The Federal Reserve raised its short-term interest rate a quarter of one percent on January 31. This could potentially push mortgage rates higher in coming weeks and months. The Fed board, at their last meeting where Alan Greenspan presided as chairman, also indicated there may be more raises in the Fed rate in the future, putting more pressure on mortgage rates.
Mortgage and real estate leaders are now focusing on the new Fed chairman, Ben Bernanke, who took over the chairmanship on Feb. 1. They are trying to determine what his policy is and what might be in store at the next meeting on March 28. In the meantime, mortgage interest rates remain at historic low levels. As of February 1, the average rate for a 30-year, fixed-rate mortgage is only 6.12 percent (with 0.5 percent fees). An increasing number of consumers are taking advantage of today’s window of opportunity to apply for a needed mortgage.
Some economists believe Bernanke will raise the Fed rate at least one more time to show he is serious about fighting inflation. Others believe the Fed has already nipped inflation in the bud and further rate hikes could unnecessarily hurt the economy. The latest rate increase is the bank’s 14th since June 2004. The Fed rate is now at 4.5 percent, the highest in nearly five years.
Hybrid Mortgage Popularity Growing
Hybrid mortgages are becoming the “loan of choice” for increasing numbers of borrowers, it was revealed in the 22nd Annual Adjustable-Rate Mortgage (ARM) Survey, conducted by Freddie Mac, a major buyer of existing home mortgages. A hybrid mortgage is basically an ARM loan but offers a fixed interest rate for a specified number of initial years before reverting to a one year adjustable rate for the remaining years of its 30-year term. It’s a viable way to obtain a low interest mortgage with the assurance the interest rate will not rise for a number of years.
“Over the past several years, annually adjusting ARMs with an initial fixed-rate period of more than one year, known as hybrid ARMs, have grown in popularity,” the recently released Freddie Mac report stated. “Most of these special ARM loans have an initial fixed-rate period of five years known as 5/1 ARMs. They have been the dominant choice of consumers. Last year (2005) two-in-five ARM loans were 5/1 hybrids.”
The average initial interest rate on 5/1 ARMs has been about 5.8 percent in recent months, according to the survey report. That’s about 0.58 percentage points above the rate on traditional 1-year ARMs, and 0.19 percentage points below the rate on a 30-year fixed-rate mortgage.
“A 5/1 hybrid ARM provides the consumer with the comfort of knowing the interest rate will be fixed over the first five years of the loan,” said Frank Nothaft, Freddie Mac’s vice president and chief economist. “This product has been particularly popular with families who plan to have the mortgage for five years or less.”
Economic Prognosis Good for 2006
Strong economic growth in 2006 is predicted by the Mortgage Bankers Association, as reported in their recent three-year economic forecast update. MBA is projecting continued strong growth of 3.5 percent this year, with moderate, below-trend growth of 3.3 percent next year. Total residential mortgage production this year will be about $2.24 trillion. That’s the fifth-largest year on record, but reflects a 19.5 percent decline from last year.
“We expect economic growth to remain solid this year, but we will begin to see below-trend growth next year,” said Doug Duncan, MBA chief economist. “Housing will decline modestly from the fifth consecutive record year in 2005, but will remain robust historically. Home price appreciation rates will moderate compared to recent years. Long-term mortgage interest rates, albeit rising, will remain relatively low, supporting residential and commercial real estate finance activity,” Duncan said.
Commercial Real Estate an Increasingly Popular Investment
Commercial real estate is becoming the investment of choice for increasing numbers of individuals and families. More than $170 billion in commercial properties was acquired by investors in 2004 up from $120 billion in the previous year, according to the firm of Cushman & Wakefield. That reflects a 41 percent increase in sales volume in one year.
The uncertainties of stock market investments is driving many investors into real estate holdings. Also, with occupancy rates climbing, purchasing investment properties is looking better all the time. Leasing activity is also on the rise. The increase in leasing commercial properties has led to a decline in the overall vacancy rate in these properties. “Leasing fundamentals are clearly strengthening, and we expect them to improve in coming months,” said Will Marks, a real estate analyst with JMP Securities.
The demand for commercial real estate is hot with new capital sources popping up every month, it was reported by Real Capital Analytics. Foreign as well as domestic buyers are on the increase. “Investment in commercial property is up substantially across all groups of buyers, and new sources keep emerging,” said Bob White, president of Real Capital. “This capital is far larger in magnitude and less cyclical in nature,” he added.
