The following are excerpts from the newsletter from HSH Associates for the week ending January 11, 2008:
“Mortgage rates continue their 2008 march downward, Conforming 30-year fixed rates averaged 5.87%, their lowest point since late September 2005. The average 5/1 ARM hit its lowest point in nearly two years.”
30 Year fixed rate Jumbo loans are in the range of 6.75 to 7.25%, while 5 year ARM loans are in the low 6% range.
The following are excerpts from the newletter from HSH Associates for the week ending December 14, 2007:
The bond markets, after weeks of fretting that the economy would continue to sink, now seem to think that the economy might skirt a significant downturn after all. Of course, a more-firm economy brings potential for higher inflation pressures, and that in turn presses interest rates higher — and higher they are.
The pain was spread all around: fixed-rate conforming loans moved 19 basis points higher to 6.18%, while jumbos moved a full 21 basis points higher, climbing back over 7% for the first time since mid-October.
The Federal Reserve, in conjunction with 4 other European Central Banks have created a new credit facility for banks to borrow money. This move is important for mortgage borrowers since it’s directly aimed at lowering the rates being charged between banks on the London Exchange, called LIBOR. LIBOR rates have been mostly rising as banks have become concerned about keeping enough cash on hand to meet their needs and suspicious of the quality of assets being pledged as collateral for loans.
As we wrote last week, a borrower with a Treasury-based ARM is seeing interest rates reset to favorable levels. Presently, a borrower with a 3/1 TCM-based ARM has been enjoying an initial interest rate of about 4.75%, and six months ago would have faced a reset into the low 7% range. Fast forward through more troubled economic times, and add in cuts in short-term interest rates of 100 basis points (1%), and that borrower now may face a reset to only the upper 5% range for their ARM, with about a 12% rise in payment. That same borrower with a LIBOR-based ARM would see a reset rate at or about 7% or more today, with a corresponding 22% rise in payment, making a LIBOR-based ARM more likely to experience default. Since most subprime ARMs and many Jumbo ARMs are keyed to LIBOR, the central bank’s move to break the lending logjam should help to press those index rates downward. This in turn could make resetting mortgages more manageable for borrowers, and should help to ease the mortgage crisis a little.
With an economy holding on, concerns about inflation renewed, and potential ’solutions’ to mortgage and liquidity issues hitting the market, mortgage rates really don’t have much room to fall, absent any especially bad news.
The Federal Reserve cut its fed funds rate by .25%, making the third consecutive monthly cut by the Fed since the credit crisis deepened in August. Although this decrease will help those homeowners who have home equity lines tied to short term interest rates such as the Prime Rate, these cuts in short term interest rates generally have an opposite effect on long term mortgage rates, which are much more affected by inflationary expectations. Aggressive cuts in short term interest rates are seen by most investors as stimulating inflationary pressures.
Several factors continue to impact the cost of home financing. Both Fannie Mae and Feddie Mac, the two large government sponsored morgage investors who purchase home loans after they are originated and thus provide on-going capital to fund new mortgages for loans with a limit of $417,000, have recently instituted a .25% up-front charge on all new mortgages that it buys or guarantees. On a $400,000 loan, this will increase closing costs by an extra $1,000. Additional surcharges are also being charged borrowers with credit scores of less than 680, with some lenders even raising their level of what they consider to be good credit risks to 720.
People with good credit scores and an adequate down-payment can still get a “conforming” loan of up to $417,000 for approx. 6.14% (per HSH Associates), however the spread between the rates for conforming loans and jumbo loans (those in excess of $417,000) continues to widen, with borrowers with good credit and down payment are paying an average of 7.13%, a full percentage point higer than conforming loans. Normal spreads, before the credit crisis began, ranged to only 2/10th of 1%.
This large spread recognizes that there is almost no market available to sell new jumbo loans to after they are originated as investors who used to invest in mortgage backed securites (pools of mortgages bundled together and sold to investors) have almost completely stopped investing in these securites. Because of this, there is a real shortage of capital available to make new jumbo loans. Most new jumbo loans are being made by investors who have capital available to hold these new mortgages in their own portgolios.
