This will be a very strong year for the mortgage industry, with GDP growing slightly above trend at 3.6 percent, down somewhat from the 4.4 percent growth rate last year, according to Doug Duncan, chief economist for the Mortgage Bankers Association.
We see the market getting stronger, with continued strong gains in productivity. There will likely be a slight uptick in the inflation rate this year. That will support the Fed’s continued march upward with the fed funds target as they maintain focus on their primary objective of keeping inflation at bay, he said. His comments were part of MBA’s long-term economic forecast, just released. (At this writing, the Fed is expected to raise its rate a quarter of a point to 2.5 percent on Feb. 2.)
Long-term mortgage interest rates will remain low, thus providing exceptional opportunities for home buyers and homeowners who want to refinance their existing mortgage. This also applies to the commercial real estate market, the MBA report noted. Long-term rates should increase by about half a percentage point by the end of this year and by another quarter of one percent during 2006, it was predicted. Rates will probably reach 7 percent for a 30-year, fixed-rate mortgage by the end of 2007.
Coming off a fairly steady rate environment last year, these predicted rate increases are very modest considering the level of economic growth we are expecting, it was noted. New home sales will fall by about 6 percent this year, and by 10 percent in 2006. It will fall by another 3 percent in 2007, MBA projected.
Residential refinance loans will total about $983 billion this year, $689 billion in 2006 and $559 billion in 2007. This year will probably be the third-biggest year ever for mortgage applications.
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HOME EQUITY BUILDS FAMILY WEALTH
Purchasing and financing a home has become the primary investment and savings method for most home owning families. That was revealed in a recent study by the Joint Center for Housing Studies at Harvard University.
For most homeowners, a significant part of overall housing costs represent a form of savings and long-term investment, the study report stated. Homeownership builds household wealth as the monthly mortgage payment pays off part of the principal and builds home equity. Additional equity gains are realized when housing values appreciate. Long-term fixed-rate mortgages greatly help to stabilize the housing component of the household budget over the life of the loan, and when the mortgage is paid off monthly household expenses are greatly reduced. For taxpayers who itemize their deductions, mortgage payments are deductible and thereby help to reduce annual income taxes.
Furthermore, home equity can be tapped for emergency expenses or used later in life for routine expenditures not covered by income. Accumulated housing wealth is typically the largest part of inheritances that are passed down to the next generation, the Joint Center for Housing reported.
Using built-up equity to finance home improvements is a strategic move for many families. It makes the home more suitable for the resident family, and it can significantly increase the market value of the home when the property is sold. In short, it maximizes the financial benefits of the initial home purchase. Considering today’s low interest rates, it’s a particularly good time to improve or purchase a home.
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LAND TITLE PROBLEMS AT LINCOLN’S BIRTHPLACE
Today, we have highly sophisticated, high-tech methods for obtaining, recording and searching land title data. Title disputes occasionally arise, but not nearly to the extent of years ago. An example of past title problems is the parcel of land on which President Abraham Lincoln was born in a tiny one-room log cabin on February 12, 1809. This land was a 348-acre parcel known as Sinking Spring Farm near Hodgenville, Kentucky. It’s now a public park and National Historic Site.
Lincoln’s father, Thomas, had major problems with the land title, according to original tax books and court records. While Lincoln was preparing for his 1860 presidential campaign, he wrote the following: From my birthplace we moved to what is now Spencer County, Indiana, in the autumn of 1816 when I was in my eighth year. This move was partly on account of slavery, but chiefly on account of the difficulty in land titles in Kentucky.
Disputes about the land’s title resulted in a series of lawsuits. Finally the land was sold by court order for ready money amounting to $87.74. By this time, the Lincoln family had given up on Kentucky and moved on to a wilderness site in Southern Indiana. Before leaving Kentucky, Thomas Lincoln sold whatever claim he then had on his Indiana land for ten barrels of whisky and $20 in cash, according to some biographers.
In today’s market we harness new technologies that make recorded land title data more accurate, complete and much more rapidly accessible. When a family purchases a home they can be virtually assured they will not encounter land title problems.
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FIXED-RATE VS VARIABLE-RATE MORTGAGES
What’s the best type of mortgage loan a solid and consistent fixed-rate mortgage or a more affordable variable rate mortgage (ARM)? Thats a question that puzzles many people who are financing a home purchase or refinancing an existing mortgage. ARMs are still popular with todays borrowers, but the newer hybrid mortgage is the rising star in the mortgage field.