Where are the Super-luxury Homes?
Have you ever wondered where the most richie-rich luxury homes are located, and what they’re selling for in the current market? As for location, most of the highest upper-tier homes currently for sale are in three states: California, Florida and Colorado, in that order. California has 183 of the multimillion dollar homes on the market, Florida has 174, and Colorado has 92, according to the 1,000 most-expensive home study and report by Ultimate Homes Magazine.
You’d better sit down before learning the price paid for the most expensive home during the past year. Okay, are you ready? The price Donald Trump paid for his Palm Beach mansion is $125 million. That breaks the previous year’s record high price of a paltry $75 million. The total of all listing prices of these for-sale homes is a mind-boggling figure of $13 billion. New York State has the greatest number of super expensive homes 333. Most of them are located in the Manhattan area.
The report points out that there are now a million homes in the nation valued at over $1 million. The number of agents specializing in the sale of luxury homes is about 700. The smallest state with a significant number (38) of multimillion dollar homes is Connecticut.
Record Sales Volume of New Homes
The sales figures are in, and there was a record number of new home sales last year, topping the previous year by more than 6 percent, according to a Commerce Department report. The total number of new single family home sales last year reached 1.28 million up from 1.20 million in 2004.
“There’s no denying that last year was a tremendous year for the housing industry,” said. David Pressly, president of the National Association of Home Builders. “Very favorable interest rates and strong buyer demand has helped spur the housing market beyond past records.
“While new home sales have been strong, we see a cooling of the market to a healthy and more sustainable pace in the months ahead. This year, we expect to see a 6 percent to 7 percent drop in sales, but certainly no reason for alarm. This would make 2006 the second or third best year in housing history.”
Banks Edging into Real Estate Brokerage and Management
The real estate brokerage industry is getting more concerned about banks encroaching on their business turf. Recently, two major banks received approval from regulators to develop and own large hotel and office properties. This could open the door wider for banks to enter the commercial real estate business, competing with professional real estate brokers and managers.
Banking laws generally prohibit banks from owning and developing commercial real estate unless the properties are predominantly occupied by the bank’s staff. Regulators have been reluctant to allow banks to have a high concentration of loans in the commercial real estate market, fearing that a sudden economic downturn could impair the bank’s capital stability.
Recently, the Comptroller of the Currency, a unit of the Treasury Department that regulates national banks, broadened its interpretation of permissible real estate development activities. This worries independent brokers and managers. The two banks that were given approval to own the hotel and office properties have not been identified at this writing.
More Consumers Using Internet for Real Estate / Mortgage Information
A record number of consumers are using the Internet when shopping for a home or mortgage. Back in 1995, only two percent of homebuyers used the Internet. By year 2004, that proportion had risen to 74 percent. The most recent survey shows 77 percent of consumers use the Internet for finding homes or related information. This information was reported by the National Association of Realtors in their new Profile of Home Buyers and Sellers study and report.
When persons who had recently purchased a home were asked where they first learned about the home they bought, 24 percent indicated it was the Internet. That percentage is up from 15 percent in 2004 and only 2 percent in 1997, according to the NAR survey. Many consumers check home listings in communities that interest them, then contact a local broker to arrange an inspection on one or more homes, and possibly handle the sales transaction. Others go to one of the “for sale by owner” Websites, then contact the owners direct to seek more information and pursue a purchase.
Still other use the Internet to obtain up-to-date information on the real estate and mortgage market, in preparation for purchasing and financing a home or selling their home. The Internet has become the consumer’s primary resource for real estate and mortgage information.
Youths Prepare for Real Estate Careers
Thousand of low-income young people will sign up for school this year, preparing for careers in homebuilding. They can do so because of $58 million in grants announced recently by the Dept. of Housing and Urban Development (HUD). The grants are part of HUD’s Youthbuild Program designed to offer job training and leadership skills for an estimated 4,300 young people.
The young people who enroll in Youthbuild programs lack high school diplomas and job skills needed to find meaningful employment. The new funding will help young men and women, age 16 to 24, to receive their high school equivalency diplomas and will provide them with training in homebuilding skills.
Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers along with freelance features. Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com. Web site: www.jimwoodard.net