The interest rates quoted above are for what are called “full doc” loans, where the borrowers income can be fully documented, compared to “stated income” loans where the borrower simply attests to his income. Interest rates for “stated loans”, where available, can be up to an additional 8/10ths of 1%.
Money is available to credit worthy borrowers with down payments of 15 to 20%, and although more expensive than 6 months ago, rates are still at historically attractive levels. Financing for borrowers with down payments of less than 15% is available, but will require more expensive mortgage insurance payments and higher interest rates.
As the credit crisis settles out, and investors become more comfortable that additonal large decrease in home values will take place, investors will once again begin to invest in mortgage backed securites, which should begin to reduce the spread between conforming loans and jumbo loans.
The following are excerpts from the newsletter published by HSH Associates for the week ending 11/23/07:
“Flight-to-quality buys of US Treasuries are driving down underlying interest rates to multi-year lows, but you can’t tell that by looking at mortgage rates. Despite a 10-year Treasury flirting with a 4% yield this week, the average 30-year fixed rate mortgage (FRM) barely budged, rising one basis point (the last week) ”
“While Treasuries are benefiting from a wash of cash weary of uncertain stock markets (and certainly uninterested in mortgage investments at the moment), the spreads between such instruments have begun to widen anew. The generally “lockstep” influence that Treasuries have had for fixed mortgage rates broke back in late July, looked to be on the mend by September, and appears to have re-fractured. Spreads have ballooned to numbers even wider than those seen during the summer’s credit crunch, as mortgage rates have remained stable due to lack of investor demand despite strong downdrafts in short-term and longer-term interest rates.”
“With that as a backdrop, there should be no expectation that mortgage rates are poised to decline measurably anytime soon, but we may see a stable-to-gentle downward trend for rates as the holidays approach. “
Assuming a 1 point loan fee, conforming loans ( under $417,000) are at approx. 5.875%, while jumbo loans range about 6.9% to 7.0% . These quotes assume fully documented loans while stated income loans would be significantly higher.
What the Heck is Going On?
Despite the mortgage woes and “doom and gloom headlines” relating to the real estate markets, most of the bad news relates to other areas of the Southland, the country or the State, such as Riverside County, Sacramento County, Las Vegas & Florida. The most severely hit areas are those that had a large amount of new home development. Price depreciation has occurred in these areas due to builders drastically cutting their prices in order to get rid of unsold inventory. This has therefore had a strong impact on home resale prices in areas near the new home development. Areas with limited new home construction, low inventory of homes for sale, and higher priced homes (such as the South Bay beach communities) have had a much smaller impact from the recent housing market turmoil.
The California Association of Realtors Chief Economist, Leslie-Appleton Young spoke last week here and she confirmed several things and apologized for a few more. Last year, she had underestimated the size of the real estate correction coming into play. The sub-prime mortgage collapse snowballed this summer and the worst of it is expected in summer 2008. For 2007 they expect an overall market correction of 9%.
California Real Estate statistics show that the average sales price of Homes valued at $1 million dollars and less, have decreased by 25%. Homes valued at $1 million plus have decreased on average only .5%.
Real Estate continues to show strength all along the California coastline. That being said 2008 will be a tough year and we should pull out in 2009. The really stressed areas will take longer.
What happened when the market collapsed in the early 1990’s is NOT what is happening now. Then, the market corrected from THE TOP ON DOWN following a large recession and loss of jobs, which is the EXACT OPPOSITE OF CURRENT CONDITIONS, which is due to the mortgage meltdown which is due to over extended families being approved for loans that they could never pay back once the short term teaser rates expired. This time the bottom of the market is in trouble and it will take 3 – 5 years to get the supply and demand in balance.
What’s happening in our South Bay Cities?
