The Cause of Higher Mortgage Rates

November 17, 2022 by

A recent article in the Wall Street Journal gave an interesting explanation for 2022’s rapid rise in mortgage interest rates. Most people think mortgage rates have risen because the Federal Reserve has increased the Federal Funds rate several times this year. Not exactly. Here’s quick evidence of that. The first mortgage I closed in 2022 had an interest rate of 3.00%. On March 15, I locked the rate for a new loan at 4.375%. The first time the Fed raised the Federal Funds rate was on March 16.

What caused mortgage rates to rise? In short, it’s economics 101 – supply and demand. In this case, the product involved is mortgage-backed securities. The vast majority of mortgages originated are sold to Fannie Mae and Freddie Mac. Fannie and Freddie package the mortgages into mortgage-backed securities (MBS) and sell the MBS to investors – insurance companies, pension funds, mutual fund managers, etc. Economic factors generated by the pandemic and then its fading created supply and demand shocks that first caused mortgage rates to drop, and then recently caused rates to rise.

When the pandemic first hit, the Fed began buying large quantities of MBS to hold in its portfolio. The increased demand for MBS pushed the security prices up but that inversely pushes the interest rates down. This process is known as “Quantitative Easing.” Banks also bought large amounts of MBS. Americans began saving more during the pandemic. Bank deposits increased significantly while consumer and business borrowing decreased. Since banks had an excess of cash, they decided to buy MBS and put their excess cash to work. So during the pandemic, the Fed and major banks combined to purchase over $1.5 trillion of MBS.

This cannot go on forever, so the Fed began backing off their MBS purchasing in November 2021 and completely stopped in February 2022 – right before rates began rising rapidly. In fact, my colleague discussed this in a January 2022 mortgage blog post. In addition, the 10 largest bank holders of MBS have reduced their MBS holdings by $133 billion in the first 3 quarters of 2022, as bank deposits have leveled off and customer borrowing has increased, leaving less excess cash to buy MBS.

Ultimately, the demand for MBS has dropped significantly now. To motivate other buyers to purchase MBS, the market has forced interest rates much higher. The effect has been dramatic. In recent weeks, mortgage lenders have charged 7.00% or more for 30-year fixed mortgages that had a 3.00% rate to start 2022.

Next time someone tells you they are holding off on a home purchase to see if the Fed raises rates in the coming months, tell them it’s not that simple. Then connect them with me. Mortgage rates are higher, but I still have clients who have saved money with a home purchase compared to the very high current market rents.

Federal Reserve Moving Too Fast?

November 15, 2022 by

The Federal Reserve said they’d take inflation seriously. After being a late to react, the Fed declared war and backed up their words with a historic pace of rate increases. While no one wants a recession, the Fed implied they are aware their actions may cause a recession and they are okay with this course of action to get the job done.

Just as the Fed was a little late when they began raising rates, they could be now raising rates too fast. A growing number of analysts are worried that the Fed is moving too far at too fast of a pace. The reasoning for these concerns is that rate increases take time to trickle down to the economy. Some say it takes a few months, others say it takes even longer. Thus far this year the Fed has raised short-term rates by over 3.0%.

Should the Fed slow down? Perhaps they will in December. The inflation numbers leveled off over the summer and dropped in the reports from September. It will be interesting to see the inflation numbers for October and November.

Getting inflation under control is important, but perhaps not having a dramatic rate increase in December could be appropriate. Maybe take a little bit of a breath to see if the over 3.0% of rate increases this year is getting the job done. I’m certainly glad I do not have the job of trying to balance out inflation figures while hoping to not cause a recession.

If the October and November stats show inflationary figures continuing to cool, perhaps take it easy in December and let’s see how things unfold. The Fed can always go back to a big rate increase in late January 2023.

Why are owners not listing homes?

November 8, 2022 by

Last week I mentioned inventory levels are higher now than they were a year ago. This is true, yet numbers can be deceiving. The Jacksonville Jaguars tripled their win total from 2020 to 2021. Sounds good, but if you only win one game in 2020, it is still a tough year with just three total wins the next season!

