Home financing and refinancing this year will probably reach the second highest level of activity on record, according to Fannie Mae, one of the nation’s largest buyers of existing home mortgages and supplier of funds for new loans. And an increasing proportion of those borrowers are obtaining a refinance fixed-rate mortgage to replace their adjustable-rate loan.
The volume of applications, of course, varies from day to day. During the last week in September the numbers for both purchase and refinance applications dropped a bit. But the general trend is on an upward path. On October 1, the average rate for a 30-year, fixed-rate mortgage is 5.9 percent. At this point, increasing inflation fears has pushed rates higher for three weeks in a row.
Mortgage lending is projected to increase to $2.77 billion, from $2.73 billion last year, the report stated. A record $3.76 billion in mortgage funds was processed in year 2003. Applications for adjustable-rate mortgages (ARMs) have declined in recent months after reaching a record high volume in March. At last report, ARMs accounted for 28.8 percent of total applications down from 29.8 percent the previous week.
“ARM borrowers now have a strong incentive to refinance into fixed-rate mortgage loans,” said David Berson, Fannie Mae chief economist. “This may help explain both the falling ARM share as well as the surprisingly strong refinance applications.” The key motivating factor is the recent edging up of mortgage interest rates, and the realization by consumers that rates will continue to rise. Borrowers are reaching for security against further increases in their interest rate and monthly payment.
Importance of Improving Credit Scores
A recent study revealed that consumers could save $16 billion a year in lower credit card finance charges if they improved their credit scores by an average of 30 points. The study, by the Consumer Federation of America and Providian Financial, also noted that many consumers still don’t understand the basic function of credit scores and its importance to their ability to obtain a favorable mortgage and its impact on other aspects of their personal finances.
“In the past year, consumer understanding of scores has somewhat improved, in part because many have obtained their scores,” said CFA executive director Stephen Brobeck. “Unfortunately, most consumers still do not know basic facts about credit scores and their financial significance.”
A wide range of businesses, not just creditors, now use credit scores in product pricing and availability, the study report noted. The cost of low scores, and savings from high scores, can be substantial. Consumers can raise their scores by doing such things as paying off debt rather than just moving it around, and not opening many new accounts rapidly. Also, it’s important for persons to check their credit reports, now free, to make sure they are error-free. Federal law now requires the three main credit bureaus to make available on request, at no charge, an annual credit report to consumers.
Licensing of Mortgage Brokers
Quote from Teresa Bryce, co-chair of MBA’s State Licensing Task Force: “The proposed Responsible Lending Act of 2005 (H.R. 1295) will elevate the standards within the mortgage brokering industry, lead to greater accountability, and make compliance easier for multi-state brokers. The act would give states three years to pass uniform statutes for the licensing of mortgage brokers, create Federal mortgage broker requirements for those states that do not pass compliant legislation, and establish a national database of licensed mortgage brokers.” Her comments were expressed in testimony on Sept. 29 before the House Financial Services Subcommittee on Housing and Community Opportunity.
Update on Home Buying / Financing Trends
Another recent study shows that nearly one in five adults in the U.S. purchased and financed a home within the past three years a home used as the buyer’s primary residence, according to a recent survey conducted by Wall Street Journal Online and Harris Interactive Personal Finance. When obtaining a mortgage for their new home, recent homebuyers who used a mortgage broker or mortgage banker were nearly three times more likely to obtain a fixed-rate mortgage (72 percent of respondents), while 26 percent opted for an adjustable-rate mortgage. About 34 percent selected a creative or option mortgage.
With skyrocketing home prices in the western part of the country it’s not surprising to find those who bought home in the West within the past three years were more likely to have gone above their suggested affordable price range when purchasing their home (29 percent). That compares to 8 percent of buyers in the Northeast; 12 percent in the Midwest; and 22 percent in the South.
Mortgage Organizations Help Hurricane Victims
Major mortgage-related organizations continue to announce special actions to ease the stress and problems faced by victims of the recent hurricanes in the Southeast Region. For example, Freddie Mac, a major buyer of existing home mortgages, announced they may defer October and November mortgage payments due to be paid by victims of Hurricane Rita. That, of course, applies to mortgages currently owned by Freddie Mac.
Also, the mortgage owning organization will extend to victims of Hurricane Rita all the special mortgage servicing relief policies it previously announced to ease the financial pressures of Hurricane Katrina victims. “We are determined to go the extra mile to help borrowers cope with this year’s unusually destructive storms in the Gulf of Mexico,” said Freddie Mac CEO Richard Syron. “Protecting investors while helping borrowers overcome unexpected shocks like Hurricanes Rita and Katrina is part of our mission to keep this nation’s housing finance system affordable, stable and liquid.”
New Homes Sales Falling
New home sales fell by nearly 10 percent in August, from the previous month, to a seasonally adjusted annual rate of 1.24 million units, according to a report from the U.S. Commerce Department. This is the second largest decline since the 10 percent downward move in November, 2004. The drop surprised many experts, who have been predicting a drop of only about half that amount.
Resale housing purchase activity rose 2 percent in August, to 7.29 million units, reports the National Association of Realtors. That’s the second highest rate on record. Rising mortgage rates is apparently a major factor in the strong real estate sales market. Most experts still expect this year to be the fifth consecutive year of record sales for new and previously owned homes.
