as elevated rates continue to add to affordability challenges along with still-low existing housing inventory,” said Joel Kan, an MBA economist, in a release.

A recent report from Redfin showed an 8% drop in pending home sales over the last four weeks compared with the same period a year ago. These measure signed contracts on existing homes.

“We’re seeing a bit of recovery with house hunters touring homes, but even demand at the earliest stages isn’t up as much as we would expect at this time of year,” said Chen Zhao, Redfin’s economic research lead. “That’s because mortgage rates are climbing again and winter weather has been harsher than usual in much of the country, keeping some house hunters at home.”

Mortgage rates surged even higher Tuesday after a government report on inflation showed it was still stubbornly higher than expected. The average rate on the 30-year fixed hit 7.08%, according to Mortgage News Daily.

“The bond market (which underlies mortgage rates) reacted immediately and forcefully when the numbers came out. Bonds continued to worsen as the day went on, leading many mortgage lenders to raise rates once or twice during the day,” wrote Matthew Graham, chief operating officer at Mortgage News Daily.

Office properties lead surge in commercial real estate delinquency rates

January 15, 2024

Office properties lead surge in commercial real estate delinquency rates

Aruni Soni | BUSINESS INSIDER

• Delinquency rates on loans backed by office properties jumped to 6.5% in the fourth quarter, an MBA survey found.

• Out of all the commercial real estate loan delinquency rates tracked by the survey, office loans led the pack.

• "Many properties and loans still face higher rates, uncertainty about property values and – for some properties – changes in fundamentals."

Financial troubles continue to plague the office market, which led an increase in commercial real estate loan delinquency rates.

A recent survey from the Mortgage Bankers Association found missed payments on loans backed by office properties jumped to 6.5% of balances at the end of the fourth quarter, up from 5.1% in the prior quarter.

Meanwhile, the delinquency rate on lodging loans climbed to 6.1% from 4.9%, retail delinquencies were flat at 5%, and multifamily delinquencies rose to 1.2% from 0.9%.

"Long-term interest rates have come down from their highs of last year, which should provide some relief to some loans, but many properties and loans still face higher rates, uncertainty about property values and – for some properties – changes in fundamentals," Jamie Woodwell, MBA's head of commercial real estate research, said in a press release.

Office loans have been weighed down by depressed demand for working spaces since the pandemic. And three years out, the persistence of work-from-home and hybrid models have pushed office vacancies up to all-time highs.

A recent report from Moody's Analytics described the US office market as being in "uncharted territory" with vacancy rates notching a record 19.6%.

In a note last month, Capital Economics forecasted that lackluster demand and high interest rates could spell another 20% plunge in prices for office buildings.

Zooming out, the commercial real estate sector has been in a pinch ever since interest rate hikes made borrowing money a lot more expensive. Some researchers say the sector is at the brink of its biggest crash since 2008, which could wipe out $160 billion from US banks.

Still, MBA's survey found that while the office market segment of commercial real estate is still wobbling, other slices of the sector are recovering.

Despite the fourth-quarter upticks, delinquency rates for retail and lodging-backed loans have largely drop since early 2020.

2023 was the least affordable homebuying year in at least 11 years, Redfin says

December 15, 2023

2023 was the least affordable homebuying year in at least 11 years, Redfin says

Laya Neelakandan | CNBC

• This year was the least affordable year for homebuying in more than a decade, according to a new Redfin report.

• California metro regions ranked as the least-affordable areas, while Midwest metros were the most affordable.

• Listing prices for next year, however, are expected to ease, Redfin said.

This year was the least affordable year for homebuying in at least in the past 11 years, according to a Thursday report from real estate company Redfin.

In 2023, someone making the median income in the U.S. — $78,642 — would’ve had to spend more than 40% of their income on monthly housing costs if they bought the median-priced home, which was around $400,000, according to Redfin. That’s the highest share in Redfin’s records dating back to 2012, up nearly 3% from last year.

Monthly costs for homebuyers have increased more than twice as fast as wages, Redfin said. The 30-year fixed mortgage rate hit 8% in October, the first time since 2000, combined with a decrease in house listings on the market.

This past year, a typical homebuyer had to earn an income of at least $109,868 if they wanted to spend a maximum of 30% of their income on monthly housing payments for a median-priced home, Redfin reported. That record high is up 8.5% from last year and $30,000 more than the typical household income.

Austin, Texas, was the only city that became more affordable in 2023, decreasing by around a 1% share, according to Redfin’s analysis. Meanwhile, the most expensive metros included many in California, such as Anaheim, San Francisco and San Jose. People in those areas, Redfin added, were forced to rent in 2023 due to high housing costs.

On the other end of the spectrum, Midwest metros proved to be among the most affordable, with someone in Detroit making the median income only spending about 18% of their earnings on monthly housing costs.

Looking to 2024, Redfin predicts mortgage rates will fall to about 6.6% and prices will drop 1% as new listings find their way onto the market.

“A perfect storm of inflation, high prices, soaring mortgage rates and low housing supply caused 2023 to go down as the least affordable year for housing in recent history,” Redfin Senior Economist Elijah de la Campa said in a statement. “The good news is that affordability is already improving heading into the new year.“

Cooler monthly inflation report pushes mortgage rates even lower

November 15, 2023

Cooler monthly inflation report pushes mortgage rates even lower

Diana Olick | CNBC

• Mortgage rates fell again on Tuesday.

• The bond market rallied after government data showed inflation was lower than expected.

• Wall Street has started to reduce its expectations for more Federal Reserve rate hikes ahead.

The average rate on the 30-year mortgage fell 18 basis points to 7.40% on Tuesday, according to Mortgage News Daily, as Wall Street lowered its expectations for future Federal Reserve hikes.

The drop was due to a sharp bond market rally, after the government’s monthly inflation report came in lower than analysts had predicted. As bond yields fell, so too did mortgage rates, which loosely follow the yield on the 10-year Treasury.

Mortgage rates had already been declining from their recent highs. A one-two punch of the Fed holding rates steady at its last meeting and a weaker-than-expected monthly employment report pointed to the end of interest rate hikes.

The 30-year fixed mortgage rate jumped over 8% on Oct. 19, the highest level in more than two decades. It then fell more than 25 basis points in the first week of November to 7.38%, coming back slightly last week and starting this week at 7.58%.

“Even though today’s inflation data was extremely important in shaping the rate narrative, the bond market’s reaction is nonetheless impressive,” said Matthew Graham, chief operating officer at Mortgage News Daily. “Mortgage lenders have done a great job of keeping pace with market movement considering mortgage rates are often accused of taking the elevator up and the stairs down.”

While the recent mortgage rate increases were all within 1 percentage point, the comparison to two years ago, when rates were near record lows around 3%, has made today’s homebuyers exceptionally sensitive to rates. Some can no longer either afford a home or qualify for a mortgage. Home sales have been falling for several months, with some calling the market frozen even before the start of winter.

“The interest rate rises should be over, and the Fed will have to consider cutting interest rates seriously. In the meantime, the bond market is reacting as if the Fed will be cutting interest rates next year. Mortgage rates look to head towards 7% in a few months and into the 6% range by the spring of 2024,” said Lawrence Yun, chief economist for the National Association of Realtors.

Adjustable-rate mortgage demand spiked last week. Here’s why.

October 15, 2023

Adjustable-rate mortgage demand spiked last week. Here’s why.

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) increased last week to 7.67% from 7.53%, for loans with a 20% down payment.

• The average contract interest rate for 5/1 ARMs decreased to 6.33% from 6.49%.

• ARM demand increased 15% over the week.

As mortgage rates reached a 23-year high last week, the cry went off across markets and social media: Is housing affordability dead? Has a version of the American dream — home ownership, kids, backyard barbecues — died with it?

The question is sharp because housing affordability has dropped by nearly half since the ultra-low interest rate days of 2021, according to the National Association of Realtors.

The median family was already $9,000 short in August of the income needed to buy the median existing home, the association says, and the recent surge in rates since has moved another five million U.S. families below the qualification standard for a $400,000 loan, according to John Burns Real Estate Consulting. At 3% mortgage rates, 50 million households could get a loan that size. Now it’s 22 million.

While an easing in treasury bond yields this week has brought the 30-year fixed mortgage back a shade below 8%, there is no quick fix.

The qualifying yearly income for a median-priced house in 2020 was $49,680. Now it’s more than $107,000, according to the NAR. Redfin puts the figure at $114,627.

″[These are] stunning numbers that render house affordability even more challenging for too many American families, especially those looking to buy their first home,” bond-market maven Mohamed El-Erian, an advisor to Allianz among many other roles, posted on X.

“It’s a very worrisome development for America,” NAR chief economist Lawrence Yun said.

Affordability depends on three big numbers, according to Yun — family income, the price of the house, and the mortgage rate. With incomes rising since 2019, the bigger issue is interest rates. When they were low, they papered over a surge in housing prices that began in late 2020, helped by people relocating to areas like Florida, Austin, Texas, and Boise, Idaho, to work in their old cities from their new homes. Now, the surge in rates is crushing affordability even as incomes rise sharply and housing prices mostly hang on to the big gains they generated during Covid.

“At the current 8% mortgage rate, mortgage payment[s] are 38% of median income,” Moody’s Analytics chief economist Mark Zandi said. “The mortgage rate has to fall to 5.5%, or the median priced home has to fall by 22%, or the median income has to increase by 28%, or some combination of all three variables.”

At the same time, demand for adjustable-rate mortgages has spiked to its highest level in a year amid the broader slowdown in mortgage applications.

What needs to change to make housing affordable again

All three indicators face a tough road back to “normal,” and normal is a long way from here. A few numbers illustrate why.

The National Association of Realtors measures affordability through its 34-year old Housing Affordability Index, or HAI. It calculates how much income the median family has to have to afford the median existing home, which, right now, costs about $413,000, according to NAR. If the index equals 100, it means the median family has enough income to buy that house with a 20% down payment. The index assumes the family wants to pay 25% of its income toward principal and interest.

The long-term average of the HAI is 138.1, meaning that, normally, the median family has a 38% cushion. Its all-time high was 213 in 2013, after the housing bust and 2008 financial crisis.

Right now, that index stands at 88.7.

A few scenarios using NAR data help illustrate how far affordability is from the average between 1989 and 2019, and what would be required to push it back into a more typical range as the national average for the 30-year ticked lower to 7.98% on Tuesday.

• If home prices are stable, rates need to fall to 3.55% in order to be back to historical average.

• If prices grow 5%, rates need to fall to 3.16%.

• If prices stay the same but incomes increase 5%, rates need to fall to 3.95%

• A mortgage rate that stays around 8% means median home prices need to fall by 35%, to $265,000.

• If rates stay at 8% and prices at current levels, income needs to increase by 63%.

But these numbers understate the challenge of getting affordability back to where Americans are used to seeing it.

Getting back to the affordability people enjoyed during the hyper-low interest rates of the pandemic would take even more: The HAI reached a yearly average of 169.9 that year, a level few think will come back any time soon.

Affordability became stretched partly because home prices rose 38% since 2020, according to the NAR, but more important was the jump in average interest rates from 3% in 2021 to as high as 8% last week. That’s a 167% jump, driving a $1,199 increase in monthly payments on a newly bought house, per NAR.