In recent months, the rate difference between a fixed-rate and adjustable-rate mortgage has narrowed. This would normally weaken the demand for adjustable-rate loans. But as the starting interest rates of ARMs increased, mortgage lenders and brokers offered rate discounts that strengthened the incentive to opt for an ARM. The hybrid ARM is rapidly growing in popularity with borrowers. This is a loan with an initial fixed-rate period of more than one year, often 3, 5 or 7 years. It then reverts to an annually adjusted ARM for the remainder of its term.
One of the most popular hybrid products today is known as a 5/1 ARM. This mortgage carries a fixed-rate for five years, then the rate is annually adjusted for the remaining term. Last year, two out of every five ARM originations were 5/1 mortgages, Freddie Mac reported. The average initial interest rate for 5/1 hybrids last year was just under 5 percent. Hybrid ARMs provide the consumer with the comfort of knowing the interest rate will be fixed over the first five year of the loan. However, the interest rate may jump as much as five percentage points on the fifth anniversary. Thus, the loan has been particularly popular with families who plan to have the mortgage for five years or less.
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ANOTHER RECORD-BREAKING YEAR FOR NEW HOME SALES
Sales of single-family homes last year topped one million and set a new annual sales record for the fourth consecutive year, according to a report from the U.S. Commerce Dept.
Sales were up nearly 9 percent for the year and topped one million for the second year in a row, said Dave Wilson, president of the National Association of Home Builders. The record-breaking pace can be attributed to strong demographic demand, low mortgage interest rates, and rising employment and household income. We can expect this pattern to continue well into this year.
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HIGHEST OF HIGH-END HOMES
The highest priced home on the market today is a residence in Bridgehampton, New York. It can be yours for a cool $75 million. The property includes a full 70-par USGA golf course, three ponds, 14 gardens, a large pool, tennis courts, barns, guest house, and 60 acres of oceanfront land. The house itself provides 24,000 square feet of living space.
Hefty price tags are increasingly common in today’s high-end real estate market. More than 35,000 million-dollar-plus homes were sold in the country last year. A recent survey from the Federal Reserve revealed that 850,000 households own primary residences in the million-dollar range. That’s three times the number reported in 1989.
Industry analysts report that million-dollar-plus homes are the fastest growing segment in the homebuilding market, with a 170 percent increase in new constructions between 1989 and 2001. It’s another indication of how high on the priority level people place their home. Whether a family is struggling financially or is very affluent, they want the best home they can afford, for personal benefit and as a strategic investment.
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EQUITY REFUGEES TREND GROWING
Homeowners in super-hot real estate markets, like Los Angeles and New York, are increasingly inclined to become equity refugees using their rapidly growing equity to acquire a home in a lesser priced housing market. That equity can often totally finance the new home purchase. The trend, sometimes called geographic arbitrage, can be attributed to concerns about housing value appreciation easing in some markets, frustration with lengthy work commutes, the desire to spend more time with family, and the ability to trade up to their dream homes, among other factors.
One market analyst believes such migration could tend to close the gap between coastal property prices and housing costs in the remainder of the country. It could also shift more highly qualified workers into inland markets.
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INCOME TAX CREDIT AVAILABLE
Tax reporting time is rapidly approaching. In a rare type of outreach effort, the Department of Housing and Urban Development (HUD) and the Internal Revenue Service (IRS) have agreed to work together to help millions of low-income working families save thousands of dollars on their annual income taxes. In year 2003, about 21 million families qualified for the Earned Income Tax Credit, providing tax refunds of up to $4,300. IRS studies indicate millions more families are eligible for this tax credit but fail to claim it.
The objective of the outreach effort is to educate the public, especially lower income families involved in HUD’s programs, about the tax savings that are available to them. To learn more about this tax-saving program, contact the office of IRS or the Department of Housing and Urban Development, or visit HUD’s Website at: www.hud.gov.
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NEW TAX-RELATED LAWS BEING CONSIDERED
Some of the tax previsions now being proposed in Congress could affect the real estate market. The Congress Joint Committee on Taxation recently released a set of recommendations to improve tax compliance and reform tax expenditures. Here are three of those proposals:
(1) Repeal the deduction for interest on home equity loans.
(2) Limit the exclusion for short-term vacation home rental to $2,000.
(3) Eliminate charitable contribution deductions for fa’ade easements on historic properties that are used as residences, whether the property is used as a principal residence or not.
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HOMEOWNERSHIP AT RECORD HIGH
Weve reached another record in the proportion of households in the nation that own their home 9.2 percent. That surpasses the previous record of 68.3 percent set in 2003, according to the Department of Housing and Urban Development (HUD).
This shows that housing is still leading the way in our rapidly recovering economy, said the HUD Secretary. The Administration is committed to building on these accomplishments so people from every walk of life can enjoy the opportunity to be homeowners.
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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/.