As mortgage interest rates dip, the number of refinance mortgage applications continue to increase. That’s the scenario in late May, according to a report from the Mortgage Bankers Association. Borrowers obviously want to lock in a money-saving mortgage rate when refinancing their existing loan, before those rates push upward again.
Rates have declined over the past few weeks, said the VP for research and economics for MBA. While the number of refinance applications increased 6.5 percent last week, the dollar volume increased by more than twice that amount 13.5 percent. That’s consistent with the idea that borrowers with larger balance loans respond quickly to even small rate incentives to refinance, he said on May 25. The refi share of mortgage activity increased to 40.3 percent of total applications at the time of the MBA report.
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Home sales and demand rising to record levels
Despite rising home prices in most markets, existing home sales are reaching record high levels. Single-family home sales have been growing substantially in recent months, reaching a record annualized rate of about 6.28 million units, according to a National Association of Realtors report. Total existing home sales (including single-family, townhomes, condos and co-ops) are also rising to record levels.
One of the biggest statewide increases in home prices is reported in California. The median price in that state recently topped $500,000. Prices are generally increasing at about 12.5 percent above those of a year ago.
A key reason for the super-active sales is, of course, the continuing low mortgage interest rates. The record volume of home sales is a bit unexpected, but so is the performance of mortgage interest rates that have been lower than forecast, said NAR’s chief economist. When we look at all factors influencing today’s real estate market, we see those factors coming together to coincide with a powerful demographic demand for housing.
The growing demand for residential real estate further supports the premise that the purchase of a home is the best of all forms of investment. This has been evident over past decades, but so clearly indicated in the past as it is in today’s market.
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Hybrid Mortgages Gain Popularity
A rising star in today’s residential mortgage programs is the hybrid adjustable rate mortgage (ARM). The growing demand for this creative loan is even surprising the mortgage industry analysts. A hybrid mortgage is one with a fixed interest rate for an initial period of years, then reverting to a one-year adjustable rate mortgage (ARM) for the remainder of its 30-year term. In other words, it’s a blend of fixed and adjustable schedules that seem to work very well for many consumers. The initial fixed-rate period can be 3, 5, 7 or 10 years. The longer the fixed period, the higher the available interest rate.
The most popular hybrid today is the 5/1 hybrid ARM, with a fixed rate for five years before the one-year adjustable schedule kicks in. These loans now account for two-fifths of all ARMs, according to a report from Freddie Mac, a secondary buyer of existing home mortgages and supplier of funds for new mortgages. Freddie Mac and Fannie Mae are now working on ways to retool their hybrid mortgage program to gain a larger share of this growing market segment. Hybrid mortgages have been the key driving force in propelling ARM lending volume in recent months, and the pace of applications for these loans continues to grow.
Many homebuyers who closely examine their mortgage options select a hybrid. It carries an interest rate significantly lower than a conventional 30-year, fixed-rate mortgage, and the borrowers have assurance their rate (and mortgage payment) will not rise for at least five years. Many families don’t own their home more than five years.
Most consumers realize that mortgage interest rates will probably rise in future months, and they may feel uneasy about applying for straight one-year ARM, said Michael Levy, president-CEO of Home Savings Mortgage, a multi-office mortgage banking firm based in Oxnard. Borrowers are increasingly looking for alternative types of loans that would give them a low rate and a certainty that their rate will not quickly rise. A hybrid mortgage seems to be just what the doctor ordered in many cases. These mortgages are now available to finance the purchase of all types of residential properties, and for refinancing an existing loan.
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Energy Action finance plan
Many homeowners are not aware of a special energy action financing plan that could be very beneficial to them. This is the FHA’s Energy Efficient Mortgage (EEM) a priority single family insured loan product. The EEM program recognizes that improved energy efficiency in a house can increase its affordability by reducing the operating costs. Cost-effective energy improvements result in lower utility bills, conserve energy and make more income available for the mortgage payment and other expenses.
The EEM program allows a borrower to finance 100 percent of the expense of a cost-effective energy package — i.e., the property improvements to make the house more energy efficient. The energy package is one where the cost of the improvements, including maintenance, is less than the present value of the energy saved over the useful life of those improvements.
The borrower does not need to qualify for the additional financing or provide additional downpayment. There is no need for a second appraisal that reflects the expense of the energy package, and improvements may be applied to retrofit an existing house or improve the energy efficiency of proposed construction. The EEM is usually used in conjunction with a purchase mortgage financing program. It’s available for new and existing single-family homes, as well as condos, townhomes, manufactured housing and 1-4 family unit properties.
For more information about the EEM program, contact a local mortgage professional, or regional office of the Federal Housing Administration (FHA) or Department of Housing and Urban Development (HUD).