Our inventory story is similar. Yes, inventory levels were up 27% compared to a year ago. The reason they were up so much is that inventory levels were so incredibly low a year ago. In addition to the fear of not finding their next home, now there is another reason current home owners are reluctant to list their homes.

With mortgage interest rates going as high as 7 percent this year, a growing number of homeowners are reluctant to sell because they have a lower rate on their current mortgage. The historically low interest rates we saw in 2020 and 2021 is keeping many homes on the sidelines.

There are some stories out there about home values dropping. As with most things, what does the local Georgia picture look like?

Sure, prices have fallen in some markets. In Georgia, values thus far have remained stable. In a time where the number of purchases is slowing, the low supply of homes is keeping home prices relatively high – simple supply and demand.

For those who already own a home, this is good news. You are likely to have seen the home noticeably appreciate while enjoying a low interest rate. For individuals who do not already own a home, homeownership is moving further out of reach for some as rising rates, elevated home prices and the persisting housing shortage make buying a house more expensive.

Eventually this trend will change. The number of homes sold in 2014 was also low, yet the housing market saw a boom in 2015-2016 in terms of a jump in sales. After years of not buying a home, the market went into overdrive. A similar thing will happen in the current environment too. Homeowners may be reluctant to sell with higher rates, but they will need a new home for changing needs… have a lot of equity in their current home… and jump into the market to use their equity on a new home purchase.

The question is “when” will this happen? The housing market was booming until about June 2022, and then it shut off – seemingly overnight! The ramp up will also be quick – when it happens. This is why buy a home now will be easier due to less competition out looking for homes. I’ve said it often lately, and I’ll say it again… finding the right home is hard. Refinancing to a lower rate later is easy. The experience of buying a home now in a higher interest rate market should be more “enjoyable” than when everyone decides it is time to move.

Ready to own a home in Georgia? If yes, contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!

Signs of a More Balanced Market

November 3, 2022 by

Once the housing market recovered from its initial Covid-19 shock in 2020, it has truly been a seller-dominated market. The demand for available homes was so great that to win a contract, home buyers had to avoid requesting seller contributions to closing costs, set the financing and appraisal contingencies to zero days or other very short windows, contract to cover some portion of an appraisal shortfall, and often offer a price higher than the home’s list price. The largest appraisal shortfall I saw a buyer willing to cover was $30,000, and I dealt with one home that sold for $110,000 more than its list price.

Higher mortgage rates have changed the housing market in recent months and lowered competition. I am now seeing this trend as I review my clients’ contracts. Some of my clients are winning contracts with offers at or slightly lower than the list price. I have recently seen sellers contributing $5,000 – $10,000 toward closing costs. And all of my recent contracts have included finance and appraisal contingencies of 12 – 21 days.

Since sellers are accepting buyer contingencies again, now seems like a great time to explain these contingencies. Both the finance and the appraisal contingencies protect the buyer’s earnest money for a set number of days. The buyer typically wants a longer contingency period to have more earnest money protection. The seller wants the contingencies as short as possible. Here’s how they work.

The finance contingency is a binding contract term giving the buyer a specific number of days to obtain financing approval. If the buyer’s loan application is denied and the buyer delivers a lender’s loan denial letter (documenting the loan type, interest rate, and down payment percentage specified in the contract finance exhibit) within that time period, the buyer is contractually entitled to an earnest money refund. If the buyer submits a loan denial letter after the contingency period has expired, the buyer forfeits the earnest money – the contract permits the seller to keep it.

The appraisal contingency is a binding contract term giving the buyer a specific number of days to obtain an appraisal on the subject property. If the appraisal report specifying a value less than the contract price is delivered within the contingency time period, the buyer is contractually entitled to an earnest money refund if the parties cannot negotiate a compromise agreement. If a low appraisal is delivered after the contingency expires, the seller can keep the earnest money if the buyer terminates the contract.