Pricing a Residential Property
Pricing a home realistically is one of the most important steps to be taken before placing the property on the market. And determining the right price has never been more difficult. Home prices are still increasing at a rapid pace in many markets, although that rate of increase is simmering down. The national average home price increased 13.4 percent since a year ago. The rate of increase varies with different markets. Generally, home values continue to rise despite the adverse effects of the twin hurricanes and skyrocketing gas prices.
Owners, of course, want to price their property at a figure that will net them maximum dollars. Many tend to be carried away with all the publicity about rising prices and today’s strong “sellers’ market.” They push their asking price too high and wonder why they are not seeing more interested prospects. The problem with an asking price that’s too high is not only that it wards off buyers who might be active prospects if the price was realistic. It also immediately identifies the property as being over-priced in the view of area brokers and prospective buyers. It’s then difficult to revive their interest even after reducing the price.
The best way to determine the right asking price is to access and study prices of recently sold and comparable homes in your area. This should include sales that have closed over at least the past four to six months. Don’t consider prices that were personally quoted by home sellers or buyers. These are often inaccurate. They should be prices documented in official governmental or multiple listing service records.
An unusual technique is sometimes used in particularly hot selling markets. The seller will purposely set his asking price a little below its current market value, thus attracting many buyers. The seller knows there’s a good chance he will receive multiple offers, with prospective buyers bidding against each other. The final sales price is likely to be higher than the market value.
Big Demand for Second Homes
There’s currently a booming market for second homes. A key reason for the brisk sales points to those aging Baby Boomers who are increasingly inclined to shift their money from stock market investments to real estate. And these gals and guys, born between 1946 and 1962, have more money to invest than any previous generation. And mortgage financing is now readily available for these properties.
What better or more attractive real estate investment could there be than acquiring a second, or vacation home a property the owner can use for personal get-aways and generate income by renting it to other vacationing families. Ownership of the property can not only produce personal enjoyment and income but can accumulate growing equity through mortgage amortization and rising market values. And it offers very attractive tax benefits.
Second home sales represented 36 percent of all home sales last year, according to the National Association of Realtors. About 23 percent of second-home purchases are strictly investment properties, while 13 percent are for personal leisure use as well as an investment.
“Boomers are now looking forward to retirement and are buying second homes because real estate is a great investment,” said Jim Gillespie, president of Coldwell Banker Real Estate Corp. “You can leverage the purchase of a second home, but you can’t leverage stocks and bonds,” he said. “If you put 20 percent down and a property appreciates 10 percent a year, that’s a 50 percent return on investment over five years.”
Buyers who acquire their second home entirely for personal use only benefit from similar tax write-offs for mortgage interest, taxes and insurance. Also, those owners can avoid capital gains tax of up to $250,000 for a single person, or $500,000 for a couple if they live in the house two of the previous five years before selling it.
The owners can also rent it out when they are not using it, or let their children use it. Many boomers are buying second homes with the idea of renting it for a period of years, then moving into it as their retirement home. For many years, it was common for buyers to select a second (vacation) home at a location within a day’s drive of the owner’s primary residence. Today, considering the super-high cost of gas, that rule-of-thumb may be shortened to a half day’s drive, unless the buyer has traded in his car for a motorcycle.
New Aerial Photo Site to be Launched
Last month, this report focused on an emerging trend in the real estate marketing field using aerial photography to graphically show a property’s proximity to desirable elements in the neighborhood. This is normally used by Realtors, home builders and other real estate professionals.
A new Website is scheduled to be launched on October 11 that will give consumers a complete picture of where they want to live in a way they’ve never seen before. It’s the first Website to combine aerial photography with neighborhood data, home listings, school information, etc., according to its producer, HomePages, owned by HouseValues Inc.
The new site features high-resolution imagery and a large seamless database of aerial photography provided by AirPhoto USA, according to a HomePages spokesperson. It includes a half million square miles of images with real-time pan and zoom capabilities. The imagery allows consumers to see an even closer view of homes and surrounding areas. The site also features access to nationwide detailed home listings. Properties can be searched by address, intersection, zip codes, city and state, recently sold homes, specified neighborhood features, or school districts. The new site’s address is: www.homepages.com.
Hottest Home Value-increasing Markets
The most active citywide market for rising home values during the second quarter of this year is Yuma, Arizona, according to the U.S. Census Bureau. The most rapidly growing statewide prices are in Nevada. As for increasing price trends in the nation’s divisions, the Pacific Division beats out all others.
Yuma reported average home price increases of more than 35 percent in the past year ending with the second quarter of this year. Pacific Division home prices grew by 21.5 percent. Some experts say Nevada and Arizona are receiving overflow demand from neighboring California, where prices rose 25.2 percent during the past year.
Capital Flowing to Commercial Mortgages
Quotable quote from Doug Duncan, chief economist for the Mortgage Banking Association: “Commercial banks and the commercial mortgage-backed securities (CMBS) markets have been leading the charge in channeling capital into commercial and multifamily mortgages. This sustained investment in commercial and multifamily real estate shows up in record origination volumes, record loan servicing volumes and in record levels of commercial/multifamily mortgage debt outstanding.”
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