Higher wages are a plus, but not enough

Rising incomes will help, and median family incomes have climbed 16% to more than $98,000 since 2020. But that isn’t nearly enough to cover the affordability gap without devoting a higher share of the household paychecks to the mortgage, said Zandi.

Aside from the raw numbers, the direction of monetary policy will keep incomes from fixing the housing problem, said Doug Duncan, chief economist at Fannie Mae. The Federal Reserve has been raising interest rates precisely because it thinks wages have been growing fast enough to reinforce post-Covid inflation, Duncan said. Year-over-year wage gains slipped to 3.4% in the most recent job-market data, he said, and the Fed would like wage growth to be lower.

Downward pressure on home prices would help, but it does not look like they will decline by much. And even if home prices do the decline, that trend won’t be sustainable unless America builds millions of more homes.

After prices surged from 2019 through early 2022, it was easy to assume a big price correction coming, but it hasn’t happened. In most markets, prices have even begun to turn up a little bit. According to the realtors’ association, the median price of an existing home dropped by more than $35,000 in late 2022 but has risen by $45,000 since its low in January.

Not enough new housing in America

The biggest reason is that so few homes are up for sale that the laws of supply and demand aren’t working normally. Even with demand hit by affordability woes, buyers who are out there have to compete for so few homes that prices have stayed close to balanced.

“Boomers are doing what they said they were going to do. They are aging in place,” Duncan said. “And Gen X is locked into 3% mortgages already. So it’s up to the builders.”

Mortgage demand stalls at a level not seen since 1996

September 15, 2023

Mortgage demand stalls at a level not seen since 1996

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances — $726,200 or less — increased to 7.27% from 7.21%.

• Demand for refinances dropped 5% for the week and was 31% lower than the same week one year ago.

• Applications for mortgages to purchase a home rose 1% week to week but were 27% lower than the same week one year ago.

Higher mortgage rates continue to take their toll on mortgage demand, especially for refinancing.

Total mortgage application volume dropped 0.8% last week compared to the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances — $726,200 or less — increased to 7.27% from 7.21%, with points increasing to 0.72 from 0.69, including the origination fee, for loans with a 20% down payment.

Demand for refinances dropped 5% for the week and was 31% lower than the same week one year ago. The refinance share of mortgage activity decreased to 29.1% of total applications from 30.0% the previous week. As a comparison, at this time of year in 2020, when pandemic monetary policy had interest rates around 3%, the refinance share of mortgage applications was 63%.

Applications for mortgages to purchase a home rose 1% week to week but were 27% lower than the same week one year ago. The adjustable-rate mortgage share of total applications rose, signaling that potential buyers are using all the tools they can to lower their monthly payments. ARMs offer lower interest rates but are deemed riskier because their rates are fixed for a shorter term.

“Mortgage applications decreased for the seventh time in eight weeks, reaching the lowest level since 1996,” said Joel Kan, a Mortgage Bankers Association economist, in a release. “Given how high rates are right now, there continues to be minimal refinance activity and a reduced incentive for homeowners to sell and buy a new home at a higher rate.”

Mortgage rates remained high to start this week, according to a separate survey from Mortgage News Daily, but that could change following the release of the monthly Consumer Price Index on Wednesday.

“While it’s always possible that big-ticket data will thread the needle and result in minimal movement, there’s little question that any big departure from expectations will rock the bond boat for better or worse,” wrote Matthew Graham, chief operating officer at Mortgage News Daily.

Real estate experts say 'challenges' to buyers and sellers are the 'greatest ever'

August 15, 2023

Real estate experts say 'challenges' to buyers and sellers are the 'greatest ever'

Kristen Altus | FOX Business

For homebuyers and sellers alike across America, there’s a massive "struggle" being felt to close deals or make any money.

"The challenges to real estate buyers and sellers right now are probably the greatest ever," real estate powerhouse Dolly Lenz told Fox News Digital. "It's a struggle for every buyer and a struggle for every seller… they really have to look and say: What am I doing? Do I struggle to stay where I am and just wait this out? Do I struggle to buy?"

"Which struggle am I willing to take on? And every family has to sit down at the dining room table and decide that," she continued. "It is a struggle and people really are suffering. So it's not a good time for real estate overall."

Recent data from mortgage buyer Freddie Mac indicated the U.S. homebuyer's monthly costs have surged nearly 20% compared to one year ago. Lenz’s daughter and managing director of the brokerage painted the current housing landscape as "a tale of two cities," joining the warning calls around a sticky real estate market with people who are "plagued" with high prices.

"We're still doing deals because [clients] have cash. And like they say, cash is king," Jenny Lenz also told Fox News Digital. "But other than the very, very high-end, we are seeing people who are pretty skittish. And again, the first-time homebuyer is suffering the most."

A mix of constantly changing insurance coverage and the Federal Reserve's latest rate hike pushing 30-year fixed mortgage rates above 7.6% come at a time when Americans are "plagued" with high food and gas prices, according to the mother-daughter real estate team. They both argued that recession-like impacts are keeping homeowners in place, thus affecting the U.S. market and related sectors.

"Sixty-percent of the country has a mortgage rate 4% or under, so it really doesn't make sense for them to sell should they want to upsize or downsize, because their monthly payments are going to be the same, if not more," Jenny pointed out.

"None of those homes are coming on the market, which means lack of inventory, which means high prices, which basically means golden handcuffs for everyone," the managing director added.

"Think about how that reverberates throughout the economy," Dolly chimed in. "So there's no movers making moves. There's no architects… people aren't buying rugs and they're not buying new furniture… a list that goes on and on and on, how that impacts the entire economy."

While Dolly admitted it’s "not the absolute worst" real estate market she’s worked in, it is the worst for daughter Jenny.

"People can't get mortgages. Insurance is becoming astronomically expensive," Jenny said. "Highest-ever median home price. So we're getting all of these things at the same time."

In certain states like Texas and Florida where there’s no individual income tax, buyers and sellers may find more success.

"Migration trends are going to make a big difference," Dolly noted. "After SALT (state and local tax deduction) disappeared, people can't deduct their real estate taxes or the state and local taxes. So it's a very expensive thing. Now they're eating that entire nut themselves since they can't deduct it."

For metropolitan areas like New York City and San Francisco, renting has become more expensive than purchasing a property, the duo warned.

"All these places where crime is at an all-time high, but its cost of living is even worse, it's absolutely ridiculous," Jenny said. "People are saying, ‘These mortgage rates are so high, these prices are so high, I'm still going to dip my toe here, even though just a year ago I could have purchased a bigger home, a more expensive home, because the rent is just so high.’"

They also cautioned against buyers making too many concessions, advising they be "flexible" through the process.

"A lot of our buyers say to us: Look, I really want to get this house, so I'm going to waive my right to inspection as an example. And we're like, it's not really a good idea because if you do that, you don't know how big a pot that is you're going to have to eat up," Dolly said.

"You have to really keep your eyes open," Jenny added. "You have to be ready with that mortgage and a loan commitment letter, if you can even get one, and really be ready to jump in and get the home, because it's really hard out there."

Though these factors pitch a "negative" market outlook for the Lenzes, they put the onus on individuals to find their own optimism.

"We're in a slight recession now. I see it as getting worse between Fitch, insurance, gas prices, everything becoming so expensive," Dolly said. "And that's not good. That really is a sign of a not-chugging-along economy."

"People are struggling and we hope that [the Federal Reserve] can keep rates down so that we can have a great economy," Jenny said as Dolly added, "and so people can navigate and have some options."

The duo's best advice for homebuyers and sellers right now? Be patient and do your research.

"Real estate is local and hyper-local. What's going on in one market could be very different than one that's seemingly next door, but a 45-minute drive," Dolly said. "So do your homework there. Don't just be bidding on houses. Asking prices of homes do not reflect value."

"You need to be tracking a market for, I would say, a couple of months to see what's going on, what's selling, how long it's taking to sell and then have an educated offer on whatever property it is, while at the same time trying to secure that lowest mortgage rate possible for yourself," Jenny weighed in.

"All the balls in the air at the same time, and that's what you need to do," the Dolly Lenz Real Estate founder said. "And very likely, if you have good credit, will be successful. You will get that house."

The American banking landscape is on the cusp of a seismic shift. Expect more pain to come

July 15, 2023

The American banking landscape is on the cusp of a seismic shift. Expect more pain to come

Hugh Son | CNBC

• Rising interest rates, losses on commercial real estate and heightened regulatory scrutiny will pressure regional and midsized banks, leading to a wave of mergers, sources told CNBC.

• Some of those pressures will be visible as regional banks disclose second-quarter results this month. Firms including Zions and KeyCorp already have warned of sinking revenues.

• Half the country’s banks will likely be swallowed by competitors in the next decade, according to Fitch analyst Chris Wolfe.

• “Some of these banks will survive by being the buyer rather than the target,” said incoming Lazard CEO Peter Orszag. “We could see over time fewer, larger regionals.”

The whirlwind weekend in late April that saw the country’s biggest bank take over its most troubled regional lender marked the end of one wave of problems — and the start of another.

After emerging with the winning bid for First Republic, a lender to rich coastal families that had $229 billion in assets, JPMorgan Chase

CEO Jamie Dimon delivered the soothing words craved by investors after weeks of stomach-churning volatility: “This part of the crisis is over.”

But even as the dust settles from a string of government seizures of failed midsized banks, the forces that sparked the regional banking crisis in March are still at play.

Rising interest rates will deepen losses on securities held by banks and motivate savers to pull cash from accounts, squeezing the main way these companies make money. Losses on commercial real estate and other loans have just begun to register for banks, further shrinking their bottom lines. Regulators will turn their sights on midsized institutions after the collapse of Silicon Valley Bank exposed supervisory lapses.

What is coming will likely be the most significant shift in the American banking landscape since the 2008 financial crisis. Many of the country’s 4,672 lenders will be forced into the arms of stronger banks over the next few years, either by market forces or regulators, according to a dozen executives, advisors and investment bankers who spoke with CNBC.

“You’re going to have a massive wave of M&A among smaller banks because they need to get bigger,” said the co-president of a top six U.S. bank who declined to be identified speaking candidly about industry consolidation. “We’re the only country in the world that has this many banks.”

How’d we get here?

To understand the roots of the regional bank crisis, it helps to look back to the turmoil of 2008, caused by irresponsible lending that fueled a housing bubble whose collapse nearly toppled the global economy.

The aftermath of that earlier crisis brought scrutiny on the world’s biggest banks, which needed bailouts to avert disaster. As a result, it was ultimately institutions with $250 billion or more in assets that saw the most changes, including annual stress tests and stiffer rules governing how much loss-absorbing capital they had to keep on their balance sheets.

Non-giant banks, meanwhile, were viewed as safer and skirted by with less federal oversight. In the years after 2008, regional and small banks often traded for a premium to their bigger peers, and banks that showed steady growth by catering to wealthy homeowners or startup investors, like First Republic and SVB, were rewarded with rising stock prices. But while they were less complex than the giant banks, they were not necessarily less risky.

The sudden collapse of SVB in March showed how quickly a bank could unravel, dispelling one of the core assumptions of the industry: the so-called stickiness of deposits. Low interest rates and bond-purchasing programs that defined the post-2008 years flooded banks with a cheap source of funding and lulled depositors into leaving cash parked at accounts that paid negligible rates.