At Dunwoody Mortgage, we meet contingency deadlines! If I tell you to put “X” number of days for the contingency in the offer, we will get the job done on time to meet the contingency.  Dunwoody Mortgage prioritizes delivering loan approvals and appraisals within the contingency period helping clients manage their financial risk and the associated stress.

Rents still rising

November 1, 2022 by

Rents hit another high over the summer according to a new report from Redfin. The national median asking rent price went up 14% year over year to $2,032. Some good news (if you can call it that) is on a monthly basis, the median rent only inched up 0.6% – the slowest growth since February.

Overall, asking rents have risen more than 30% in some of the 50 largest markets and they will continue to increase in markets with strong job growth and limited housing construction.

Why is the rental market in such a tight squeeze? Well, one of the reasons for the rental market is the same as the purchase market.

Decades worth of under-building have pushed inventory levels near record lows. Yes, the supply of homes for sale increased 27% at the start of September compared with a year ago (per Realtor.com). Yet, active inventory of for-sale homes remained 43% lower than it was in 2019.

The lack of inventory has kept home prices high and out of reach for some buyers struggling to enter the market. “We had a housing shortage before the pandemic” Yun said, “…and then it worsened during the pandemic as people went rampant in terms of purchasing properties.”

Sidelined buyers have had no other choice but to rent. The problem? Rent prices have been skyrocketing as well, as landlords capitalize on the growth in demand. This isn’t the case everywhere in the U.S., but it is cheaper to own that rent in metro Atlanta. The number of buyers out looking is significantly lower than earlier this year. Yes, interest rates are higher. While finding the right home can be hard, refinancing to a lower interest rate in the future isn’t. Rates will lower at some point

Ready to own a home in Georgia? If yes, contact me today (see my banner above for contact info). We can get started in just a few minutes and get you pre-approved for the offer on your new home!

Mortgage Rates Expected for 2023…

October 27, 2022 by

2022’s rapid increase in mortgage rates has been dramatic and impactful. Many potential home buyers have stopped searching because rising rates have driven home payments to uncomfortable levels. Interest rates have risen about 4% this year, starting at around 3% in January and rising to around 7% now (for a 30-year fixed rate mortgage.)

People often ask me where interest rates will go in the future. After my initial smart aleck answer, “If I could predict the future, I would be sitting on a tropical beach somewhere enjoying retirement.” I tell people it’s impossible to accurately predict where mortgage rates will go. There are too many variables that can impact rates unexpectedly. Statistical experts in analysis with access to troves of research data disagree on where the economy and rates will go, almost all of the time. And now is a great example with respect to mortgage rates.

Here’s a link to an article (dated October 24, 2022) reporting that the Mortgage Bankers Association (MBA) predicts that mortgage rates will drop to 5.4% by the end of 2023.

And here’s a link to an article (dated October 21, 2022) reporting that a financial advisory firm predicts that mortgage rates will rise above 10% in 2023.

Here’s another article (dated October 17, 2022) stating that mortgage rates could reach 11.6% by October of 2023.

And finally, for balance, here’s an article (dated August 29, 2022) stating that Fannie Mae predicts mortgage rates will fall to 4.5% in 2023.

The bottom line is that experts do not agree on their interest rate forecasts, and that makes it tough for home buyers to plan. Here’s the good news, for those who find a home they love and can afford the payment, experts say they are likely better served to buy now rather than wait. If interest rates go higher, someone who buys now has locked in a lower rate and will thus have a lower payment than if they had waited. And if interest rates drop, as some experts predict, people who buy now can refinance their mortgages to lock a lower rate, when that happens. With less competition for available homes now, buyers may be able to negotiate a deal that would have been impossible just a few months ago.

Interest rates frequently cycle up and down. If you or someone you know finds the home they love in Georgia and they want to buy now, connect them with me. Dunwoody Mortgage can get them a competitive interest rate now. If future rates are higher, they are protected. If future rates decrease, I’ll call them and let them know when refinancing will make good financial sense.