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Commercial real estate: a timely opportunity
The commercial real estate market has been given a particularly healthy prognosis by industry analysts. The four major sectors of the commercial market office, retail, industrial and multifamily will steadily improve over the next two years, it is predicted by the National Association of Realtors.
There are, of course, pluses and minuses affecting the projection for the uptrend in the commercial market, said David Lereah, NAR’s chief economist. Business spending has been hesitant of late. On the other hand, jobs have been growing since the beginning of last year. Lereah said some uncertainties could potentially impact commercial real estate sectors. But on balance, the fundamentals for all sectors are improving. We’ve seen a strengthening in the job market, capital has been flowing into commercial real estate at record levels, the modest rise in interest rates from time to time is not impacting long-term investments, and there’s been a healthy restocking of business inventories.
So far this year, investments in office buildings has increased 30 percent over last year. Commercial lending is up while delinquencies are down, and construction levels have stabilized. This is good news for individuals who have been considering a jump into the commercial real estate market. This may be a strategic time for action.
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New Freddie Mac plan
Owners of new multifamily properties received good news from Freddie Mac recently. This major buyer of existing mortgages announced a new multifamily mortgage option for loans to borrowers. The plan could reduce the lease-up occupancy requirements, extend the rate-lock option, and increase liquidity for newly constructed or rehabbed properties.
The new plan is called Premier Lease-Up. It’s an effort to help property owners and lenders respond to an increasingly competitive market. Under this new plan, Freddie Mac will lock a rate much earlier in the construction and lease-up cycle for a newly constructed apartment complex. Locking the rate earlier eliminates the interest rate risk for a borrower much earlier in the process, said a Freddie Mac spokesperson. In the current environment, this is a critical feature since most market observers expect rates to increase in coming months.
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Using that growing home equity
Rising home values have produced huge increases in equities for homeowners, and many of them are using the cash in creative ways. The amount of home equity extracted by property owners rose to $705 billion last year from $266 billion in 1999.
Most of that equity money was used for purchasing another home, repaying credit-card debt, and funding home improvement projects. An increasing number of homeowners are using the cash to purchase investment properties 2.2 million last year compared to 1 million in 1994, according to a report from SRI Consulting Business Intelligence.
The most secure and profitable way to use the growing equity in your home is (1) let it continue to grow with the rising value of your home and amortization of your mortgage loan, or (2) use it in the purchase of another home, or (3) take some of that equity money for acquiring investment real estate. Real estate has long been known as a top choice of seasoned investors. Some investors look for and purchase strategically located raw land. As the old adage states: Buy land they’re not making any more of it.
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FHA’s HECM reverse mortgage reaching limit
FHA’s Home Equity Conversion Mortgage (reverse mortgage) has nearly reached its 150,000 loan cap, established by Congress. The cap was recently interpreted as applying to all such loans every written, not the current portfolio of outstanding loans, according to a report from the Mortgage Bankers Association.
Reverse mortgages are a unique type of mortgage available to homeowners 62 years of age and older. Instead of making mortgage payments each month, the homeowner receives a check in some cases, for the rest of their lives. The loan and accrued interest is paid off when the homeowners sells the property, moves from his home, or dies.
MBA’s data indicates that since the HECM reverse mortgage program’s inception in 1989, FHA has endorsed close to 140,000 of the loans. At current endorsement rates, the cap will likely be reached this summer. It could be renewed at that point. While sales of these loans grew moderately during the 1990s — rising from several hundred loans to an average of about 7,000 per year since 2001 the program has grown exponentially, with over 37,000 HECM loans insured by FHA last year. MBA predicts this year’s volume will exceed that of last year by a strong margin.
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YOUNG HOME BUYERS LEAD MARKET ACTIVITY
Young families and individuals are the primary buyers of new homes in today’s market, according to a report from the National Association of Home Builders. The most active young buyers are Generation X-ers (between age 27 and 40) and echo-boomers (those born after 1979). These groups are purchasing 55 percent of all newly built homes and are fast becoming the key trend-setter in U.S. housing markets, it was noted in U.S. Census and NAHB reports.
Those Gen-X buyers account for about 28 percent of all U.S. households. They were responsible for about 49 percent of all new home purchases in the most recent reporting period. Another six percent of newly built homes were purchased by eco-boomers, and 33 percent were purchased by baby boomers. About 12 percent were purchased by seniors over age 60.
Another interesting finding: A NAHB study reveals that 37 percent of Gen-Xers and 27 percent of echo-boomers intend to buy homes in the next two years, compared to just 13 percent of baby boomers and six percent of seniors. The younger buyers may be more thrifty than their parents with respect to their housing choices in some respects. However, those families moving up say they want a home thats about 50 percent larger than their current residence.
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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/.