Prices are generally down a bit in the South Bay and the Palos Verdes Peninsula, and most homes are taking longer to sell. We have about a 4 month inventory at this time. Some sellers are still reluctant to adjust to today´s ”picky buyers”, though more homes are priced aggressively.
Incentives - Some seller’s are offering to “buy down” interest rates and are either offering or are asked in the offer to help with closing costs. Staging homes is more important than ever. It is important to show a homes best attributes so the buyer gets a sense of real value in the home and feel a strong emotional connection. When buyer’s are holding back like many are now - something has to spark them into action!
Pricing – Too High, In the Middle, Too Low… What should I do?? When the price reflects the merits of the property, good or bad, the home usually sells. It is not always that clear but is more times than not. Demand for well located properties is still strong. Buyer’s also want as much remodeling completed as possible, unless they want to fix up a place and then the price needs to be appropriate. Today’s families are stressed with work and school schedules and generally prefer to buy a property that has already been remodeled. There have even been a few bidding wars for these type of properties. It is true: The Market Sets The Price.
1. Home sales activity for the Palos Verdes Peninsula and the South Bay actually increased compared to the prior year.
Palos Verdes Peninsula - 447 single family residences were sold during the first 9 months of 2007, compared to 389 for the first nine month of 2006 ( a 15% increase). The inventory of homes, condos and townhomes as of 9/30/07 has also decreased 12% from this time last year on the Palos Verdes Peninsula. This equates to a little more than a 4.7 month supply. There are strong indications that the market is “bottoming out”.
Beach Cities - Manhattan Beach, Redondo Beach, & San Pedro had sales for the first 9 months of 2007 very similar to the levels of 2006, however Torrance had an 11% drop in sales compared to the first 9 months of 2006.
2. Home Prices (Average Price Per Sq. Ft. )
Palos Verdes - During the first nine months of 2007 prices showed an increase of approx. 1% over the comparable period of 2006 (to an average price per sq. ft. of $596).
South Bay Cities - Showed greater decreases over the comparable period last year, with Redondo Beach -14% ( $574 Sq Ft.) and Manhattan/Hermosa Beach -6% ($767 per sq. ft.), with San Pedro ($444 per sq. ft.), and Torrance ($491 per sq. ft.) remaining the same compared to the prior year.
Detailed market reports for the Palos Verdes Peninsula and each city in the South Bay can be viewed at my website http://www.maureenmegowan.com
Interest rates – See our web blog for rates - Interest rates on jumbo 30 year fixed rate mortgages have increased about one half of one percent over the last quarter to an average rate of approx. 6.9%. The Federal Reserve Bank has stopped their increases in short term interest rates, and in fact recently cut short-term rates, however long-term rates have increased due to bond market changes. Problems in the sub-prime mortgage markets has led to less investors interested in investing in mortgage-backed securities, resulting in an increase in the “spread” over underlying Treasury note rates for mortgage rates. Lenders have tightened their lending requirements, making it more difficult for buyers to secure 100% financing. FICO scores over 700 are expected.
How can you get prepared to buy or sell in this market?
We have a tremendous internet presence for our website http://www.maureenmegowan.com both locally and across the country. Don´t miss this very important sales tool. Most buyers begin there search on the internet today. I can also help you maximize your home´s best attributes for an optimal selling price and fewer days on the market. My website is filled with ideas to get your home ready, or it can be professionally staged. Now may be the best time for the foreseeable future to put your house on the market while rates are still relatively low and buyers are re-entering the market. In the future, interest rates may increase, possible tax reform measures may be passed, and the market may continue to cool.
The spread between conforming loans (less than $417,000) and Jumbo loans remains very large, at about 100 basis points (1%). Conforming 30 year fixed rate mortgages can be made at just over 6%, while 30 year fixed rate jumbo loans are just over 7%. Historically, this spread has only been about 20 basis points (.2%). As the commercial mortgage backed securities market stabilizes, hopefully this spread will shrink, however it may take up to 6 months to do so.