Changes Coming for Title Insurance?

October 12, 2022 by

Recently, government sponsored enterprises and large mortgage companies have discussed proposals to change the current title insurance requirements. Industry discussions are in their early stages now, but the idea is that alternatives to title insurance can reduce costs for homebuyers. The American Land Title Association (ALTA) is arguing against these changes, saying they increase the risks that homeownership rights on some mortgaged properties could be forfeited, which would greatly harm the affected owners.

So, what is title insurance and do you need it? If you have bought a home with a mortgage, you have seen the cost line items “lender’s title insurance” and “owner’s title insurance.” Lender’s insurance protects the mortgage company from property title defects and is required when the buyer uses mortgage financing. Owner’s insurance protects the homeowner and is optional. Note that these costs are one-time and paid at closing – they are not recurring.

Title insurance protects the insured against financial loss related to the property’s ownership. Between the contract and closing dates, a title research company will check the property’s ownership history. If there are no liens or levies assigned to the property (from lenders, government entities, or contractors), or challenges to the property’s ownership (perhaps from heirs of a deceased owner), then the research company gives the property a “clear title.” That means the title (ownership) of the property has no “defects.”

Title insurance protects the insured against defects or challenges to the property that may not have been filed at the time of the title research, meaning the research company would not be able to find them. A title defect arising after closing could, at minimum, cost the owner thousands of dollars in legal fees. The worst-case scenario is that the title issue could cause the owner to lose the property and all the equity he / she has in it. Note that title claims can arise many years after the owner purchases the property.

What about title insurance costs? Remember that, unless national guidelines change, lender’s title insurance is required for all purchases made with mortgage financing. The lender is not willing to risk a loss based on a title issue. And often, title insurance providers offer discounts when purchasing multiple policies. So the actual cost of the optional owner’s policy may be only a few hundred dollars since the lenders policy is already required. For many homebuyers (myself included – I am risk averse), purchasing an owner’s title policy is a matter of being safe versus sorry.

Regarding the proposed title insurance changes, my opinion is that we should wait and let this play out over the next couple of years as industry leaders weigh cost savings vs potential owner protection risks. Perhaps they can create real world examples for us to review before making a huge change.

Are you risk averse or a gambler? Either way, if you are buying a home in the State of Georgia, I can help you. Give me a call and we will help you plan for your home purchase, owner’s title insurance or not.

Rates are higher. Now what?

October 11, 2022 by

We all know rates of all types have moved higher. It is all over the news, savings accounts at banks are paying more interest to the account holders, car loan rates are up, home loan rates are up, and the housing market has slowed… yup, rates are higher.

So now what?

Last week I mentioned how the housing market is returning to historical norms. Well so too are mortgage rates. Take a look at mortgage rates over the past 50 years:

Even with a rate in the 6% range, rates are still lower than the historical average since the 1970s. I do not mean to sound flippant. I know it is a struggle when would be buyers have lost 20% of their purchasing power this year due to higher rates. I know it is hard out there.

We are accustomed to lower rate as they’ve been pretty low since the housing crash in 2008, and it is hard transitioning to where rates are today. So this is what I am telling clients now as we navigate higher interest rates – the home is long term. Interest rates are not.

Find the right home and buy it, own it, and live in it. While double digit annual appreciation is gone, homes still appreciate in value. Even when we saw the housing crash, home values came back (and a big crash like that has only happened twice… once during the Great Depression in the 1930s and the other from the housing crash).

Rates change and fluctuate. Look back at the chart in this post. Year over year, rates move up and down. I’ve owned two homes in my life and I’ve refinanced each of the homes (one of the homes I refinanced twice).

For roughly two years people were willing to go way over asking price, waive all contingencies and home inspections, offer to cover appraisal gaps, etc. Now homes are going at (and sometimes less than) their list price. There is less competition out there looking to buy. Sellers are giving money for closing costs, and buyers have contingencies and protections in their contracts again.

