Despite continually rising home prices and interest rates, many people are deciding to purchase and finance a needed home now. Or perhaps they are taking action because of those rising prices and interest rates. This was the focus of a study recently completed by Harvard’s Joint Center for Housing Studies. Prospective home and condo buyers are looking at those rising prices and rates and are deciding that this is the strategic time to take action before prices and rates rise further.
“Even with higher interest rates and home prices crimping affordability, the lure of house price appreciation continues to draw homebuyers to the market,” the Harvard study report stated. “While national homeownership rates edged down last year, it increased in the West and Northeast where house price growth was the strongest.”
Mortgage innovations such as low-downpayment, hybrid and interest-only loans have helped blunt the impact of higher prices and interest rates, the report pointed out. These favorable factors are motivating many home buyers in today’s market. The Harvard study, and others, point to the value of applying for a purchase or refinance mortgage soon, and locking-in a low rate while their still available.
Most seasoned experts agree that mortgage interest rates will continue to rise over coming months and years. Here’s what Frank Nothaft, chief economist for Freddie Mac, wrote in a new report: “Financial markets believe the current rate of inflation is above the Fed’s comfort zone, and that will lead to more rate hikes in the future. What was believed to be a vaguely possible hike by the Fed in August is now considered to be highly likely. Change in market expectations is causing mortgage rates to jump higher.”
The current plan to enhance and modernize FHA mortgages will help low- and medium-income families to qualify for home financing.
Mortgage Rates Continue to Slowly Rise
Mortgage interest rates for a 30-year, fixed-rate loan increased to an average of 6.86 percent from 6.73 percent during the last week in June, according to the Mortgage Bankers Association. The average number of points (fees) decreased from 1.14 to 1.10. The interest rate for 30-year mortgages is now at the highest level since April, 2002. The average rate for 15-year fixed mortgages is 6.49 percent. also the highest since April, 2002. One-year adjustable-rate mortgages (ARMs) now carry an average interest of 6.36 percent. That’s the highest rate for that mortgage since February, 2001.
Freddie Mac reports the average interest rate for a 30-year fixed mortgage to be 6.78 percent for the week ending June 29. The average rate for a 15-year fixed loan is reported at 6.43 percent. “Financial markets continue to expect more rate hikes by the Fed over the next six month, adding upward pressure on mortgage rates,” said Frank Nothaft, Freddie Mac’s chief economist. The last quarter-point Fed rate increase was on June 29, taking it to 5.25 percent, the highest level in more than five years.
Home-Related Tax Deduction
The average amount of mortgage interest deducted among taxpayers is now up to $9,650, it was revealed in a recent study by the National Association of Home Builders. For those who deduct real estate taxes, the average for those deductions is a bit more than $3,000. These are the two most widely used and important preferences in the federal tax code, according to NAHB.
“Because mortgage interest and real estate deductions significantly reduce federal tax liabilities for home owners, they are important tools for promoting homeownership,” said Jerry Howard, executive VP for the NAHB. “The report shows that millions of working families across the nation use and depend on these tax incentives to help them maintain their current standard of living.”
Flood Reform Act Passed by House
The Flood Modernization and Reform Act (H.R. 4973), passed by the House of Representatives on June 27, will strengthen the protection of property owners against flood related damage and provide flood insurance to millions of homeowners across the country, according to the National Association of Realtors.
“Floods can strike any place and at any time, and in the wake of the most destructive hurricane season in the century and the recent heavy rains experienced over much of the country, this legislation is very important,” said Thomas Stevens, NAR president. “It underscores the importance of accurate and current flood maps and will enhance the authority of the National Flood Insurance Program to pay existing claims.”
Shrinking Middle-Class Neighborhood
Middle-class neighborhoods are shrinking. They are losing ground in most regions nationwide. If fact, they are shrinking at more than twice the rate of the middle class itself. At the same time, poor and rich neighborhoods are expanding, as cities and suburbs have become increasingly segregated by income, according to a new study by Brookings Institute. It found that as a share of all urban and suburban neighborhoods, middle-income neighborhoods in the nation’s 100 largest metro areas have declined from 58 percent in 1970 to 41 percent in 2000.
Expanding income inequality has been well documented in recent years, but the Brookings analysis of census data uncovered a much more accelerated decline in communities that house the middle class. It far outpaces the seven percentage-point decline between 1970 and 2000 in the proportion of middle-income families living in and around cities.
Middle-income neighborhoods, where families earn 80 to 120 percent of the local median income, have plunged by more than 20 percent as a share of all neighborhoods in cities like Los Angeles and Chicago. In all income levels, the primary goal of most families is to own their own home.
