It feels as if mortgage rates have found a comfortable range to move back-and-forth in, for now. Let’s talk about mortgage rates, how they change, and why I feel as if they’ve “found a range.”
Mortgage rates may change everyday. Sometimes they may change more than once per day. Mortgage rates behave differently then other rates. For example:
the Federal Funds Rate remains static unless it is changed by the Federal Reserve (and wow, it has changed a lot over the past year).
Prime Rate moves based on the Federal Funds Rate. It doesn’t change unless the Feds make a move.
Savings/CD rates typically increase/decrease on the Federal Funds Rate changes too.
From those examples, it is easy to see how the Federal Reserve and their Federal Funds Rates drives a lot of the rates out there (I didn’t even get into credit card and car rates). Mortgage rates move on a daily basis. Their values (up or down) move more like stocks on a day to day basis… some days they go up a bit, then down a bit, and sometimes up and down in the same day.
Mortgage rates move on bond values. As those values change, so do mortgage rates (and as previously stated, change day to day and sometimes more than once a day).
With the knowledge mortgages rates do not behave like other rates and can change often, they usually find a comfortable “range” to float and up and down in until something (economic data, recession, high inflation) moves them out of it.
I feel the mortgage rate range is moving in the low to high 6s… say 6.25-6.75. Why am I making this statement? When mortgage rates went over 7% several months ago, they immediately began to improve. When rates touched a little under 6% not so long ago, they immediately got worse. In both directions, they changed pretty quickly until they feel back into this 6.25-6.75% range and then slowly moved back and forth.
Which puts us… in the 6s for now. If the economy does enter a recession, expect mortgage rates to improve and move under 6%. If inflation jumps back up, expect rates to get into the 7s again. Depending on who you read, there is talk of inflation stagnating/not improving along with many saying a recession is right around the corner. It feels as if a lot can happen in 2023.
So here we are, possibly in the 6.25-6.75% “eye of the economic storm” for 2023.
The most exciting mortgage news from the week before Thanksgiving was the significant drop in mortgage interest rates. Official reports show rates improved almost one-half of one percent. I actually had a client whose rate improved by five-eighths (0.625) of one percent. That is a significant impact on home affordability and I hope that trend continues.
Many people wonder how mortgage interest rates can decrease when the Federal Reserve has been consistently raising the Federal Funds rate in recent months. As discussed in a recent Mortgage Blog post, mortgage rates are not directly linked to the Federal Funds rate. The Fed most directly influences mortgage rates using purchases of mortgage bonds. Now that the Fed is not buying mortgage bonds to lower interest rates (called quantitative easing), other economic factors naturally impact mortgage rates.
One of the most important economic influences on mortgage rates is inflation. When inflation trends higher, mortgage rates tend to increase as well. It’s no surprise that without Fed mortgage bond purchases keeping mortgage rates low, the recent high inflation numbers have caused mortgage rates to rise rapidly.
In mid-November, published data was positive – inflation is still high but the inflation rate cooled from prior months. Freddie Mac’s chief economist noted that mortgage rates decreased due to data “that suggests inflation may have peaked.”
This good news does not mean that the period of relatively high mortgage rates has ended nor does it indicate a trend of declining mortgage rates. That will all depend on future inflation report data. But the good news is that when mortgage rates hit the 7% level, they quickly moved lower. Hopefully that 7% level will remain the ultimate ceiling for mortgage rates.
Are you (or perhaps someone you know) looking to buy a home in Georgia? With the recent drop in mortgage rates and current sellers’ willingness to negotiate contract terms (such as price and closing cost contributions), right now could be the best time in almost two years to buy a home. Give me a call and we can get you fully underwritten with a TBD address so you can make an aggressive offer, giving you strength to negotiate contract terms in this more favorable market.
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.
Part of the stimulus plan by the Federal Reserve during the Covid caused Recession was purchasing bonds. This was a repeat effort by the Feds just like they did during the Great Recession. Just as they stopped this effort several years ago, they started the process of ending bond buying again.
The process began in November 2021. The Fed was purchasing $120 Billion monthly in bonds ($80 Billion in Treasuries and $40 Billion in mortgage backed securities). It was reduced to $105 Billion (a $70 & $35 breakdown) in November and down to $90 Billion ($60 & $30) in December. This trend will continue until the Fed is completely out of the bond buying business.
What can we expect from Tapering? The main impact for readers of this blog – mortgage rates will rise. Rates were predicted to end 2021 in the low 3s for a 30 year fixed rate loan (they did) and move into the upper 3s by the end of 2022.