Yes, rates are higher, but buying a home is easier now than it was just a few months ago! Finding the right home is hard and a long term decision. The interest rate isn’t permanent and one can refinance to a lower rate to take advantage of a rate dip, and it will happen at some point in time.

When comparing the two, finding the right home is hard; whereas getting a new interest rate is easy.

For those looking to buy a home in the state of Georgia , contact me today to get started. I can have you well on your way to being ready to own your new home.

Housing market closer to historical norms

October 4, 2022 by

Recent data shows the housing market is slowing to more of historical norm in terms of the number of sales. The numbers through most of the summer shows a decline month over month and also a decline of roughly 15% from 2021.

“Slowing sales are a symptom of a housing market that’s coming off a two-year pandemic-influenced frenzy and settling into a pace that’s more in line with historical norms,” according to Mark Fleming, chief economist at First American. 

To be clear, the decline is not a crash, but rather an adjustment back to normal. What began this trend? You guessed it, higher mortgage rates.

Buyers are adjusting to the new world of higher mortgage rates. While median household income increased over the past two years, it isn’t enough to offset mortgage rates jumping by over 3% from their historical lows. The result is an over 20% decline in purchasing power (and I am not even considering the impact of inflation in those figures).

Combining higher rates, a loss of purchase power, inflation, and the fears of a looming recession, some would be buyers and current home owners are staying out of the market. Since home sellers are also prospective home buyers, homeowners choosing not to sell is also reducing housing market potential.

One thing to keep in mind is this… homeowners today have record levels of equity. As their equity grows, current home owners are more likely to consider using that equity to purchase another home that better suits their needs regardless of the interest rate. At some point, as it always does, the housing market will pick back up again.

This is the dichotomy potential buyers are weighing… should one buy now when homes are going closer to (or less than) list price, sellers are giving money to closing costs again, and buyers have time for inspections but with a higher rate, or wait until the mortgage rate market improves? More on this next week…

Positive News for Homeowners

September 27, 2022 by

With all the recent negative economic news – high inflation, Fed rate increases, stock market declines, etc. – I really need some positive economic news. There’s nothing like good news to shift your perspective, at least temporarily, right? So, here’s some bit of good news…

ATTOM Data Solutions recently released its second-quarter US Home Equity and Underwater Report. The report showed that 48.1% of US mortgaged homes were considered “equity-rich.” This shows an increase from 44.9% in 2022 Q1 and from 34.4% one year ago.

The definition of an “equity-rich” home is one where the current loan to value ratio is 50% or lower. Home equity is the difference between the home’s value and the existing liens on the home. So if a home is worth $400,000 and the current mortgage balance is $200,000, the owner has $200,000 of equity and is considered “equity-rich.”

This report marked the ninth straight quarterly rise in equity-rich homes. Other good news is that only 2.9% of mortgaged homes are now considered seriously underwater, which means that the value of the loans linked to the home exceeds the home’s value by 25% or more.

An ATTOM executive stated the obvious, “After 124 consecutive months of home price increases, it’s no surprise that the percentage of equity-rich homes is the highest we have ever seen.”

What does that mean for future home values? Thus far, home values are holding up even though the pace of home sales is decreasing. Due to higher interest rates and home prices, homebuyer demand has decreased, and lower demand should put a downward impact on prices. However, we still have a lower than normal supply of available homes to purchase. This means that supply and demand impacts have been offsetting and keeping home values flat. To this point, we have not seen a significant drop in home values.

Even with higher mortgage rates, people are still buying homes. Do you know someone who wants to buy a house in Georgia? Tell them that some finance experts are saying home prices will not decrease soon. They might as well buy now and earn some appreciation on their home investment. I can help buyers in Georgia get a competitive interest rate in this market, and I can help them win the contract in this sellers’ market. Tell the home buyer you know to call me at 770-634-0992.