“For at least 15 years, banks have been awash in deposits and with low rates, it cost them nothing,” said Brian Graham, a banking veteran and co-founder of advisory firm Klaros Group. “That’s clearly changed.”

‘Under stress’

After 10 straight rate hikes and with banks making headline news again this year, depositors have moved funds in search of higher yields or greater perceived safety. Now it’s the too-big-to-fail banks, with their implicit government backstop, that are seen as the safest places to park money. Big bank stocks have outperformed regionals. JPMorgan shares are up 7.6% this year, while the KBW Regional Banking Index is down more than 20%.

That illustrates one of the lessons of March’s tumult. Online tools have made moving money easier, and social media platforms have led to coordinated fears over lenders. Deposits that in the past were considered “sticky,” or unlikely to move, have suddenly become slippery. The industry’s funding is more expensive as a result, especially for smaller banks with a higher percentage of uninsured deposits. But even the megabanks have been forced to pay higher rates to retain deposits.

Some of those pressures will be visible as regional banks disclose second-quarter results this month. Banks including Zions and KeyCorp told investors last month that interest revenue was coming in lower than expected, and Deutsche Bank analyst Matt O’Connor warned that regional banks may begin slashing dividend payouts.

JPMorgan kicks off bank earnings Friday.

“The fundamental issue with the regional banking system is the underlying business model is under stress,” said incoming Lazard CEO Peter Orszag. “Some of these banks will survive by being the buyer rather than the target. We could see over time fewer, larger regionals.”

Walking wounded

Compounding the industry’s dilemma is the expectation that regulators will tighten oversight of banks, particularly those in the $100 billion to $250 billion asset range, which is where First Republic and SVB slotted.

“There’s going to be a lot more costs coming down the pipe that’s going to depress returns and pressure earnings,” said Chris Wolfe, a Fitch banking analyst who previously worked at the Federal Reserve Bank of New York.

“Higher fixed costs require greater scale, whether you’re in steel manufacturing or banking,” he said. “The incentives for banks to get bigger have just gone up materially.”

Half of the country’s banks will likely be swallowed by competitors in the next decade, said Wolfe.

While SVB and First Republic saw the greatest exodus of deposits in March, other banks were wounded in that chaotic period, according to a top investment banker who advises financial institutions. Most banks saw a drop in first-quarter deposits below about 10%, but those that lost more than that may be troubled, the banker said.

“If you happen to be one of the banks that lost 10% to 20% of deposits, you’ve got problems,” said the banker, who declined to be identified speaking about potential clients. “You’ve got to either go raise capital and bleed your balance sheet or you’ve got to sell yourself” to alleviate the pressure.

A third option is to simply wait until the bonds that are underwater eventually mature and roll off banks’ balance sheets – or until falling interest rates ease the losses.

But that could take years to play out, and it exposes banks to the risk that something else goes wrong, such as rising defaults on office loans. That could put some banks into a precarious position of not having enough capital.

‘False calm’

In the meantime, banks are already seeking to unload assets and businesses to boost capital, according to another veteran financials banker and former Goldman Sachs

partner. They are weighing sales of payments, asset management and fintech operations, this banker said.

“A fair number of them are looking at their balance sheet and trying to figure out, `What do I have that I can sell and get an attractive price for?’” the banker said.

Banks are in a bind, however, because the market isn’t open for fresh sales of lenders’ stock, despite their depressed valuations, according to Lazard’s Orszag. Institutional investors are staying away because further rate increases could cause another leg down for the sector, he said.

Orszag referred to the last few weeks as a “false calm” that could be shattered when banks post second-quarter results. The industry still faces the risk that the negative feedback loop of falling stock prices and deposit runs could return, he said.

“All you need is one or two banks to say, ‘Deposits are down another 20%’ and all of a sudden, you will be back to similar scenarios,” Orszag said. “Pounding on equity prices, which then feeds into deposit flight, which then feeds back on the equity prices.”

Deals on the horizon

It will take perhaps a year or longer for mergers to ramp up, multiple bankers said. That’s because acquirers would absorb hits to their own capital when taking over competitors with underwater bonds. Executives are also looking for the “all clear” signal from regulators on consolidation after several deals have been scuttled in recent years.

While Treasury Secretary Janet Yellen has signaled an openness to bank mergers, recent remarks from the Justice Department indicate greater deal scrutiny on antitrust concerns, and influential lawmakers including Sen. Elizabeth Warren oppose more banking consolidation.

When the logjam does break, deals will likely cluster in several brackets as banks seek to optimize their size in the new regime.

Banks that once benefited from being below $250 billion in assets may find those advantages gone, leading to more deals among midsized lenders. Other deals will create bulked-up entities below the $100 billion and $10 billion asset levels, which are likely regulatory thresholds, according to Klaros co-founder Graham.

Bigger banks have more resources to adhere to coming regulations and consumers’ technology demands, advantages that have helped financial giants including JPMorgan steadily grow earnings despite higher capital requirements. Still, the process isn’t likely to be a comfortable one for sellers.

But distress for one bank means opportunity for another. Amalgamated Bank, a New York-based institution with $7.8 billion in assets that caters to unions and nonprofits, will consider acquisitions after its stock price recovers, according to CFO Jason Darby.

“Once our currency returns to a place where we feel it’s more appropriate, we’ll take a look at our ability to roll up,” Darby said. “I do think you’ll see more and more banks raising their hands and saying, `We’re looking for strategic partners’ as the future unfolds.”

Mortgage demand drops despite rates coming off recent highs

June 15, 2023

Mortgage demand drops despite rates coming off recent highs

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.81% from 6.91%.

• Applications for a mortgage to purchase a home fell 2% for the week and were 27% lower than a year ago.

Mortgage rates fell back from their recent highs, but demand dropped for the fourth straight week.

Total mortgage application volume declined 1.4% last week, compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.81% from 6.91%, with points falling to 0.66 from 0.83 (including the origination fee) for loans with a 20% down payment. That was still, however, the second-highest weekly average rate of 2023 to date.

Applications to refinance a home loan fell 1% for the week and were 42% lower than the same week a year ago. The refinance share of mortgage activity increased to 27.3% of total applications from 26.7% the previous week.

Applications for a mortgage to purchase a home slipped 2% for the week and were 27% lower than a year ago.

“Purchase activity is constrained by reduced purchasing power from higher rates and the ongoing lack of for-sale inventory in the market, while there continues to be very little rate incentive for refinance borrowers,” said Joel Kan, MBA’s deputy chief economist. “There was less of a decline in government purchase applications last week, which was consistent with a growing share of first-time home buyers in the market.”

Mortgage rates have not moved much this week, as there has been little economic data to push them in either direction. Next week’s monthly inflation report from the government will likely be the next major read on the economy to influence mortgage rates.

While SVB and First Republic saw the greatest exodus of deposits in March, other banks were wounded in that chaotic period, according to a top investment banker who advises financial institutions. Most banks saw a drop in first-quarter deposits below about 10%, but those that lost more than that may be troubled, the banker said.

“If you happen to be one of the banks that lost 10% to 20% of deposits, you’ve got problems,” said the banker, who declined to be identified speaking about potential clients. “You’ve got to either go raise capital and bleed your balance sheet or you’ve got to sell yourself” to alleviate the pressure.

A third option is to simply wait until the bonds that are underwater eventually mature and roll off banks’ balance sheets – or until falling interest rates ease the losses.

But that could take years to play out, and it exposes banks to the risk that something else goes wrong, such as rising defaults on office loans. That could put some banks into a precarious position of not having enough capital.

‘False calm’

In the meantime, banks are already seeking to unload assets and businesses to boost capital, according to another veteran financials banker and former Goldman Sachs

partner. They are weighing sales of payments, asset management and fintech operations, this banker said.

“A fair number of them are looking at their balance sheet and trying to figure out, `What do I have that I can sell and get an attractive price for?’” the banker said.

Banks are in a bind, however, because the market isn’t open for fresh sales of lenders’ stock, despite their depressed valuations, according to Lazard’s Orszag. Institutional investors are staying away because further rate increases could cause another leg down for the sector, he said.

Orszag referred to the last few weeks as a “false calm” that could be shattered when banks post second-quarter results. The industry still faces the risk that the negative feedback loop of falling stock prices and deposit runs could return, he said.

“All you need is one or two banks to say, ‘Deposits are down another 20%’ and all of a sudden, you will be back to similar scenarios,” Orszag said. “Pounding on equity prices, which then feeds into deposit flight, which then feeds back on the equity prices.”

Deals on the horizon

It will take perhaps a year or longer for mergers to ramp up, multiple bankers said. That’s because acquirers would absorb hits to their own capital when taking over competitors with underwater bonds. Executives are also looking for the “all clear” signal from regulators on consolidation after several deals have been scuttled in recent years.

While Treasury Secretary Janet Yellen has signaled an openness to bank mergers, recent remarks from the Justice Department indicate greater deal scrutiny on antitrust concerns, and influential lawmakers including Sen. Elizabeth Warren oppose more banking consolidation.

When the logjam does break, deals will likely cluster in several brackets as banks seek to optimize their size in the new regime.

Banks that once benefited from being below $250 billion in assets may find those advantages gone, leading to more deals among midsized lenders. Other deals will create bulked-up entities below the $100 billion and $10 billion asset levels, which are likely regulatory thresholds, according to Klaros co-founder Graham.

Bigger banks have more resources to adhere to coming regulations and consumers’ technology demands, advantages that have helped financial giants including JPMorgan steadily grow earnings despite higher capital requirements. Still, the process isn’t likely to be a comfortable one for sellers.

But distress for one bank means opportunity for another. Amalgamated Bank, a New York-based institution with $7.8 billion in assets that caters to unions and nonprofits, will consider acquisitions after its stock price recovers, according to CFO Jason Darby.

“Once our currency returns to a place where we feel it’s more appropriate, we’ll take a look at our ability to roll up,” Darby said. “I do think you’ll see more and more banks raising their hands and saying, `We’re looking for strategic partners’ as the future unfolds.”

Mortgage demand surged after Fed signaled potential pause in rate hikes

May 15, 2023

Mortgage demand surged after Fed signaled potential pause in rate hikes

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased last week to 6.48% from 6.50%

• Applications to refinance a home loan jumped 10% last week, compared with the previous week.

• Applications for a mortgage to purchase home increased 5% for the week, but were 32% lower than the same week one year ago.

Mortgage rates fell slightly last week after the chairman of the Federal Reserve suggested a potential end to a historic string of interest rate hikes. The drop wasn’t substantial, but it was enough to boost demand from current homeowners hoping to refinance their mortgages to lower rates.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased last week to 6.48% from 6.50% in the previous week, with points declining to 0.61 from 0.63 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association’s weekly survey. The rate was 5.53% for the same week one year ago. Mortgage rates for all surveyed loan types decreased over the week.

As a result, applications to refinance a home loan jumped 10% last week, compared with the previous week, seasonally adjusted. Refinance demand, however, was still 44% lower year over year.

“Mortgage applications responded positively to a drop in rates last week, as the Fed signaled a potential pause at the current level for the federal funds rate in anticipation of inflation slowing and tightening financial conditions that will slow economic and job growth,” wrote Joel Kan, MBA’s deputy chief economist, in a release.