How will this impact home loans?
expect a sharp drop in the number of refinances in 2022
we may see a cooling of the housing market in terms of purchase volume, but not necessarily a cooling in housing prices
What will keep prices steady for home sales? For one, sellers who do not need to move may simply take their home off of the market if they cannot get a high price for their home. The bigger story here is the sheer number buyers still looking to purchase a home. Many would-be buyers stopped looking in 2021. With many still wanting to purchase a home, along with Millennials in their prime home-buying years, and an improving economy, signs remain positive for the housing market itself.
While we may be in a new year (hello 2022!), this year should still be another’s seller’s market (although possibly not as severe as 2021).
It is still a competitive market. With the numbers of homes expected to be sold this winter higher than normal, now is a good time to get ready to purchase a home. If you are buying in the state of Georgia, contact me today. In a few minutes, I can have you prequalified and working toward getting your loan pre-underwritten approved.
A key concept in sports and business is, “Know your competition.” That concept also applies to home buyers in this very competitive market. So who are you competing with when offering on a home? There are many other people just like you who want to own and live in a primary residence. But increasingly, you are competing with investors, individuals and corporations buying homes which they will then rent. Here are some statistics on recent investor purchases from a second quarter 2021 Redfin study:
Nationwide, investors bought 67,943 homes in Q2 – $48.5 billion.
This is a 15.1% / $9.6 billion increase over Q1.
This is a 106.7% / $27.6 billion increase over last year – 2020 Q2.
Investors bought 15.9% of homes sold – about one in every six homes sold.
Investor purchases of single family homes and condos increased in Q2.
Investors purchased 21.2% of low-priced American homes. But due to Atlanta’s relatively low home prices, investors purchased 23.6% of Atlanta homes.
74% of Q2 investor purchases were all-cash purchases.
OK, “enemy” may be too strong a term, but this tune rocks, and when was the last time you saw a music video in the Mortgage Blog, so let’s use it!
So how do you compete with investors making all cash offers? According to another study by Redfin, noted in this prior Mortgage Blog post, all cash offers deliver the greatest competitive advantage to the home buyer. The second most powerful offer detail is a zero-day finance contingency. By using a zero-day finance contingency, the home buyer is basically waiving her right to an earnest money refund if underwriting denies the loan application. Why would someone take that risk and offer a zero-day finance contingency? Because they have already been fully approved by underwriting prior to making the offer. We call this obtaining underwriting approval on a “to be determined (TBD)” property.
In August 2020, we used this approach with one of my clients. Jim wanted to buy a home in a very competitive market, and he wanted every competitive advantage he could get. So we obtained his TBD approval before he started making offers. When Jim’s Realtor saw the approval letter, he replied, “This is as good as a cash offer!” Now I don’t know that I would totally agree with that, but I would say it’s the next best thing to a cash offer. Then Jim actually beat a cash offer and has been living in his dream home for the last year now. Many more of my clients have successfully used TBD approvals to win their own homes this year.
Not every lender can obtain underwriting approvals for a TBD address. Dunwoody Mortgage can do it. Do you want to buy your own piece of the American Dream in Atlanta before prices rise more and mortgage interest rates increase? Then call me today and let’s get to work on your TBD approval so you can defeat your competition, whom you now know a little better.
Here is a quick summary of how national policy priorities can impact conventional mortgage interest rate calculations. Conventional mortgage giants Fannie Mae and Freddie Mac charge what are called “guarantee fees” in their interest rate pricing models. These “g-fees” cover losses from borrower defaults, administrative costs and provide a return on capital. In 2019, g-fees amounted to 58 basis points on average for a 30-year fixed rate loan. Lenders typically pass these g-fees along to borrowers in the form of higher interest rates.
Congress and the mortgage giants can modify mortgage interest rate fee structures to generate additional revenue to cover national policy priorities. For example, in 2020, Fannie and Freddie implemented a 50 basis point fee specific to mortgage refinances (dubbed the “Adverse Market Fee”). The fee only applied to refinances, not purchases. This fee caused rates on refinances to be slightly higher than rates on similar home purchase mortgages. The refinance fee was eliminated earlier in 2021.
Congress sometimes mandates fees to pay for specific legislative priorities. For example, in 2011, Congress applied an extra 10 basis points to the g-fees charged by Fannie and Freddie. Congress passed this extra fee to cover a three-month payroll tax cut. The fee was set to expire in September 2021. Recently, some Senate members have proposed moving the expiration date from 2021 to 2032. They estimate the extra g-fee will generate $21 billion in revenue to help fund the estimated $579 billion designated to pay for roads, power grid modernization, and rural broadband expansion. Mortgage industry and housing advocacy groups – often in opposition on other policy proposals – are now united in opposition to this use of g-fees. The infrastructure package does not have a housing component. So this proposal will tax home mortgage holders without benefitting national housing concerns. People who pay cash for their homes will not pay this fee.
