Guest post contributed by Gabriel Knight
It’s to be seen whether the property managers and their clients will carry on seeing the vacancies drop with the rent prices going higher. However, ultimately it depends on whether or not people can buy homes easily. Everyone’s feeling confident about “how much house can I afford”. This is reflected in the fact that the US banks have come out with reports about the increasing number of applications for mortgages. As per the reports of August 2012, the housing market seems to be looking for a bottom literally as the home affordability index hits a record low.
However, don’t be fooled by this resiliency in mortgage applications. There’s another part to the story. Lenders have set pretty high standards for borrowers when it comes to qualifying for a mortgage. Everyone’s wondering whether or not the worst possible days that the housing market could see are over. However, there’s no degree of certainty as far as this fact is concerned.
Economists are ready to term this increase in mortgage loan demand as a “gradual housing sector recovery”. In fact, it’s obvious that sooner or later buying a house will become affordable than renting one. This is because the Home Affordability Index points to the fact that now is one of the best times to purchase a home in almost about 20 years or so. The Home Affordability Index measures what percentage of income a median income family would need to spend on buying a house. It gives a clear indication to the individual regarding “how much house can I afford”. The higher the index, the more affordable are the houses; and so it is at present.
According to the Home Affordability Index, it’s literally never been as affordable as now to buy a home. The National Association of Realtors has been tracking home prices since the 1970s and they say that this is the first time that the index has actually gone above the 200 level. In fact, that tells us a lot. It can be observed that the median priced home would take up only 13.5 percent of the total income of a median income household.
The challenge, however, lies in the fact that it still remains uncertain whether or not these median income families can manage to actually qualify for a mortgage on time. The Federal Reserve had recently conducted a survey revealing that 93 percent of loan officers believe that the standard for mortgage approval to borrowers with strong credit remains the same since the preceding quarter of 2012.
Rather, a troubling revelation was the fact that 95 percent loan officers said that the standards remained unchanged for the small business borrowers who make less than 50 million dollars in terms of annual sales. This means the small business owners will not only be unable to qualify for a mortgage, but also find it tougher to obtain money for operating their businesses.
Nevertheless, the good news is that when consumers think of “how much house can I afford”, then they shouldn’t forget that it’ll take less of their income to buy a home at present.
Despite an improving U.S. economy, the nation’s banks remain cautious about what they will lend, and to whom.
Last quarter, by a margin of 3-to-2, more banks tightened residential mortgage lending standards for “prime borrowers” than did loosen them.
A “prime borrower” is defined as one with a well-documented credit history, high credit scores, and a low debt-to-income ratio. The insight comes from the Federal Reserve’s quarterly survey of its member banks.
Last quarter, of the 54 responding banks :
- 0 banks tightened mortgage guidelines considerably
- 3 banks tightened mortgage guidelines somewhat
- 49 banks left guidelines basically unchanged
- 2 banks eased mortgage guidelines somewhat
- 0 banks eased mortgage guidelines considerably
By contrast, in the quarter prior, not a single surveyed bank reported tighter residential mortgage guidelines. The period from January-March was a step backwards, therefore, for the fledgling U.S. housing market.
Overall, getting approved for a mortgage is tougher than it used to be. Banks enforce higher minimum credit score standards; ask for larger downpayment/equity positions; and require higher monthly income relative to monthly debt obligations.
It’s one reason why the homeownership rate is at its lowest point since 1997.
Another reason why homeownership rates may be down is that prospective home buyers believe the hurdles of today’s mortgage approval process may be impassably high. That’s untrue.
There are many U.S. homeowners and renters — even here in Carlsbad — that were approved for a home loan last quarter — prime borrowers or otherwise. Some had excellent credit, some had modest credit. Some had high income, some had moderate income. Many, however, took advantage of low-downpayment mortgage options such as the FHA’s 3.5% downpayment program, and the VA’s 100% mortgage program for military veterans.
Despite a general tightening in mortgage standards, loans are still available and banks remain eager to lend.
It is harder to get approved today as compared to 5 years ago, but for those that try and succeed, the reward is access to the lowest mortgage rates in a lifetime. Mortgage rates throughout California continue to push home affordability to all-time highs.
If you’re in the market to buy a new a home or refinance one, your timing is excellent.
The Federal Open Market Committee begins a 2-day meeting today in the nation’s capitol. It’s the group’s third of 8 scheduled meetings this year. Mortgage rates are expected to change upon the Fed’s adjournment.
Led by Chairman Ben Bernanke, the FOMC is a 12-person, Federal Reserve sub-committee. The FOMC is the group within the Fed which votes on U.S. monetary policy. “Making monetary policy” can mean a lot of things, and the action for which the FOMC is most well-known is its setting of the Fed Funds Funds.
The Fed Funds Rate is the overnight interest rate at which banks borrow money from each other. It’s one of many interest rates set by the Fed.
However, one series of interest rates not set by the Fed is mortgage rates. Instead, mortgage rates are based on the prices of mortgage-backed bonds and bonds are bought and sold on Wall Street.