Applications for a mortgage to purchase a home increased 5% for the week, but were 32% lower than the same week a year ago. Rates haven’t really dropped enough to offset high home prices. Prices have been cooling since last summer, but are already reheating this spring due to strong demand and very low supply.

Mortgage rates rose sharply to start this week, according to a separate survey from Mortgage News Daily. The increase was due to investor sentiment that the regional banking crisis may be easing. All bets are off Wednesday, however, when the government releases the consumer price index, a monthly report on inflation. Any large divergence from expectations, in either direction, could move bond yields, and consequently mortgage rates, decisively.

Rent or buy? Here’s how to make that decision in the current real estate market

April 30, 2023

Rent or buy? Here’s how to make that decision in the current real estate market

Emily Lorsch | CNBC

Choosing whether to rent or buy has never been a simple decision — and this ever-changing housing market isn’t making it any easier. With surging mortgage rates, record rents and home prices, a potential economic downturn and other lifestyle considerations, there’s so much to factor in.

“This is an extraordinarily unique market because of the pandemic and because there was such a run on housing so you have home prices very high, you also have rent prices very high,” said Diana Olick, senior climate and real estate correspondent for CNBC.

By the numbers, renting is often cheaper. On average across the 50 largest metro areas in the U.S., a typical renter pays about 40% less per month than a first-time homeowner, based on asking rents and monthly mortgage payments, according to Realtor.com.

In December 2022, it was more cost-effective to rent than buy in 45 of those metros, the real estate site found. That’s up from 30 markets the prior year.

How does that work out in terms of monthly costs? In the top 10 metro regions that favored renting, monthly starter homeownership costs were an average of $1,920 higher than rents.

But that has not proven to be the case for everyone.

Leland and Stephanie Jernigan recently purchased their first home in Cleveland for $285,000 — or about $100 per square foot. The family of seven will also have Leland’s mother, who has been fighting breast cancer, moving in with them.

By their calculations, this move — which expands their space threefold and allowing them to take care of Leland’s mother — will be saving them more than $700 per month.

‘You don’t buy a house based on the price of the house’

“You don’t buy a house based on the price of the house,” Olick said. “You buy it based on the monthly payment that’s going to be principal and interest and insurance and property taxes. If that calculation works for you and it’s not that much of your income, perhaps a third of your income, then it’s probably a good bet for you, especially if you expect to stay in that home for more than 10 years. You will build equity in the home over the long term, and renting a house is really just throwing money out.”

Mortgage rates dropped slightly in early March, due to the stress on the banking system from the recent bank failures. They are moving up again, although they are currently not as high as they were last fall. The average rate on a 30-year fixed-rate mortgage is 6.59% as of April — up from 3.3% around the same time in 2021.

But that hasn’t significantly dampened demand.

“As the markets kind of bubbled in certain parts of the country and other parts of the country priced out, we’ve seen a lot of investors coming in looking for affordable homes that they can buy and rent,” said Michael Azzam, a real estate agent and founder of The Azzam Group in Cleveland.

“We’re still seeing relatively high demand” he added. “Prices have still continued to appreciate even with interest rates where they’re at. And so we’re still seeing a pretty active market here.”

Buying a home is part of the American Dream

The Jernigans are achieving a big part of the American Dream. Buying a home is a life event that 74% of respondents in a 2022 Bankrate survey ranked as the highest gauge of prosperity — eclipsing even having a career, children or a college degree.

The purchase is also a full-circle moment for Leland, who grew up in East Cleveland, where his family was on government assistance.

“I came from a single-mother home who struggled to put food on the table and always wanted better for her children ... it was more criminals than there were police ... It is not the type of neighborhood that I wanted my children to grow up in,” said Jernigan.

The new homeowner also has his eye on building a brighter future for more children than just his own. Jernigan plans to purchase homes in his old neighborhood, renovate them and create a safe space for those growing up like he did.

“I’m here because someone saw me and saw the potential in me and gave me advice that helped me. … and I just want to pay it forward to someone else” Jernigan said.

Mortgage demand gets a boost from bank volatility, but it may be short-lived

March 31, 2023

Mortgage demand gets a boost from bank volatility, but it may be short-lived

Diana Olick | CNBC

• Overall mortgage demand rose 2.9% last week compared with the previous week.

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.45% from 6.48%.

• Mortgage applications to purchase a home increased 2% for the week but were 35% lower than the same week one year ago.

Stress in the banking system turned out to be a boon for the U.S. mortgage market. As investors hid in the relative safety of the bond market, yields moved even lower last week. Mortgage rates followed.

Mortgage demand, consequently, rose 2.9% compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. The string of gains, however, could be short-lived, as rates are now moving higher again.

Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726,200 or less) decreased to 6.45% from 6.48%, with points decreasing to 0.62 from 0.66 (including the origination fee) for loans with a 20% down payment. The rate was 4.8% the same week one year ago.

Applications to refinance a home loan increased 5% for the week but were still 61% lower year over year. The vast majority of homeowners today have mortgages with interest rates far below today’s rate, leaving them little incentive to refinance. Those who want to take out equity are largely opting for second loans, rather than give up the rates they have in a cash-out refinance.

Mortgage applications to purchase a home increased 2% for the week but were 35% lower than the same week one year ago. Buyers are coming back into the market for the traditionally busy spring season but are finding very little available for sale.

“Home-price growth has slowed markedly in many parts of the country, which has helped to improve buyers’ purchasing power,” said Joel Kan, an MBA economist in the release. “While the 30-year fixed rate remained 1.65 percentage points higher than a year ago, homebuyers responded, leading to a fourth straight increase in purchase applications.”

Mortgage rates, however, moved more than 20 basis points higher to start this week, according to a separate survey from Mortgage News Daily. With no more bank failures in the news this week, and no major economic data to influence investors, rates could return to the higher trajectory they were on before the bank issues hit.

A rush of homes go under contract in January, but it’s unlikely to last

February 28, 2023

A rush of homes go under contract in January, but it’s unlikely to last

Diana Olick | CNBC

• A sharp drop in mortgage interest rates brought homebuyers out in force in January.

• Signed contracts on existing homes jumped 8.1% last month compared with December, according to the National Association of Realtors.

• It’s the second straight month of gains, but growth may be short-lived.

A sharp drop in mortgage interest rates brought homebuyers out in force in January, but rates have bounced back higher again, so the gains may be short-lived.

Signed contracts on existing homes jumped 8.1% last month compared with December, according to the National Association of Realtors. That’s the second straight month of gains. Sales, however, were still 24% lower compared with January 2022.

The so-called “pending sales” are the most current indicator of housing demand, as it can take up to two months to close on a signed sale. Closed sales in January were lower because they were based on contracts signed in November and December, when mortgage rates were higher.

And January’s jump is all about mortgage rates. After hitting a high of just over 7.3% in October, which caused sales to plummet, the average rate on the popular 30-year fixed mortgage dropped back close to 6% in January, according to Mortgage News Daily.

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR chief economist Lawrence Yun.

But mortgage rates moved higher again in February, and the average rate stood at 6.88% as of Friday. Sales activity is likely already slowing. Mortgage applications to buy a home, which are a weekly indicator of buyer demand, have been falling for much of February.

The mortgage rate effect was also seen in sales of newly built homes in January, as those numbers from the U.S. Census Bureau are based on signed contracts as well, not closings. Builder sales jumped just over 7% compared with January. Some of that was due to incentives offered by big builders, but lower rates improved affordability, especially for buyers of entry-level homes.

Going forward, with rates higher and the supply of homes for sale still historically low, sales may not be able to continue this type of growth.

“Home sales activity looks to be bottoming out in the first quarter of this year, before incremental improvements will occur,” Yun said. “But an annual gain in home sales will not occur until 2024. Meanwhile, home prices will be steady in most parts of the country with a minor change in the national median home price.”

Housing market: Jason Oppenheim warns of an 'armageddon' in the real estate industry

January 31, 2023

Housing market: Jason Oppenheim warns of an 'armageddon' in the real estate industry

Dylan Croll | Yahoo

The real estate industry could soon be upended, says star broker Jason Oppenheim.

Oppenheim – who leads a team of glamorous agents on Netflix (NFLX) reality series "Selling Sunset" – recently sat down with Yahoo Finance to talk about the current state of the U.S. real estate market. During the far-ranging conversation, he warned that the industry's commission structure could soon change forever.

"To be specific about real estate agents, we've got federal regulators and a couple of lawsuits coming down the pipeline that at worst case could be an armageddon for real estate agents," he said. "You might see regulators uncouple the commission structure where the seller is now essentially paying for the buyers' and agents' commission."

In 2019, two home-sellers filed a lawsuit [Sitzer et al v. National Association of Realtors (NAR)], alleging that several NAR rules violate the Sherman Antitrust Act, an 1890 law which prohibits activities that restrict interstate commerce and competition.

One of the NAR rules in question requires listing brokers to offer buyer brokers a commission to list a property. The lawsuit alleges that this practice inflates sellers' costs and, therefore, is anticompetitive.

Traditionally, it takes two agents to sell a house: a buyer's agent and a seller's agent. However, if NAR loses the suit, the real estate industry would effectively see buyers' agents removed from the equation. That means the number of real estate agents in the U.S. (there are 1.5 million right now, according to NAR), could drop precipitously.

"You could see hundreds of thousands of real estate agents leaving the profession, and major brokerages go out of business," said Oppenheim. "We're on the precipice of an armageddon that nobody talks about."

There's hope for a settlement with regulators or an appeal process, but there's a high likelihood the marketplace for real estate agents is about to get majorly overhauled, said Oppenheim. He added that we could see the U.S. ultimately turn towards a model with lower total commissions, as is the case in Australia.

"I think there are too many real estate agents anyway, so I don't think that's part of the problem," he said. "I think the problem is that if we remove the buyer's agent's commission, you'll see the listing agent representing the buyer in 90% of transactions. It's called dual agency," said Oppenheim. "I don't think that's healthy for the consumer, because I think that the buyer should have their own representation. It would be no different than going into a courtroom and you have one lawyer, representing both sides."

This could create a situation where the agent would have a fiduciary duty to one side, the seller, Oppenheim added.

In 2022, a federal court ruled that a private real estate listing service could sue the NAR over anti-competitive practices. Earlier this month, the U.S. Supreme Court rejected the trade association's attempt to challenge the ruling.

"It's something that's not talked about that much, and it could be difficult, probably more in 2024, but it's coming," Oppenheim said.

Mortgage loan limits are increasing in 2023 – here’s what to know if you’re taking out a home loan

December 31, 2022

Mortgage loan limits are increasing in 2023 – here’s what to know if you’re taking out a home loan

Jason Stauffer | CNBC

Borrowers can look forward to higher limits for conforming conventional loans and FHA loans in 2023.

In spite of skyrocketing mortgage rates, average home prices are still increasing by double digits year over year. To help potential homebuyers caught between this crunch of high home prices and mortgage rates, two federal entities—the Federal Housing Finance Agency (FHFA) and the Federal Housing Administration (FHA)—will raise conforming loan limits and FHA loan limits for 2023.