Mortgage-Related Pressure from Home Builders
When buying a newly constructed home, don’t let the builder pressure you into obtaining needed financing through his affiliated mortgage lender. That’s the advice coming from several government agencies. Some builders try to motivate buyers with “free upgrades” or closing cost discounts if they will deal with their lender. In some cases, they threaten to withhold those incentives or even scuttle the home purchase transaction if the buyer insists on getting the mortgage from another source. That’s illegal.
“Often consumers feel compelled to use a builder’s hand-picked mortgage company because they feel they’ve been offered an incentive they can’t refuse,” said Brian Montgomery, federal housing commissioner. “But federal real estate settlement rules require that these incentives be legitimate and not built into the price of the house or the cost of the loan.”
The builder, of course, receives a monetary reward for directing home buyers to an affiliated lender. In some cases, it’s a lender firm owned, or partially owned, by the builder. The buyer can usually find a much more advantageous loan from another mortgage firm. The money saved by going with a more desirable loan will probably far surpass the advantage of any incentive offered by the builder.
“Tie-in sales” can violate federal antitrust laws, it’s noted on the Federal Trade Commission’s Web site (www.ftc.gov). The sale of one product on condition that a customer purchase a second product which the customer may not want or can buy elsewhere at a lower price, is a tie-in, and they are illegal.
Land Values Push Up Home Prices
Home sales are decreasing due to rising interest rates, but prices are still increasing due to rising land values. Increasing home prices are reflecting the rising value of the land on which they are situated, rather than building values. That was determined by a recent study conducted by the Federal Reserve. In the 46 biggest metro housing markets, land’s share of property prices increased from 32 percent in 1984 to 51 percent in 2004, according to Michael Palumbo, chief economist in the Fed’s Flow of Funds section.
Land value increases were most dramatic during the 1998-2004 housing boom when land’s share of property values gained rapidly. “With residential land having appreciated so significantly over the last 20 years, the future course of land prices is expected to play an even more important role in driving home prices in the next two decades in terms of average appreciation rates and volatility,” the study report stated.
The increasing share of property values are being determined by rising land values. “This could mean faster home price appreciation, on average, and possibly a larger swing in home prices,” the report noted. Most experts now point to a much slower pace of home value increases in future years. However, the cumulative gains in land values in past years means that house prices might rise more quickly on average than they did before the boom, according to the study report. At least, this might be the case on some areas.
Markets where homes are particularly high priced have seen the biggest increases in land’s share of prices, but the recent housing boom has been marked by rapid appreciation of residential land just about everywhere, the study revealed.
Enhanced Mortgage Program Announced
Freddie Mac, a major buyer of existing mortgages and supplier of funds for new loans, recently announced a new Loan Prospector automated underwriting service that will enhance its suite of affordable mortgage products to help more low- and moderate-income borrowers qualify for mortgages that are eligible for purchase by Freddie Mac.
“We believe the new changes will further demonstrate how we are fulfilling our mission to expand homeownership opportunities for American families while delivering a consistently superior business experience to our lender customers,” said Paul Mullings, senior vice president of Freddie Mac. “Also, by removing our Loan Prospector assessment fee and providing more `accept’ responses, it will enable our lenders to expand their business while discovering how many more of their customers qualify for Freddie Mac’s most affordable mortgage products.”
Title Insurance Surpluses Up
The title insurance industry is in the middle of a three-year rise in loss ratios, now at the highest point in 10 years, according to data published by Demotech Performance of Title Insurance Companies. During this cycle, despite increasing overall income, net operating gains are down over 25 percent. That amounts to a $250 million drop from 2003 levels. At the same time, the yield on invested assets is at a 10-year low.
Two out of three title companies increased their surplus during the past year, Demotech noted. Some of the largest increases are from industry leaders. Stewart Title Insurance Company, Fidelity National, Chicago Title and First American Title all report double-digit increases in their surplus, averaging over 25 percent more surplus than at this time last year.
Evolving Trends for New Homes
New homes being designed and built in today’s market are significantly larger and offer more amenities than homes built two or three decades ago., according to a report on new home characteristics released by the U.S. Census Department in June. The information provides a snapshot of changing aspects of home design in recent decades, including the continued expansion of new home sizes through last year.
The average floor area in a newly built home last year reached an all-time high of 2,434 square feet. That’s up from an average 2,349 square feet in 2004 and just 1,645 feet in 1975. The Northeast Region had the largest average new home size, with the Midwest reporting the smallest sized new homes.
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