Excerpts from HSH Associates Newsletter for the week ending September 14, 2007:
“Adding a shakier economy to an already jittery credit markets has helped push mortgage rates down to levels seen since just before summer began. While the disparity between conforming and jumbo mortgage rates hasn’t narrowed, both series managed a decline this week. Conforming 30-year fixed rates slipped slightly more than did jumbos (a 13-basis-point decline compared to 10). It was the second week that these numbers moved in tandem, suggesting at least some investor interest in non-conforming mortgages. Overall, the average for a 30-year fixed-rate mortgage (average of both conforming and jumbo loans ) slipped by 15 basis points (.15%) to 6.77%, while the five-one Hybrid ARM shed 13bps to land at 6.57%.
After the rising level of mistrust washed across markets in August, many different markets which function on trust have been affected, including Commercial Paper, overnight loans between banks (including LIBOR), non-conforming mortgages, and Treasury markets. Because they didn’t trust the quality of the assets being pledged, those firms and banks which would put up money on a short-term basis against assets in the Commercial Paper markets stopped doing so, crimping the availability of credit to businesses (including those which make mortgages). This became the case in overseas markets, where the short-term cost of borrowing money (LIBOR) began rising to cover perceived risks. Also, investors who would buy mortgages pulled back, as they could not trust the quality of the assets or that a market to resell those loans at a profit would exist when or if they wished to unload them. Finally, money roared into the most trusted assets, namely US Treasury obligations, whose prices soared and yields plummeted over the past few weeks.
But are those markets beginning to repair themselves? Rumor has it that Commercial Paper markets have begun to loosen somewhat this week, even as the Fed has been lending more money though its discount window to help provide liquidity at a competitive price. If not improved, mortgage markets do seem to have stabilized somewhat.
Mortgage rates moved a fair bit this week, rather more than we expected. Based upon that, and with regards to how the Treasury market performed this week, it does seem likely to us that no improvement in mortgage rates should be expected next week. “
Fixed Rate Variable
| Survey Area | 15 Year | 30 Year | Composite | 1 Year | Composite |
| NW/National | 6.42% | 6.77% | 6.60% | 6.35% | 6.58% |
| CA/Statewide | 6.50% | 6.95% | 6.76% | 6.64% | 6.81% |
Note: The above fixed rate loan rates are an average of both conforming loans and Jumbo loans
There is an increasing disconnect between interest rates for “Conforming Loans” (those loans that meet the stringent requirements of FNMA and FHLMC which purchase these loans and which must be less than $417,000), and Jumbo Loans (those loans that are not conforming and usually in excess of $417,000), which are grouped into mortgage backed securites and sold to private investors. Investors are showing an increasingly reluctance to purchase these mortgage backed securities due to the turmoil in the credit markets, originally caused by the sub-prime mortgage debacle. HSH Associates, in their newletter for the week ending August 10, 2007 notes: “The average conforming 30-year fixed rate mortgage (FRM) actually declined this week, falling to an average 6.61% from 6.68% last week.. . The average 30-year FRM jumbo shot up from 7.09% last week to an average 7.40% this week in our weekly editorial survey.. . The difference in price between conforming and jumbo mortgages depends upon market conditions and investor appetite for the two, but commonly ranges between 1/8 to 3/8 of a percentage point. As recently as a month ago, that spread was 20 basis points (.20%), a fairly typical spread, but had surged to a bloated 31 basis points this week.”
The statistics for the average interest rate quoted for jumbo loans noted above has been somewhat distorted by some lenders quoting rates near 8%, which is essentially telling the market that they are not currently making Jumbo loans. As noted in the entry below, there are lenders currently making Jumbo loands near the 7% rate, which is 40 basis points (.4%) higher than the 30 year fixed rate conforming loan. These abnormally large spreads between the interest rates for conforming and non-conforming loans should shrink as stability returns in the coming weeks to the credit markets.