Taken together, conforming conventional loans and FHA loans accounted for 85% loans issued for primary residences in 2021, according to the Consumer Financial Protection Bureau’s (CFPB) mortgage market trends report. Increasing their limits should help give more buyers access to an important tool for overcoming historically high home prices.

How will these changes impact your home-buying experience?

If your budget for buying a home was near the 2022 limits for FHA or conforming loans, you may be able to take out a larger loan without resorting to a jumbo loan (which is usually more expensive and harder to be approved for). That said, the yearly adjustment in loan limits isn’t likely to be the biggest factor in whether you can afford a house. Your local real estate market, personal finances, and the current mortgage rates will all have a larger effect on whether you can close a deal on a home.

Conforming loan limits for 2023

The conforming loan limit for your area determines the boundary between when a conforming conventional loan turns into a jumbo loan, which requires a larger down payment and typically has a higher interest rate.

Conforming loan limits also establish which loans can be purchased by Fannie Mae or Freddie Mac on the secondary mortgage market. Because lenders can more easily sell conforming loans, they tend to make these loans more affordable for borrowers (compared with jumbo loans).

Conforming loan limits are based on the average home price of an area and change each year to reflect the current home values. Homebuyers shopping for a single family home in designated low-cost areas (the vast majority of the country) will be able to qualify for a conventional loan of up to $726,200 in 2023, a $79,000 jump over the 2022 conforming loan limit.

Conforming conventional loans are available for properties with one to four units.

FHA loan limits for 2023

The FHA loan limit for low-cost areas is set at 65% of the conforming loan limit, and is higher in areas where homes are more expensive. To account for the higher cost of construction in places like Hawaii or Alaska, FHA loans issued in those areas have their own special limits. Because the FHA loan limit is tied to the conforming loan limit, the FHA will back mortgages for single family homes in low-cost areas up to $472,030 in 2023. That’s an increase of $51,350 over 2022.

What’s the difference between conventional and FHA loans?

Aside from the varying loan limits, there are significant differences between FHA loans and conventional loans.

FHA loans are issued by private mortgage lenders, but are guaranteed by the government. This government backing classifies FHA loans as non-conventional, but it also makes the loans less risky for banks. As a result, it’s usually easier for borrowers to qualify for an FHA loan than for a conventional or conforming loan. If you have issues with your credit, you’ll typically find it much easier to obtain an FHA loan.

Conventional loans fall into two categories: Conforming and non-conforming loans. Loans that that don’t meet the FHFA’s standards are considered non-conforming conventional loans, and include jumbo loans and other niche products.

Conforming conventional loans are not backed by the government, but they meet the standards set by the FHFA and can be sold by your lender to Fannie Mae or Freddie Mac. Conventional loans have fewer restrictions, but can be harder to qualify for.

Conventional loans vs. FHA loans

Many of these guidelines for conventional and FHA loans are the minimum standards the government sets for these types of mortgages. Most lenders have additional standards beyond what the government mandates. For example, many mortgage lenders will require you to have a higher credit score than compared to government minimums (and you’ll need an even higher score if you want the best interest rate).

How to choose the right loan type for you

The best mortgage for you depends on your personal financial situation, the type of property, and other factors, such as where the home is located.

First, see what you can qualify for. Mortgage lenders will preapprove you for a loan based on your income, credit score, assets, and other considerations. If you’re eligible for both an FHA loan and a conventional loan, then you’ll want to compare the mortgage rate and fees for each loan type.

FHA loans require an upfront mortgage insurance payment of 1.75%, in addition to a monthly mortgage insurance premium. Paying an extra 1.75% may not sound like a lot, but for a $200,000 loan that’s $3,500. You also can’t waive the monthly insurance premium with an FHA loan (in most situations) without refinancing into a conventional loan. With a conventional loan, the private mortgage insurance is waived once you have a loan-to-value of 80% (i.e. 20% equity in the property).

In a hot real estate market where sellers receive multiple offers, it may be challenging to get an offer accepted with a FHA loan. Conventional loans are generally more appealing to sellers because they are looked at as being easier to deal with. This is partly because FHA loans have a stricter appraisal and inspection process compared to conventional loans.

One advantage of FHA loans is that they’re easier to qualify for, especially if you have a lower credit score. For borrowers with average credit, you’re likely to find the mortgage rate and monthly insurance premiums are more reasonable with an FHA loan.

There are also nuances to your local market that may impact which type of loan is right for you. It’s a good idea to have a conversation with your mortgage lender and real estate agent to determine what type of mortgage is the best fit for your home buying or refinancing goals.

And while finding the right mortgage lender is a personal decision unique to your financial circumstances, Select can help point you in the right direction. Select ranked the five best mortgage lenders for borrowers in a variety of circumstances, such as Rocket Mortgage being a good fit for borrowers with lower credit scores and SoFi as the best for saving money.

Bottom line

The limits for conforming loans and FHA loans are increasing in 2023 to account for a rise in home prices. This gives homebuyers more flexibility in how they finance a home purchase.

However, the type of the loan you take out is only one factor that impacts your decision to purchase a home or refinance your mortgage. Rising mortgage rates have increased the cost of borrowing for a home, and reduced how much buyers can afford. This has pushed some homebuyers out of the market and cooled the housing prices in some areas. But while the overall market remains this expensive, homebuyers should welcome every bit of help they can get.

Investors’ home purchases drop 30% as price increases slow down

November 30, 2022

Investors’ home purchases drop 30% as price increases slow down

Diana Olick | CNBC

• Investor home purchases dropped just over 30% in the third quarter of this year compared with the same period last year, according to Redfin.

• The drop in investor sales outpaced the drop in overall home purchases, which were down roughly 27% in the third quarter.

• Home prices are still higher compared with a year ago, but the annual gains are shrinking at an unprecedented pace.

Home sales have dropped for nine straight months, driven by surging mortgage rates, and now investors are pulling back even more than traditional homebuyers.

Investor home purchases dropped just over 30% in the third quarter of this year compared with the same period last year, according to real estate brokerage Redfin. That’s the biggest drop in investor sales since the Great Recession over a decade ago, with the exception of a very brief stall in the first two months of the Covid-19 pandemic in 2020.

The drop in investor sales outpaced the drop in overall home purchases, which were down roughly 27% in the third quarter. The investor share in the overall market also fell to 17.5% of all sales from 18.2% a year ago. The share is still, however, slightly higher than the 15% share seen before the pandemic.

“It’s unlikely that investors will return to the market in a big way anytime soon. Home prices would need to fall significantly for that to happen,” said Sheharyar Bokhari, senior economist at Redfin. “This means that regular buyers who are still in the market are no longer facing fierce competition from hordes of cash-rich investors like they were last year.”

Non-investor homebuyers are facing much higher mortgage rates and a shortage of affordable homes for sale. Investors tend to use cash more often than traditional buyers, so they are not quite as influenced by mortgage rates. They are, however, influenced by home prices, which are weakening.

Home prices are still higher compared with a year ago, but the annual gains are shrinking at an unprecedented pace. The S&P CoreLogic Case-Shiller national home price index was up 13% in August, which is the most recent reading, but that was down from a 15.6% annual gain in July.

“The -2.6% difference between those two monthly rates of change is the largest deceleration in the history of the index (with July’s deceleration now ranking as the second largest),” Craig Lazzara, managing director at S&P DJI, said in a release. “Further, price gains decelerated in every one of our 20 cities. These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since.”

Investors who are still in the market, however, are still paying higher prices than last year. The typical home purchased by an investor in the third quarter cost $451,975, up 6.4% from a year ago, but down 4.3% from the second quarter.

Regionally, markets seeing the biggest decline in investor activity were Phoenix, Arizona, Portland, Oregon, Sacramento, California, and Atlanta, Georgia. All of those were some of the hottest pandemic-driven markets that are now seeing the steepest slump in overall sales. Miami also saw an outsized drop in investors, suggesting that even the massive drive to the Sun Belt is finally easing.

Homebuilders say they’re on the edge of a steeper downturn as buyers pull back

October 31, 2022

Homebuilders say they’re on the edge of a steeper downturn as buyers pull back

Diana Olick | CNBC

• Homebuilders say 2023 is going to bring an even sharper downturn in the market, as high interest rates scare away buyers.

• Housing starts for single-family homes dropped nearly 19% year over year in September, according to the U.S. Census. Building permits, which are an indicator of future construction, fell 17%.

• “It is definitely a hard landing for housing,” said one homebuilder in the Denver area.

The once-hot housing market is cooling off at an alarming rate, and some homebuilders say it will only get worse come the new year as new orders dry up.

Fast-rising mortgage rates have caused once-frenzied homebuyers to turn on their heels and become worried about their potential investment and the health of the overall economy.

“There’s this cliff that’s happening in January,” said Gene Myers, CEO of Thrive Homebuilders in the Denver area, which was one of the hottest markets in the years leading up to and through the coronavirus pandemic.

U.S. homebuilders were a major beneficiary of the Covid economy. Record low interest rates, combined with surging demand from consumers looking for more living space, caused a run on housing unlike most had ever seen before. Home prices surged over 40% in just two years, and homebuilders couldn’t meet the orders fast enough. They even slowed sales just to keep pace. All of that is over.

Housing starts for single-family homes dropped nearly 19% year over year in September, according to the U.S. Census. Building permits, which are an indicator of future construction, fell 17%. PulteGroup

, one of the nation’s largest homebuilders, reported its cancelation rate jumped from 15% in the second quarter of this year to 24% in the third.

The public homebuilders that have reported earnings so far showed surprisingly strong results, but that is because much of it is based on a backlog of homes that went under contract last spring. That was before mortgage rates crossed 6% and then 7%.

Now builders are preparing for what’s coming next. Myers said that his company’s balance sheet is incredibly strong right now, thanks to a backlog of homes sold at high prices, but he predicted that the market will be “ugly” by the start of next year.

“It is definitely a hard landing for housing,” he said. “Any hope of a soft landing really evaporated last spring, when it became so clear that our customers who are accustomed to such low mortgage rates just were going to go on strike.”

Myers was around during the last housing crash, which was brought on by a faulty mortgage market where just about anyone, qualified or not, could get a home loan. It caused a massive run on housing, based almost entirely on speculative buying and selling by investors. Single-family housing starts fell a stunning 80% from January 2006 to March 2009, but Myers notes that it was a slower turn compared with what is happening now.

“I think we’re seeing the most abrupt change in the market in my career, and I’ve been around a while,” he said. “I’ve never seen sales just turn off, which for us happened in May.”

Downward spiral

Barely six months ago, single-family housing starts were still up 10% year over year. That was just before mortgage rates really started to jump quickly. To go from a 10% annual gain in construction to a 19% drop in that time frame is an historically sharp turn.

While sales of newly built homes are falling, prices are still higher compared with a year ago. Much of that has to do with still-inflated prices for labor and materials. Part of the price strength may just be indicative of which homes are selling, namely the more expensive ones. But that may change soon, as well.

Sheryl Palmer, CEO of Arizona-based homebuilder Taylor Morrison

, which just reported strong earnings for its third quarter, said entry-level buyers are clearly struggling. But she also admitted that higher-end buyers are not flooding in the door either anymore.

