Mortgage Trends in 2005

The mortgage market will remain strong and active in year 2005 due to several key factors, according to leading analysts. First, interest rates remain at near record low levels. At this writing, the average rate for a 30-year, fixed-rate mortgage is only about 5.7 percent. It’s expected to slowly rise reaching an average rate for the year of about 6.2 percent, according to the Mortgage Bankers Association.

Another factor that will boost mortgage activity is the increased maximum amount allowable for conforming mortgages, effective this month. This makes it possible for borrowers to obtain larger loans without having to pay higher rates for so-called Jumbo mortgages. The conforming loan maximum has been raised from $333,700 to $359,650. This will enhance the ability of many families to afford and qualify for a mortgage.

Yet another factor is the widening variety of loan plans that have recently become available to borrowers. Working with a mortgage counselor, individual borrowers can now select the precise plan that best meets their financial capabilities and needs. Some applicants want a conventional 30-year, fixed-rate mortgage to finance a home purchase or refinance an existing mortgage. Others opt for a shorter term loan that will save interest expenses, usually with a 15-year term.

Those who want to save even more interest apply for a variable rate mortgage (ARM), a loan where the rate is tied to an index that can periodically raise or lower the rate. The hybrid mortgage is becoming more popular. This is a combination of fixed-rate and variable-rate loan, designed to meet special needs of borrowers. In some cases, a borrower with good credit (credit score of at least 620) can obtain a stated income mortgage in an amount up to 100 percent of the property’s value. In qualifying for the loan, the borrower’s income is listed as he states it, without the time-consumer process of verifying income. If desired, this can be divided into two loans  80 and 20 percent if property value loans — to avoid the necessity of buying mortgage insurance coverage.

Special sub-prime programs can generate home loans for individuals and families with low or marginal qualifications. Those with credit scores as low as 500 can usually qualify for these loans. And, in some cases, the loans can cover the full value of the property. Many applicants don’t need a new mortgage at this point, but they want a way to tap their home equity for financing certain upcoming expenses, such a home remodeling project or college tuition for an offspring. In these cases, they often apply for a home equity line of credit. These credit lines are now available at low interest rates, and can even be structured with interest-only payments.

Investor-owners of income-producing residential real estate are also availing themselves of today’s desirable mortgage plans. They are obtaining loans up to 100 percent of their property’s value for their one-to-four unit residences. And this can be on a stated income basis, with interest only payments possible.

The mortgage business in 2005 is very much a people’s business, said Michael Levy, president-CEO of Home Savings Mortgage, a multi-office mortgage banking firm based in Oxnard, California. Our products must be wide-ranging and flexible enough to meet the varied needs of all individual borrowers.

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Real Estate Analysts Bullish

Real estate analysts are bullish about home sale activity in 2005, but it won’t reach the record-breaking volume of 2004, most of them agree. Housing demand will not burn out in 2005. It will show some reduction in activity from last year, but it will probably be our second best year, according to a spokesperson for the National Association of Realtors. NAR predicts this year’s existing home sales will reach 6.38 million units.

On the new home front, single-family home construction is expected to reach 1.55 million units. That’s down only slightly from the 2004 volume, according to the National Association of Home Builders. Home prices are expected to moderate this year, with 2005 existing-home prices rising 5 percent. That’s considerably less than the 7.9 percent increase is prices during 2004. The median new home price is expected to rise 5.8 percent this year, compared with the 8.9 percent jump last year.

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Commercial Market Heating Up

The commercial real estate and mortgage markets are heating up. Growth in the U.S. economy and a rise in exports will raise demand for commercial properties over the next two years with notable increases already surfacing, it was reported in the Commercial Real Estate Quarterly publication. The commercial real estate market is responding to improvements in the overall economy, said David Lereah, chief economist for the National Association of Realtors.

New jobs are filling office and industrial space, and vacancies will generally decline in commercial buildings. A silver lining to the recent slide of the U.S. dollar on foreign currency is an expected boost to U.S. exports that could also stimulate foreign purchases of U.S. commercial properties. On one hand, the higher cost of foreign products will rein in some consumer spending. On the other, rising exports will help the economy grow in 2005, thus creating new jobs, he said.

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Quarter-century Record Home Price Increases

Home prices throughout the nation (and equity of homeowners) increased during last year at the fastest pace in a quarter-century. A key factor driving the increasing values is the continuing low mortgage interest rates. It has made the purchase of a home more affordable for many families, thus pushing up prices. Interest rates have remained low even in the wake of several 0.25 percent increases announced by the Federal Reserve.

The extent of value increases varied greatly from region to region. The largest single-state increase was in Nevada, where home values surged 36 percent. In Greater Las Vegas, values jumped a record 41 percent. Hawaii reported a growth of 28 percent  California 27 percent. Generally, west and east coast markets experienced the greatest value increases. Freddie Mac, one of the nation’s largest buyers of existing home mortgages and supplier of funds for new loans, predicts home price appreciation will slow to a more moderate rate in year 2005.

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Impact of Housing on Economy

It’s interesting to note that housing wealth has a more immediate impact on consumer spending than stock wealth. It has sustained the national economy since the beginning of this decade, according to the results of a study produced by the Joint Center for Housing Studies of Harvard University. The study was commissioned by the National Association of Realtors. It shows a large difference between the impact of housing wealth and stock wealth on consumer spending, particularly during the last economic downturn.

Aggressive cuts in short term interest rates at the beginning of the decade forestalled economic problems and led to record home sales and home equity borrowing, said David Lereah, NAR’s chief economist. Without this stimulus, the housing’s contribution to consumer spending would have been about half as great, and the recession would have been much worse and recovery less robust.

An NAR study shows that expansionary monetary policy can provide a rapid and substantial lift to consumer spending under the right circumstances. While many investors pulled out of the stock market when values began to fall in year 2000, a near 45-year low in interest rates allowed housing to help the economy through a tough spot.

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: Web site:

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