Recent turmoil in the sub-prime mortgage markets spilled over to the other sectors of the mortgage market, and has significantly affected long term mortgage rates for non-conforming jumbo mortgages. These loans are dependent on lenders pooling these mortgages and reselling them as mortgage backed securities in the secondary markets, however investor interest in these mortgage backed securites decreased significantly, therefore raising the required interest rates on these mortgages to make them attractive to buyers, therefore leading to significant increases in jumbo mortgage rates. Some lenders were quoting 30 year fixed rate jumbo loans at 8%. Rates on fixed rate long term mortgages for conforming loans, however, have not been significantly affected. There are lenders still making 30 year fixed rate jumbo loans, with interest rates of approx. 6.75 % with 3/4 points or 7% with 1/4 point. A popular program is a 7 year fixed rate jumbo with interest only payments at approx. 6 5/8 % with 1/2 to 3/4 points, with 10 year fixed rate options at a 1/8% higher interest rate.
Excerpts from HSH Associates newsletter for the week ending August 3, 2007:
“Mortgage borrowers and industry participants hoping for a quiet mid-summer had their hopes dashed anew this week, as more bad news pummeled select portions of the mortgage and lending markets. As is usually the case, traditionally-documented, good-credit quality borrowers are among the least affected by the stanching of certain forms of credit. According to the nation’s leading mortgage pricing survey, 30-year fixed rate mortgages rose by a lone basis point (.01%) to an average 6.88%, while hybrid 5/1 ARMs held on at 6.47% amid the swirling maelstrom.
News of expanding troubles related to mortgage-based investments continues to dominate the landscape. Because of investor pullback, certain mortgage products are said to be very dear right now, including alt-A and alt-doc programs, especially at higher LTV ratios. That pullback carried over into the non-conforming (”jumbo”) markets, where our editorial rate surveys found rates at some lenders jumping by as much as 7/8% for certain products, with rate quotations all over the ballpark for some (and “no quote” for others). As far as rates go, well, it’s all a matter of where you look. For top-flight borrowers, the continued downward pressure on underlying interest rates hasn’t yet translated into lower mortgage rates, but history says it ultimately will. For borrowers closer to the fringes of lending, your rates, product choices, and available credit are all becoming more limited.”
The headlines have been full of doom and gloom relating to the real estate markets, but fortunately, most of the bad news relates to other areas of the country or the State, such as Riverside county in Southern California.
The last 3 months have seen a strengthening of the market, following a very weak first quarter of 2007. Prices are generally down a bit in the South Bay and the Palos Verdes Peninsula, and homes are taking longer to sell. Of those homes listed that have adjusted their original listing prices downwards, most of these were not properly priced in the first place. Some sellers are still reluctant to adjust to today’s “picky buyers”.
What I am seeing is an active market for well priced attractive properties. Properties that have a strange lay-out, deferred maintenance, poorly designed remodel, poor location or are significantly over-priced are sitting on the market. They have seen the greatest decrease in prices. When the price reflects the merits of the property, good or bad, it usually sells. Demand for well located properties is still strong. There have even been a few bidding wars. It is true: The Market Sets The Price.
Two of my recent listings sold within 3 days of being placed on the market. The three most important factors which led to their quick sales was sharp pricing relative to the competition; the sellers agreed to “stage” their property, and the homes were updated and well cared for. Both properties showed like a model home.
1. Home sales activity for the Palos Verdes Peninsula and the South Bay actually increased compared to the prior year.
On the Palos Verdes Peninsula, 289 single family residences were sold, compared to 240 for the first six month of 2006 ( a 20% increase). The inventory of homes, condos and townhomes as of 6/30/07 has also decreased 25% from this time last year on the Palos Verdes Peninsula. This equates to a little more than a 3.5 month supply. There are strong indications that the market is “bottoming out”.
For the Beach Cities ….Manhattan Beach and Redondo Beach also had increases in sales for the first six months of 2007 of approx. 13%, compared to the comparable quarter in 2006. Torrance and San Pedro, however, had slight decreases in sales volume during the first six months of 2007 of approx. 4%.