“When we look at our move-up and our resort lifestyle buyers they absolutely can still afford to buy, but emotionally, you need to have the confidence,” Palmer said Friday on CNBC’s “Mad Money.” “Even at today’s rates, both our FHA and conventional buyers have a great deal of room, but being able to afford it doesn’t mean they have the confidence, given everything that’s going on in the economy today.”

Palmer told analysts on the company’s earnings call that new orders were down “sharply” in September, and that the slowdown has been felt across a wide range of price points, geographies and consumer groups. As a result Taylor Morrison is pulling back on land investment, lowering its pace of new construction starts and offering buyers additional incentives.

Sales of newly built homes dropped below pre-pandemic levels in September, and cancelations are now double what they were a year ago, according to the National Association of Home Builders.

“This will be the first year since 2011 to see a decline for single-family starts,” NAHB Chief Economist Robert Dietz said in a release. “While some analysts have suggested that the housing market is now more ‘balanced,’ the truth is that the homeownership rate will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”

Supply of newly built homes remains elevated, unlike in the existing-home market, where listings are still scarce. NAHB reported that one-quarter of builders are now slashing prices.

And that is the big unknown. Prices are cooling down for both new and existing homes, but analysts are divided as to if they will actually show year-to-year declines, and how wide those declines might be. Myers said he has heard talk of a 20% drop in prices for new construction.

“And it sounds really harsh, but when we were looking back, because our construction costs have gone up so rapidly, we only have to dial back a little over a year to be 20% less than we are now,” Myers said. “So to think about, well, we’re just going to go back to 2020 doesn’t sound nearly as crazy as a 20% price correction. But I think it definitely has to happen if we’re going to get velocity back.”

Home purchase cancellations are above 15% for the second straight month. It’s important to know the financial repercussions

September 30, 2022

Home purchase cancellations are above 15% for the second straight month. It’s important to know the financial repercussions

Sarah O’ Brien | CNBC

• In August, 15.2% of home purchase agreements fell through, similar to 15.5% in July, according to a new report from Redfin.

• The average mortgage rate reached 6.7% last week, up from 3.3% heading into 2022.

• It’s important to know if you can walk away from your agreement without losing your deposit.

Amid higher interest rates and a softening housing market, home buyers are continuing to back out of purchase contracts at an elevated rate.

About 64,000 home-purchase agreements were canceled in August, according to a new report from Redfin. That’s equal to 15.2% of home contracts initiated during the month and similar to the 15.5% canceled in July. A year ago, the share was 12.1%.

If you’re considering joining the ranks of those who walk away from a deal in progress, it’s important to know whether it will cost you to do so. Or, if you haven’t yet signed a contract but are nearing that point, it’s worth determining if you can cancel at some point in a way that doesn’t result in forfeited money.

Your deposit may be at stake

Typically, buyers provide what’s called an earnest money or “good faith” deposit when an offer is made on a home, although the specifics vary from state to state. The amount is usually 1% to 5% of the purchase price but can run as high as 10% depending on the local market.

The deposit is kept in an escrow account and goes toward your down payment or other closing costs when you finalize the purchase at settlement.

If the seller accepts your offer and you sign a purchase agreement — whether weeks or months before settlement — you can risk losing that deposit if you try to get out of the contract without meeting the terms.

Contingencies can help protect buyers

Given the financial risks of a broken contract, it makes sense to ensure the final purchase is contingent upon certain aspects of buying a house. Common contingencies relate to home inspection, appraisal and financing.

For example, if the inspection were to reveal problems with the house that are unacceptable to you, a home inspection contingency generally would mean you can walk away and get your deposit back. Or, if the appraisal were to fall short of the agreed-upon sale price or you cannot secure a mortgage at a rate or terms specified in the contract, you could back out without losing your money.

Be aware, though, that the process and conditions for being able to recoup your deposit differs from state to state, said Erin Sykes, chief economist for Nest Seekers International, a real estate brokerage.

For buyers, the softening market means entering into a contract with contingencies is more likely than it was just a few months ago.

“Buyers are putting contingencies back in [purchase agreements] … and not giving it all away to sellers like they did,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker.

There also can be affordability issues causing buyers to walk away, especially in new construction, said Al Bingham, a mortgage loan officer with Momentum Loans in Sandy, Utah.

Basically, with persisting supply chain issues affecting construction, new houses are taking longer to complete. This means that the current interest rate available to a buyer ahead of settlement may be higher now than it was before construction started.

Buyers “are willing to walk away even if they can qualify because the house payments have gone up,” Bingham said. “They just cannot afford it.”

After two years of surging home prices, rising interest rates have hit the brakes on a red-hot housing market. The average fixed rate on a 30-year mortgage was 6.7% as of Friday, up from about 3.3% in early January, according to Mortgage News Daily.

The difference a higher interest rate makes can be stark.

For example, on a $300,000 mortgage at 6.7% over 30 years, monthly payments for principal and interest only would be $1,935. That same loan at 3.3% would result in a payment of $1,313 (a savings of $622). Those amounts do not include other costs that often are wrapped into mortgage payments, including homeowners insurance, property taxes or private mortgage insurance.

“The market shifted really fast,” Rinaldi said. “It went from people offering $40,000 above asking price, waiving inspections, promising their first-born … to not so much, because rates increased so fast.”

Mortgage rates will fall to 4.5% in 2023? That’s the estimate from Fannie Mae. Here’s what that means for homebuyers

Aug 31, 2022

Mortgage rates will fall to 4.5% in 2023? That’s the estimate from Fannie Mae. Here’s what that means for homebuyers

Greg Iacurci | CNBC

• The rate on a 30-year fixed mortgage will fall to an average 4.5% in 2023, according to Fannie Mae.

• Rates have jumped more than two percentage points since the beginning of 2022, largely due to the Federal Reserve increasing borrowing costs.

• Consumers shouldn’t necessarily delay a home purchase if they find an affordable home they like now, experts said.

Mortgage rates are projected to decline next year — but that doesn’t mean prospective homebuyers should necessarily delay a purchase for the prospect of lower financing costs.

The rate on a 30-year fixed mortgage will fall to an average 4.5% in 2023, according to a recent housing forecast published by Fannie Mae, a government-sponsored lender.

That dynamic would offer relief to would-be homebuyers who’ve seen mortgage rates balloon this year.

The Federal Reserve started increasing its benchmark interest rate in March to tame stubbornly high inflation, which has resulted in higher borrowing costs for consumers — who may feel a sense of whiplash from 2020, when rates bottomed out near historically low levels.

Average rates are expected to be 4.7% and 4.4% in the first and fourth quarters of 2023, respectively — down from 5.2% in Q2 this year, according to Fannie Mae.

Still, consumers should “take forecasts with a grain of salt,” according to Keith Gumbinger, vice president of HSH, a market research firm.

“If you’re participating in the marketplace, interest rates are important but might not be the most important component,” Gumbinger said.

How mortgage rates impact your wallet

Rates for a 30-year fixed mortgage — the interest rate of which doesn’t change over the loan’s term — have jumped more than two percentage points since the beginning of 2022.

Rates averaged 5.55% the week of June 23, according to data from Freddie Mac, another government-sponsored entity. That’s up significantly from 3.22% the first week of January though a slight decline from the 5.81% high point in June.

Even a seemingly small jump in mortgage costs can have a big impact on consumers, via higher monthly payments, more lifetime interest and a smaller overall loan.

Here’s an example, according to HSH data: At a 3.5% fixed rate, a homebuyer with a $300,000 mortgage would pay about $1,347 a month and $185,000 in total interest over 30 years. At a 5.5% rate, homeowners would pay $1,703 a month and pay over $313,000 in interest for the same loan amount.

Here’s another example, which assumes a buyer has an $80,000 pretax annual income and makes a $30,000 down payment. This buyer would qualify for a $295,000 mortgage if rates were 3.5%, about $50,000 more than the same buyer at a 5.5% rate, according to HSH data. That differential may put certain home out of reach.

What prospective buyers should consider

Many consumers have turned to an adjustable-rate mortgage instead of fixed mortgages as borrowing costs have swelled.

Adjustable-rate loans accounted for more than 12% of mortgage applications in both June and July this year — the largest share since 2007 and double the percentage from January this year, according to Zillow data.

These loans are riskier than fixed rate mortgages. Consumers generally pay a fixed rate for five or seven years, after which it resets; consumers may then owe larger monthly payments depending on prevailing market conditions.

Kevin Mahoney, a certified financial planner based in Washington, D.C., favors fixed-rate loans due to the certainty they provide consumers. Homebuyers with a fixed mortgage can potentially refinance and lower their monthly payments when and if interest rates decline in the future.

More broadly, consumers should largely avoid using mortgage estimates like Fannie Mae’s as a guide for their buying decisions, he added. Personal circumstances and desires should be the primary driver for financial choices; further, such predictions can prove to be wildly inaccurate, he said.

“You could chase better numbers for years on end in some cases if things don’t go your way,” said Mahoney, founder and CEO of millennial-focused financial planning firm Illumint.

But prospective buyers can perhaps risk waiting if they don’t have a rigid timeline for a purchase and have cushion in their budgets in case mortgage rates don’t move as projected, Mahoney added.

Consumers who find a home they like — and can afford to buy it — are likely better served jumping on the opportunity now instead of delaying, Gumbinger said.

Even if borrowing costs improve next year, overall affordability will likely still be a challenge if home prices stay elevated, for example, he added.

Home prices cooled at a record pace in June, according to housing data firm

July 31, 2022

Home prices cooled at a record pace in June, according to housing data firm

Diana Olick | CNBC

• Home price gains are cooling fast, as demand wanes and supply builds.

• The annual rate of price appreciation fell two percentage points from 19.3% to 17.3%.

• Price gains are still otherwise strong because of an imbalance between supply and demand. The housing market has had a severe shortage for years.

Rising mortgage rates and inflation in the wider economy caused housing demand to drop sharply in June, forcing home prices to cool down.

Home prices are still higher than they were a year ago, but the gains slowed at the fastest pace on record in June, according to Black Knight, a mortgage software, data and analytics firm that began tracking this metric in the early 1970s. The annual rate of price appreciation fell two percentage points from 19.3% to 17.3%.

Price gains are still strong because of an imbalance between supply and demand. The housing market has had a severe shortage for years. Strong demand during the coronavirus pandemic exacerbated it.

Even when home prices crashed dramatically during the recession of 2007-09, the strongest single-month slowdown was 1.19 percentage points. Prices are not expected to fall nationally, given a stronger overall housing market, but higher mortgage rates are certainly taking their toll.

The average rate on the 30-year fixed mortgage crossed above 6% in June, according to Mortgage News Daily. It has since dropped back into the lower 5% range, but that is still significantly higher than the 3% range rates were in at the start of this year.

“The slowdown was broad-based among the top 50 markets at the metro level, with some areas experiencing even more pronounced cooling,” said Ben Graboske, president of Black Knight Data & Analytics. “In fact, 25% of major U.S. markets saw growth slow by three percentage points in June, with four decelerating by four or more points in that month alone.”

Still, while this was the sharpest cooling on record nationally, the market would have to see six more months of this kind of deceleration for price growth to return to long-run averages, according to Graboske. He calculates that it takes about five months for interest rate impacts to be fully reflected in home prices.

