Housing / Mortgages: A Look into the Future

New reports from major real estate organizations point to good news for future home buyers and sellers. General consensus of reports: Home sales will remain strong, with more marginal buyers being able to purchase a home of their own. Mortgage interest rates will rise, but only modestly over the next few years.

With long-term mortgage rates below 6 percent and adjustable rate mortgages around 4 percent, buyers have had a powerful incentive to buy and we expect robust sales to continue in coming months, said Bobby Rayburn, president of the National Association of Home builders. The latest NAHB/Wells Fargo Housing Market Index, based on monthly surveys of home builders, indicated they saw particularly large turnouts of prospective buyers at model homes in October, Rayburn added.

Economic conditions, including low mortgage rates and healthy income and employment growth, continue to invigorate demand, according to David Seiders, NAHB’s chief economist. We certainly remain on track to have another record year in 2004. The Mortgage Bankers Association is now forecasting modest increases in interest rates. As long as rates remain at today’s low levels, home buying will remain an attractive alternative to renting and the purchase market will continue strong, said Douglas Duncan, MBA’s chief economist.

MBA now predicts 30-year fixed-rate mortgages will increase gradually to 6.5 percent by the end of 2005  and 6.8 percent by the end of 2006, largely a result of long-term Treasury rates staying well below 5 percent next year and climbing to 5.1 percent by the end of 2006. Short-term (1-year) Treasury rates are expected to climb more quickly, increasing from 2.2 percent to 3.2 percent by the end of next year, and to 4.0 percent by the end of 2006. Underlying this forecast is our expectation of continued economic growth, said MBA’s economist Duncan. GDP growth will likely decline, but the economy should generate increasing numbers of jobs per quarter over the next two years, a key factor in fueling the home purchase market.

The MBA sees a number of demographic, economic and industry trends that are supporting home buying. First, low rates are keeping mortgage payments very competitive with apartment rents, so apartment vacancy rates increase as homeownership rates increase. Second, low mortgage payments are opening homeownership opportunities to many immigrant families. And third, the mortgage industry has shown itself adept at using the capital markets to bring greater liquidity to a number of innovative products like hybrid ARMS, low documentation loans and loans to borrowers who want to buy a house while they are still rebuilding their credit.

* * *

Mortgage Rates Drop

At this writing, mortgage interest rates have dropped to the lowest level in the past six months, according to a report from Freddie Mac, the nation’s second largest supplier of funds for home mortgages. Even though key analysts continue to predict increases in mortgage interest rates over the next couple of years, those rates have remained historically low so far this year. In fact, they periodically drop a bit. The average rate for a 30-year, fixed-rate mortgage has most recently lowered to 5.64 percent, according to Freddie Mac (at the end of October). Rates for 15-year fixed-rate mortgages are down to 5.01 percent.

The recent decline in mortgage rates was primarily due to a weak employment report for September, suggesting economic growth is still subdued, said Frank Nothaft, Freddie Mac’s chief economist. As a result, we expect mortgage rates to continue to stay quite affordable over the next few weeks, benefiting homebuyers and those wanting to refinance an existing mortgage.

Nothaft also noted that the interest rate difference between fixed-rate and adjustable-rate mortgages has thinned in recent weeks, boosting the appeal of fixed-rate loans for homebuyers. This surprising mortgage news has opened a window of opportunity for many people who want to lock-in a low interest rate on a new mortgage before they start climbing again.

The fluctuations in rates has not deterred consumers from applying for needed mortgages, either for financing a home purchase or refinancing an existing mortgage. Current factors at play in today’s market, including historically low interest rates, are motivating many people to make their home purchase and apply for a mortgage now before interest rates and home prices rise, said Michael Levy, president-CEO of Home Savings Mortgage, a multi-office mortgage banking firm based in Oxnard, Calif.

Many homeowners are taking this opportunity to refinance their mortgage at a low rate, sometimes taking cash out of the transaction to pay off outstanding debts. The continuing strong activity in mortgage applications and home purchases is a positive sign for the housing and mortgage market, Levy noted.

* * *

About Hybrid Adjustable Mortgages

Another new report indicates that income growth over the next two years will help borrowers make payments on their hybrid adjustable-rate mortgages (ARMs), even if their fixed-rate and interest-only periods expire simultaneously. The report, by Michael Youngblood (an analyst with Friedman, Billings, Ramsey & Company), discounts some experts who express concerns that borrowers of ARM loans requiring only interest payments during the initial years of the loan will have difficulty making the payments after the initial period. The report concludes that income growth will outpace the rise in payments over the next two years.

Youngblood expects subprime interest-only hybrids to perform most favorably, considering the interest-only periods are set to expire a few years after the first rate adjustments, whereas conforming hybrids tend to introduce both payment shocks at the same time. Also, he believes the credit quality of these loans to be superior to traditional subprime ARMs.

* * *

Home Value Bubble Concept Deflating

Increasingly, experts are backing off from predicting the bursting of a housing value bubble. Even the nation’s top economist, Federal Reserve chairman Alan Greenspan, does not believe a housing bubble exists. A national severe housing price distortion seems most unlikely in this country, given its size and diversity, he said.

He also believes most homeowners have enough equity to handle record debt loads and withstand moderate regional declines in property prices. To be sure, some households are stretched to their limits, but the vast majority of them appear to be able to calibrate their borrowing and spending to minimize financial difficulties, Greenspan said.

Brian Topley, a real estate investment advisor, had this to say on the subject: Though we have witnessed a period of rapidly increasing housing prices, similar increases in prices have occurred in the recent past without resulting in a major drop. Also, the housing market has historically demonstrated the ability to withstand a sharp increase in interest rates without sustaining a major correction in housing prices.

* * *

New Resource for Military Folk

Active members of the armed forces, along with reserves and National Guard members, now have a new resource when purchasing a home. The Financial Counselors of America has launched a fund that helps cover down payments and closing costs for these military folk. This nonprofit organization has formed the Military Housing Assistance Fund as a national program.

Participating military men and women must qualify for a mortgage that accepts gift funds in order to take advantage of the program. And the home builder or seller must consent to pay a $600 administrative fee that covers the fund�s overhead. The group hopes to provide assistance to at least a thousand military families by this coming January.

* * *

Growing Market for Student Housing

The demand for student housing is growing dramatically, and it’s expected to grow at an accelerated pace in coming years. This segment of the home building industry is now considered one of the apartment industry’s most important niche opportunities, according to the National Multi-Housing Council. This group has just completed a study of market condition for off-campus, privately owned housing in college towns nationwide.

To a large extent, the Council’s projections are based on the fact that many of the 75 million echo boomers persons born between 1976 and 1994 will be heading to colleges this decade.

Our analysis of privately owned properties show that student housing is a potentially lucrative market niche that could help the industry counteract the effect of rising homeownership rates and a still somewhat soft economy, said the senior vice president of NMHC. He noted that student housing can differ from conventional apartments in some key aspects. Financing can be challenging, he added. Universities can sometimes be a bureaucratic partner and property management can be more intensive, but investors who can master the unique dynamics of this market should find it worth the effort.

* * *

Record Number of Homeowners

We’ve reached another record high in the number of homeowners in the United States. There are now 73.7 million homeowners, more than any time in history, according to the U.S. Census Bureau. That’s 323,000 more than the previous high set in the second quarter of this year and about 1.6 million more than in the third quarter of last year.

Jim Woodard, a Ventura resident, writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers. He also writes freelance features on real estate and mortgage related subjects. He is also a professional storyteller, with a Web site at: www.jimwoodard.net/.

Leave a Reply

Your email address will not be published. Required fields are marked *