2. Home Prices (average price per sq. ft. ) in Palos Verdes sold during the first six months of 2007 showed a decrease of approx. 1% over the comparable period of 2006 (to an average price per sq. ft. of $591). Prices in other cities of the South Bay showed greater decreases over the comparable period last year, with decreases of 18% (Redondo Beach to $560 per sq. ft.) to 5% for Manhattan/Hermosa Beach ($763 per sq. ft.) and San Pedro($445 per sq. ft.), however the average price per sq. ft. for Torrance ($493 per sq. ft.) remained the same compared to the prior year.. Prices in the second quarter have improved, however, after a very poor first quarter of 2007.. Detailed market reports for the Palos Verdes Peninsula and each city in the South Bay can be viewed at my website http://www.maureenmegowan.com
3. Discounting? The discounting from asking prices that homes are selling at has increased, but this is as much a function of the fact that the homes were improperly priced when originally listed. Property has been taking longer to sell, with the average days on the market for properties to sell averaging approx. 40 day, however this is a substantial improvement from the first quarter of 2007 where homes were taking close to 70 days to sell, on average, in the South Bay.
4. Interest rates have risen recently, but remain at very attractive levels. Interest rates on 30 year fixed rate mortgages have increased about one half of one percent over the last quarter to an average rate of approx. 6.9%. The Federal Reserve Bank has stopped their increases in short term interest rates, however long-term rates have increased due to bond market changes as well as problems in the sub-prime mortgage markets which has led to lower interest by investors in investing in mortgage securities, which has led to an increase in the “spread” over underlying Treasury notes for mortgage rates.. Lenders are tightening their lending requirements, making it more difficult for buyers to secure such aggressive loans as 100% financing.
5. The market does appear to be stabilizing. Basically, the market has returned to a more “normal” real estate housing market, with general equilibrium between buyers and sellers. Certainly, compared to the super-heated market of 2005, things have cooled down considerably, however this market is not a bubble bursting or a market of plunging prices which some media reports would lead you to believe.
Considering making a move? If you are thinking of selling, remember that the low interest rates attract buyers and they are cautiously returning to the market. We have a tremendous internet presence both locally and across the country. Don´t miss this very important sales tool. Most buyers begin there search on the internet today. I can also help you maximize your home´s best attributes for an optimal selling price and fewer days on the market. My website is filled with ideas to get your home ready, or it can be professionally staged. Now may be the best time for the foreseeable future to put your house on the market while rates are low and buyers are re-entering the market. In the future, interest rates may increase, possible tax reform measures are passed, or the market continues to cool.
Want To Buy A Home or Investment Property? For buyers, this is an excellent time to be in the market. Sellers are more willing to negotiate price and interest rates have remained low. Reasonable offers are receiving serious consideration by sellers, and the competition to buy the home of your dreams is back to a more normal market.
Are You Waiting For The Market To Cool? Any advantage obtained by waiting for hopefully for prices to decrease longer than a few months may be offset by increasing interest rates, which are still near historically low levels.
Excerpts from HSH Associates newsletter for the week ending July 20, 2007:
Despite downdrafts in key benchmark interest rates, mortgage rates for good-credit borrowers kept rising this week, with the average 30-year fixed-rate mortgage (FRM) posting a 52-week high of 6.88%. Holes in the subprime landscape keep appearing, and investors may be beginning to shy away from even certain good-credit quality mortgages. That disdain for buying loans may be reflected in the spread differential between the 10-year Treasury and the average 30-year FRM. This week, that gap stands at 185 basis points (1.85%), the widest in 17 months, with the implication that investors are demanding higher compensation for risk than they were just a few months ago.
Fixed Rate Variable
| Survey Area | 15 Year | 30 Year | Composite | 1 Year | Composite |
| NW/National | 6.53% | 6.88% | 6.71% | 6.15% | 6.47% |
| CA/Statewide | 6.61% | 6.94% | 6.79% | 6.34% | 6.56% |
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