Markets seeing the sharpest drops are those that previously had the highest prices in the nation. Average home values in San Jose, California, have fallen 5.1% in the last two months, the biggest drop of any of the top markets. That chopped $75,000 off the price.

In Seattle, prices are down 3.8% in the past two months, or a $30,000 reduction. San Francisco, San Diego and Denver round out the top five markets with the biggest price reductions.

The cooling in prices coincides with a sharp jump in the supply of homes for sale, up 22% over the last two months, according to Black Knight. Inventory is still, however, 54% lower than 2017-19 levels.

“With a national shortage of more than 700,000 listings, it would take more than a year of such record increases for inventory levels to fully normalize,” said Graboske.

Price drops will not affect the average homeowner as much as they did during the Great Recession, because homeowners today have considerably more equity. Tight underwriting and several years of strong price appreciation caused home equity levels to hit record highs.

Despite that, the strong demand in the market recently could present a problem for some. About 10% of mortgaged properties were purchased in the last year, so price drops could cause some borrowers to edge much lower in their equity positions.

Mortgage demand stalls again, even as interest rates swing briefly lower

Jun 30, 2022

Mortgage demand stalls again, even as interest rates swing briefly lower

Diana Olick | CNBC

• The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances decreased to 5.84% from 5.98% last week, causing mortgage refinance demand to rise slightly.

• Homebuyer demand was flat for the week and down 24% from a year ago.

After rising steadily for three weeks, mortgage rates dipped slightly last week, prompting a small increase in refinance activity. Activity from homebuyers, however, pulled back further, leaving total mortgage demand basically flat from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.84% from 5.98%, with points decreasing to 0.64 from 0.77, including the origination fee, for loans with a 20% down payment.

Applications to refinance a home loan rose 2% for the week but were 80% lower than the same week one year ago. The refinance share of mortgage activity increased to 30.3% of total applications from 29.7% the previous week.

Mortgage demand to purchase a home increased 0.1% for the week after rising more solidly the previous week. It was, however, 24% lower year over year.

“Overall purchase activity has weakened in recent months due to the quick jump in mortgage rates, high home prices, and growing economic uncertainty,” said Joel Kan, an MBA economist. “The average purchase loan amount declined to $413,500, which highlights an ongoing downward trend seen since it hit a record $460,000 in March 2022.”

The drop in the loan size is likely the result of moderating price growth due to higher mortgage rates and buyers not being able to borrow as much at those higher rates.

After that brief drop, mortgage interest rates popped back up at the end of last week and continued this week, according to another read from Mortgage News Daily. The average rate on the 30-year fixed is now approaching 6% again.

Mortgage demand slides further, even as interest rates pull back slightly

May 31, 2022

Mortgage demand slides further, even as interest rates pull back slightly

Diana Olick | CNBC

• Mortgage rates turned lower for the second straight week, but it wasn’t enough to boost demand for purchase loans or refinances.

• Applications to refinance a home loan dropped 2% for the week and were 75% lower than the same week one year ago.

• Applications for a mortgage to purchase a home were flat week to week and down 16% from a year ago.

Mortgage rates turned lower for the second straight week, but it wasn’t enough to boost demand for either new purchase loans or refinances, according to a weekly report from the Mortgage Bankers Association.

Rates are still much higher than they were for the past two years. Last week the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.46% from 5.49%, with points dropping to 0.60 from 0.74 (including the origination fee) for loans with a 20% down payment.

Applications to refinance a home loan dropped 2% for the week and were 75% lower than the same week one year ago.

“Most refinance borrowers continue to remain on the sidelines as a result, and refinance applications have fallen in nine of the past 10 weeks. Compared to January 2022, refinance activity is down 66%,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting.

Homebuyers are also pulling back. Applications for a mortgage to purchase a home were flat week to week and down 16% from a year ago.

More supply is coming on the market, but homes are suddenly sitting longer for sale.

Mortgage demand from homebuyers is now close to the lows last seen in spring 2020, at the start of the Covid pandemic. Homebuying quickly picked up after that, and frenzied demand pushed prices higher at an astounding rate over the past two years.

Now those high prices are sidelining potential buyers, especially people seeking to purchase their first home.

Foreclosure filings are up 132% from a year prior.

Apr 30, 2022

Foreclosure filings are up 132% from a year prior. Here’s what that means for the housing market (and it’s not what you might think)

Alisa Wolfson | MarketWatch

When we were reading through real estate data this month, three stats caught our eye. The first: That the number of active foreclosures (this is when the foreclosure process has begun on a seriously delinquent loan, but it has yet to be completed and liquidated) edged up by more than 7,000 in March — the first year-over-year increase in almost 10 years, according to mortgage technology, data and analytics provider Black Knight. Secondly, more than 78,000 U.S. properties had a foreclosure filing during the first quarter of 2022, which is up 39% from the previous quarter and up 132% from a year ago, according to real estate analytics company ATTOM. And third, serious mortgage delinquencies — those 90 or more days past due — are 70% higher than they were pre-pandemic, according to Black Knight.

While those numbers seem grim, pros say the reality isn’t as bad as it looks: Though active foreclosures are up year-over-year, the number of loans in active foreclosure is still way below historic norms. On average, prior to the pandemic, the country saw about 30,000 to 40,000 foreclosure starts per month. But the foreclosure moratoria that were put in place as part of the CARES Act in response to COVID-19 drove all of that normal activity to a halt. And for the most part, the continued low foreclosure starts are because the vast majority of folks who had taken advantage of forbearance have come out of such plans and returned to performing on their mortgages. And those who remain in forbearance may still have protection against foreclosure until they reach the maximum allowable forbearance period.

As for foreclosure filings, Rick Sharga, executive vice president of market intelligence at ATTOM, says that though “foreclosure activity increased significantly in the first quarter of 2022 … that doesn’t indicate a sudden weakness in the housing market, or the U.S. economy. Mortgage servicers are essentially ‘catching up’ on processing foreclosures on loans that were already in default or more than 120 days delinquent prior to the pandemic. Many of these loans are fairly old – issued prior to 2009.” And he adds: “We’re not expecting to see a huge wave of foreclosure activity anytime soon … Even with the dramatic increase in Q1 foreclosure activity, we’re still running at about 50% of the normal level.”

And finally, regarding serious mortgage delinquencies, though they are up since the pandemic, in March they fell 12% for the strongest single-month improvement in 20 years, and there are actually more than 1.2 million fewer serious delinquencies than there were last March, Black Knight reports. What’s more, delinquencies overall are way down. Black Knight reports that 30-day delinquencies — borrowers who were just a single payment past due — plunged 20% from February. The reason for this decline? A combination of rising employment, student loan deferrals, strong post-forbearance performance and millions of refinances have all helped put downward pressure on delinquency rates.

Why do foreclosures and delinquencies matter to the housing market?

We watch foreclosures and delinquencies because they are often a sign of distress, which can indicate weakness in the housing market. Given the decrease in delinquencies from a few months ago, experts suggest that even a minor uptick from the beginning of the year isn’t a reason to worry. “These delinquency rates are so low that they’re not having much effect on the overall housing boom,” says Jeff Ostrowski, analyst at Bankrate. Although the housing market needs any and all new inventory, Ostrowski says he doubts the volume of foreclosures will be enough to really make a dent in the inventory squeeze. “Foreclosures are at a very low level and the legal process can take months, so I don’t expect any real fallout from the foreclosure uptick,” says Ostrowski.

What does this all mean for home buyers and sellers?

Pros say you shouldn’t expect a shift in the housing market as a result of these foreclosure upticks. “With demand for homes exceeding supply by so much, no one is going to get a foreclosure for a steal. Competing buyers are bidding up prices for all homes, including foreclosures,” says Holden Lewis, home and mortgage expert at Nerdwallet.

It’s possible however, that you’ll come across foreclosed properties when searching for a home — and if you’re considering buying one, you’ll likely want to understand the different types of foreclosures listed for sale. “Many real estate investors are looking for a deep foreclosure bargain, but it’s still a seller’s market,” says Lawrence Yun, chief economist at the National Association of Realtors.

Depending on the stage of the delinquency process, you may find pre-foreclosures where a lender notifies the homeowner that they’re in default; short-sales where a homeowner tries to sell the home for less than the mortgage value due to financial distress; sheriff’s sale auction where properties in default are sold at courthouses, bank foreclosures known as real estate owned (REO) properties, and government foreclosures where properties are purchased with loans from the Federal Housing Finance Agency or Veterans Administration.

Properties in foreclosure can be found on the multiple listing service (MLS), so you don’t need to go hunting undercover for them — they’re available for anyone to see. “Properties going through foreclosures are also listed in newspapers, bank offices and websites. For buyers considering a foreclosed property, auctions are another venue to find available houses,” says Ratiu.

That said, a serious delinquency can be devastating for a homeowner because it means a hit to their credit score and potentially a default and foreclosure, says Ostrowski. The silver lining is that because prices are holding strong, a struggling homeowner should be able to sell their home before losing it, but the same homeowner then has to keep themselves afloat in an expensive rental market.

An adjustable rate mortgage could mean a lower monthly payment for a while. Be sure you fully understand the risks

Mar 31, 2022

An adjustable rate mortgage could mean a lower monthly payment for a while

Sarah O’Brien | CNBC

KEY POINTS

• The average fixed rate on a traditional 30-year mortgage is 4.67%, up from below 3% in November and the highest it’s been since late 2018.

• By comparison, the initial rate on a 5/1 adjustable rate mortgage is 3.5%.

• While an ARM can make sense for some homebuyers, it’s worth assessing whether it works best for your situation.

As interest rates tick upward, it may be tempting for homebuyers to explore adjustable rate mortgages.

The appeal of an ARM, as it’s called, can be the lower initial interest rate compared with a traditional 30-year fixed-rate mortgage. However, that rate can change down the road — and not necessarily in your favor.

“There is a lot of variability in the specific terms as to how much the rates can go up and how quickly,” said certified financial planner David Mendels, director of planning at Creative Financial Concepts in New York. “No one can predict what rates will do, but one thing is clear — there is a whole lot more room on the upside than there is on the downside.”

Interest rates remain low from a historical perspective but have been rising amid a housing market that already is posing affordability challenges for buyers. The median list price of a home in the U.S. is $405,000, up 14% from a year ago, according to Realtor.com.

The average fixed rate on a 30-year mortgage is 4.67%, up from below 3% in November and the highest it’s been since late 2018, according to the Federal Reserve Bank of St. Louis. By comparison, the average introductory rate on one popular ARM is at 3.5%.

With these mortgages, the initial interest rate is fixed for a set amount of time.

After that, the rate could go up or down, or remain unchanged. That uncertainty makes an ARM a riskier proposition than a fixed-rate mortgage. This holds true whether you use an ARM to purchase a home or to refinance a loan on a home you already own.

If you’re exploring an ARM, there are a few things to know.

For starters, consider the name of the ARM. For a so-called 5/1 ARM, for instance, the introductory rate lasts five years (the “5”) and after that the rate can change once a year (the “1″).

Some lenders also offer ARMs with the introductory rate lasting three years (a 3/1 ARM), seven years (a 7/1 ARM) and 10 years (a 10/1 ARM).

Aside from knowing when the interest rate could begin to change and how often, you need to know how much that adjustment could be and what the maximum rate charged could be.