There is little historical correlation between the Fed Funds Rate and the common, 30-year fixed rate mortgage rate.
As the chart at top shows, since 1990, the Fed Funds Rate and the 30-year fixed rate mortgage rate have followed different paths. Sometimes, they’ve moved in the same direction. Sometimes, they’ve moved in opposite directions.
They’ve been separated by as much as 5.29 percent at times, and have been as near to each other as 0.52 percent.
Today, that spread is roughly 3.65 percent. It’s expected to change beginning 12:30 PM ET Wednesday. That’s when the FOMC will adjourn from its meeting and release its public statement to the markets.
The FOMC is expected to announce no change in the Fed Funds Rate, holding the benchmark rate within in its current target range of 0.000-0.250%. However, how mortgage rates in and around Carlsbad respond will depend on the verbiage of the FOMC statement.
In general, if the Fed acknowledges that the U.S. economy as in expansion; growing from job growth and consumer spending, mortgage rates are expected to rise. If the Fed shows concern about domestic and global economic growth, mortgage rates are expected to fall.
Any time that mortgage markets are expected to move, a safe play is to stop shopping your rate and start locking it. Today may be one of those times.
As part of its quarterly survey to member banks nationwide, the Federal Reserve asked senior loan officers whether last quarter’s “prime” residential mortgage guidelines have tightened, loosened, or remained as-is.
A “prime” borrower is defined as one with a well-documented, high-performance credit history; with low debt-to-income ratios; and who chooses to finance a home via a traditional fixed-rate or adjustable-rate mortgage product.
After a 2-year easing cycle, the nation’s biggest bank banks report that they’ve reversed course, and are raising the bar on mortgage approvals.
For the period July-September 2010, 88% of responding loan officers admitted to tightening their prime guidelines, or leaving them “basically unchanged”.
If you’ve applied for a home loan of late, you’ve experienced this first-hand.
High delinquency rates and defaults since 2007 have caused the banks to rethink what they will lend, and to whom. As a result, today’s mortgage lenders scrutinize assets, incomes, and credit scores to make sure that nothing “slips by”.
For today’s home buyers and would-be refinancers, the mortgage approval process can be challenging as compared to how it looked just 18 months ago.
- Minimum credit scores requirements are higher today
- Downpayment/equity requirements are larger today
- Debt-to-Income ratio requirements are more strict today
In other words, although mortgage rates are the lowest that they’ve been in history, fewer applicants can qualify. And, with more the housing market still in recovery, it’s likely that guidelines will tighten again in 2012.
Therefore, if you’re among the many people in San Diego wondering if it’s the right time to buy a home or refinance, consider that, although mortgage rates may fall, approval standards may not.
The best rate in the world won’t matter if you’re not eligible to lock it.
Commentary: Fed chairman’s speech a ‘Thud!’
By Lou Barnes
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Hurricane Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3 percent to 2 percent, has settled near 2.2 percent, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air: “Thump!”
The entire financial world had waited two weeks for Federal Reserve Chairman Ben Bernanke’s speech at the annual gathering of central bankers in Jackson Hole, Wyo.
At 8 a.m. Mountain Standard Time today … “Thud!”
As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, with country rascals at regional Feds in open rebellion.
The ball landed at the Fed’s Sept. 20 meeting, the chairman adding Sept. 21 for extended argument. The game will go on, but the Fed will be entirely off the field for a month, maybe more.
Bernanke did give a whole paragraph to housing, noting the credit-default spiral still under way, with defaults producing tighter credit — which, in turn, produces a weaker housing market and more defaults.
What to do about the obvious? Federal Housing Finance Agency home prices falling 5.9 percent year over year? New mortgage delinquencies declining through 2010, but gently rising in 2011?
Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll mortgage-backed securities purchased in QE1 (the first round of the Fed’s quantitative easing)?
He didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, President Obama, depending on the track and vigor of Hurricane Irene, may forced to interrupt his vacation.
No matter: He already punted to an economic policy speech on Sept. 4. The nation trembles in anticipation. Uh-huh. He might have demanded that Congress stay in town, get to work; but that would require the same from him. “Thwack!” Shank.
Markets live in real time, and “tempus fugit” (Latin for “time flies”) no matter how much you’d like it to pause.
Markets attend the Church of What’s Happening Now, whether the punter is in town or not.
Second-quarter U.S. gross domestic product was revised down to 1 percent. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday, Sept. 1, we’ll get employment data from August, and the first of the August surveys from the Institute for Supply Management. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week, Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all OK? CNBC stock-pushers said so.
BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. He didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6 percent dividend. Do you know any safe investments paying 6 percent guaranteed today?
He also received warrants to buy 700 million shares at $7.14 and resell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes.
We are learning the hard way — very hard — that the standard prescriptions of the left and right are dead ends.
More spending, income redistribution, and regulation won’t get us out of this. Neither will do-nothing, hard-money liquidation, or nut-case imaginings.
Salvation lies in basic things: Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at [email protected]