“Don’t just think in terms of a 1% or 2% increase,” Mendels said. “Could you cope with a maximum increase?”

Mortgage lenders employ an index and add an agreed-upon percentage point (called the margin) to arrive at the total rate you pay. Commonly used benchmarks include the one-year Libor, which stands for the London Interbank Offered Rate, or the weekly yield on the one-year Treasury bill.

So if the index used by the lender is at 1% and your margin is 2.75%, you’ll pay 3.75%. After five years with a 5/1 ARM, if the index is at, say, 2%, your total would be 4.75%. But if the index is at, say, 5% after five years? Whether your interest rate could jump that much depends on the terms of your contract.

An ARM generally comes with caps on the annual adjustment and over the life of the loan. However, they can vary among lenders, which makes it important to fully understand the terms of your loan.

• Initial adjustment cap. This cap says how much the interest rate can increase the first time it adjusts after the fixed-rate period expires. It’s common for this cap to be 2% — meaning that at the first rate change, the new rate can’t be more than 2 percentage points higher than the initial rate during the fixed-rate period.

• Subsequent adjustment cap. This clause shows how much the interest rate can increase in the adjustment periods that follow. This number is commonly 2%, meaning that the new rate can’t be more than 2 percentage points higher than the previous rate.

• Lifetime adjustment cap. This term means how much the interest rate can increase in total over the life of the loan. This cap is often 5%, meaning that the rate can never be 5 percentage points higher than the initial rate. However, some lenders may have a higher cap.

An ARM may make sense for buyers who anticipate moving before the initial rate period expires. However, because life happens and it’s impossible to predict future economic conditions, it’s wise to consider the possibility that you won’t be able to move or sell.

“I’d also be concerned if you do an ARM with a low down payment,” said Stephen Rinaldi, president and founder of Rinaldi Group, a mortgage broker. “If the market corrects for whatever reason and home values drop, you could be underwater on the house and unable to get out of the ARM.”

Rinaldi said ARMs tend to make the most sense for more expensive homes because the amount saved with the initial rate can be thousands of dollars a year.

“The difference between 3.5% and 5% can be $400 a month,” Rinaldi said. “On a 7/1 ARM that could mean saving $5,000 a year or $35,000 altogether, so I can see the logic in that.”

For a mortgage under about $200,000, the savings are less and may not be worth choosing an ARM over a fixed rate, he said.

“I don’t think it’s worth the risk to save $100 or so a month,” Rinaldi said.

Before rushing into the hot housing market, here’s how to set yourself up for success

Feb 28, 2022

Before rushing into the hot housing market, here’s how to set yourself up for success

Michelle Fox | MFOXCNBC

Looking for a new home may seem like a daunting task these days.

Prices are up, inventory is low and mortgage rates are rising.

That’s why, in this environment, it pays to do your homework before you enter the market. Once you start looking, you’ll have to move at light speed to place an offer, explains Jessica Lautz, vice president of demographics and behavioral insights for the National Association of Realtors.

“As interest rates are climbing, there has been a rush to lock in lower relative rates, while at the same time the inventory of homes has hit all-time lows,” she said.

The median price of a home in January jumped to $350,300, an increase of 15.4% from January 2021, according to the National Association of Realtors. Homes are spending an average of 19 days on the market.

Meanwhile, the mortgage rate for a 30-year fixed loan is 4.17%, according to Mortgage Daily News. Early last year, they were less than 3%.

With that in mind, here’s what you can do now to put yourself in the best position to find your new home.

Learn the language

Becoming familiar with real-estate lingo, like closing costs and home inspections, is part of the process. Yet learning the language before you jump in can help you move quickly.

“Your offer will likely be up against other buyers, so educate yourself with your agent on what terms like earnest deposit, appraisal contingency, home inspection contingency, and appraisal gap mean before viewing homes,” Lautz suggested.

Earnest money is the deposit you put down on the property you’d like to buy. It shows good faith, and the funds eventually go toward the down payment and closing costs. An appraisal contingency is a provision in your contract that allows you to back out if the appraisal price comes in lower than the sale price. That difference in the appraisal and sale prices is known as an appraisal gap.

Similarly, a home inspection contingency gives you an out if there are issues that arise during the home inspection. In both cases, you can also try to negotiate with the seller instead of pulling out of the sale.

Since competition is so fierce, many buyers have been waving contingencies in order to get a leg up.

Make a list

Write down your “must-haves” and your “nice-to-haves,” said Danielle Hale, chief economist at Realtor.com.

This way, when you have to make a quick decision you already know what trade-offs you want to make.

It can also help you in a bidding war, which is easy to get carried away with in a highly competitive market.

“Focus on the goal you set out for yourself, like your list of must-haves and nice-to-haves and your budget,” Hale said. “Stick to that. Be persistent.”

Tackle debt

Mortgage lenders will look at your debt-to-income ratio, which is the amount of debt relative to your income, when determining your loan. If you have debt, try to pay it down before you start house hunting, Lautz advises.

Consider using any bonus money or cash gifts to pay it off. If you don’t have debt, put that cash into savings to help with your down payment.

Know your credit

Your credit score is also an important factor in getting a mortgage and the type of loan you’ll get. It also impacts the interest rate you’ll receive and potentially how much money you need for a down payment.

By checking your credit score ahead of time, you’ll know whether you’ll need to make any changes or adjustments to try to increase that number.

Also, get a copy of your credit report to check for any errors or unpaid bills, which may also affect your credit score. Consumers can get their credit report up to once a week for free from the nation’s three largest credit reporting firms — Equifax, Experian and TransUnion — through April.

Talk to a mortgage lender

Reach out to a lender as soon as possible, at least to ask questions and find out what they need from you in order to preapprove a mortgage.

Using online calculators can help you figure out what you can afford and whether it makes sense to buy or rent. You’ll also want to know how much money you’ll need to bring to closing, since there are fees — known as closing costs — that are due in addition to your down payment.

You can also get preapproved for a mortgage before you start house hunting, since you’ll need it before you submit a contract for a house.

Have a budget

Just because you are preapproved by a mortgage lender for a certain amount of money to spend doesn’t mean that is your budget.

Look at your monthly expenses to determine what you can afford to pay each month. Don’t forget about interest rates. If they continue to rise before you close on the home, they will increase your monthly mortgage payments.

Consider expanding your market, if possible, to find lower-priced options.

“This is the time to go to overlooked areas if there are any in your market,” Lautz said.

Home prices in 2021 rose 16.9%, the highest on record

Feb 8, 2022

Home prices in 2021 rose 16.9%, the highest on record

Anna Bahney | CNN Business

The real estate market was on fire last year, with the frenzied pace of sales activity pushing home prices to record highs.

The median home sales price was $346,900 in 2021, up 16.9% from 2020, and the highest on record going back to 1999, according to the National Association of Realtors. Home sales had the strongest year since 2006, with 6.12 million homes sold, up 8.5% from the year before.

While that was bad news for would be buyers, it was a boon for those who already owned a home. A typical homeowner accumulated $50,200 in housing wealth, looking at the median price from 2020 to 2021.

"That is a sizable wealth gain for homeowners across the country," said Lawrence Yun, NAR's chief economist. "The housing market has seen a spectacular performance this last year with sales rising and prices rising. But inventory is at an all-time low."

By the end of 2021, there were fewer homes for sale than ever. The inventory of unsold existing homes fell to a record low of 910,000 at the end of December. That's a 1.8-month supply of homes at the current pace, also an all-time low.

Yun anticipates total annual home sales to drop a bit in 2022 as mortgage rates tick up. But he added that employment gains, stricter underwriting standards and continued demand are strong indications that the market is not in danger of crashing.

"This year, consumers should prepare to endure some increases in mortgage rates," Yun cautioned. "I also expect home prices to grow more moderately by 3% to 5% in 2022, and then similarly in 2023 as more supply reaches the market."

Inventory hits new low

Because of scarce inventory, sales of existing homes -- which include single-family homes, townhomes, condominiums and co-ops -- dropped 4.6% in December from November, and 7.1% from a year ago.

"December saw sales retreat, but the pullback was more a sign of supply constraints than an indication of a weakened demand for housing," said Yun.

The low inventory has also knocked down the sales of homes in affordable price ranges.

Home sales in the $100,000 to $250,000 range were down 23.2% in December from the year before. Meanwhile, homes priced between $750,000 and $1 million saw sales rise 32.2% from last year, according to the report.

"The upper end of the market is moving along," Yun said. "But at the lower end, there is not enough inventory or some homes are being pushed into the higher price brackets."

More homes are expected to come onto the market during the spring home selling season, Yun said. And good news also came from the Commerce Department on Wednesday that home building grew in December.

"This new supply is clearly needed, as move-up buyers purchasing new homes will free up existing inventory for the wave of first-time buyers," said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. "We continue to expect that 2022 will see growth in home sales, decelerating home-price growth, and a record volume of purchase mortgage originations."

"Homebuilders have already made strides in 2022 to increase supply, but reversing gaps like the ones we've seen recently will take years to correct," said Yun.

Home prices still climbing

With fewer than one million homes on the market at the end of December, prices continued to climb as buyers raced against the clock to secure low mortgage rates on the homes for sale.

"Even as sales are falling, prices are rising showing that demand is still there," Yun said.

The median existing home price for all housing types in December was $358,000, which was up 15.8% from a year ago, marking 118 straight months of year-over-year increases, the longest-running streak on record. Prices rose across the country, with the south seeing the biggest appreciation.

In November, the share of first-time buyers fell to just 26% of all buyers. But in December the share of first-time buyers perked back up to 30%.

"There was a significant surge in first-time buyers at the end of the year," Yun said. "With mortgage rates expected to rise in 2022, it's likely that a portion of December buyers were intent on avoiding the inevitable rate increases."

Momentum continues in 2021

July 15, 2021

California Real Estate Market Prices Hit Record High in May 2021

By MARCO SANTARELLI

The California housing market ended the previous year on a high note as sales remained strong in December and the median house price reached another record high. The same momentum has been carried forward in 2021. Homes in California are staying on the market for about seven days (median time) before going under contract, with 70% of homes selling above their list prices, according to the data released by C.A.R. for May 2021.

The year-over-year price increase was the largest ever, and it was the second month in a row that the state had an annual increase of more than 30%. It was the second time since June 2013 that the state recorded an annual increase of over 30 percent, according to the California Association of Realtors (C.A.R.). Just like the national housing market trends, the tight inventory and low mortgage rates are fueling the rise in California home prices. While this kind of price appreciation impacts housing affordability, higher home prices will hopefully encourage more sellers to list their homes for sale, which would in turn reduce the rate of appreciation.

California is a seller’s market and home prices have reached new record-highs across all the regions due to tight supply. Homes are moving nearly 46% faster than a year ago; the median time on the market was 7 days in May. Nearly 70% of homes sold above the asking price in May. New construction can’t keep up with demand in the California housing market. Every major region saw home prices continuing to increase from last year by double digits as buyers competed amid a shortage of homes for sale.

There is an increase in demand leading to bidding wars and subsequent higher selling prices. These trends show us that the California housing market remains very competitive. Growth of sales are prices are driven by low mortgagee rates, buyers seeking more living space, and a perennial shortage of houisng supply.