How will this impact you? If the fee is extended, there’s no change to what people have experienced since 2011 in terms of applying for a home loan or changes for doing a home loan. If the fee is allowed to expire, it won’t cause a significant change in interest rates as the fee is minimal. Ultimately there will be a minimal impact to consumers. I just find this topic interesting.
All of this said, if you (or someone you know) want to buy a home in Georgia, now is still a great time to buy as interest rates are near historic lows. These current low rates increase your buying power. And Dunwoody Mortgage offers tools to help home buyers win the contract in this competitive market. Contact me to get started.
Mortgage rates are higher than their historic lows, and that isn’t necessarily a horrible thing.
Some are concerned about rising rates and whether it could slow the economic recovery. While the higher rates have slowed down the number of homeowners refinancing, there are plenty of people still refinancing. And I think we all know how insane the purchase market is right now.
All said, there are two points to make about higher rates:
Higher rates are a sign of economic recovery, which is a good thing. I’ve had clients say they want to see rates in the 1% range, to which I say something like…. while low rates are great, rates that low means something is very, very wrong with the economy and we may all be out of a job… so higher rates are a good sign for the strength of the economy.
Even with rates moving a little higher this year, they are still not high. The Federal Reserve is keeping short term rates near zero, and longer term rates (like mortgages) are hovering a little higher than their historic lows. Even after the Great Recession, rates were higher than they are now. No one should fear rates at these levels hurting the recovery.
So things are not as bad as they seem with rates getting higher, and as the economic rebound continues, that is good news for all of us!
Unison’s March 21 homeownership survey gives interesting insight regarding how the pandemic has impacted Americans’ feelings about their homes. It covers many different aspects of American home ownership in 2021. Here are some points that I find most interesting.
The pandemic forced Americans to do everything from home, so homes became schools, offices, gyms, and more. Therefore, 64% of respondents stated their home is more important now than ever before. 91% of respondents stated that owning a home makes them feel more successful, stable and secure. Before covid, 58% of homeowners felt an emotional attachment to their homes. After the pandemic changed our lifestyles, 70% of owners now feel an emotional attachment to their homes. Millennials reported the highest level of emotional attachment to their homes.
90% of respondents view their home as an asset as opposed to a burden. However, 29% of owners had to take some sort of action to keep up with their mortgage payments due to pandemic impacts. To weather the storm, homeowners accessed retirement savings, delayed remodeling projects, rented out portions of their homes, and sought forbearance relief. The study noted that Millennials reported the greatest economic impacts from covid.
45% of homeowners are planning a 2021 home improvement project. 33% of mortgage-holders say they would tap their homes’ equity to finance a home improvement. That’s up from 21% before the pandemic. The most popular planned renovations are kitchen and bathroom remodels. Only 4% believe creating a dedicated home work space will most improve their home life.
Finally, 37% of Millennials stated that the pandemic has made them consider moving. The biggest drivers of the desire to move are (1) needing more space, (2) reducing living expenses, and (3) job location flexibility.
The study has a lot more detail than I can cover here. Check it out if you want to learn more.
From a mortgage perspective, interest rates are still close to historic lows. Now is still a great time to buy a new home or do a cash out refinance to fund a home improvement project. If you know someone in Georgia considering a move or a refinance, please refer them to me. The Dunwoody Mortgage team can help our buyers win purchase contracts and will make the mortgage process as simple as possible.
As the Mortgage Blog has stated many times recently, buying a home in metro Atlanta is now a very competitive endeavor. Home buyers seek every possible advantage to win. A recent Redfin report documented the effectiveness of certain strategies. Here’s a quick summary:
All cash offers increase the buyers’ odds of winning by 290%.
Waiving the financing contingency increases the buyers odds by 66%.
Using a price escalation clause has no significant impact.
Waiving the inspection contingency has no significant impact.
I must say that the last two surprised me. But let’s focus on the effective strategies. The impact of making a cash offer is obviously huge, but one key in this market is that now cash offers must match or exceed the list price, or the offer may not win.
What if you have the cash but would prefer to finance some of the purchase? You have two options. I’m currently working with a client who made an all cash offer. After winning the contract, he applied for a relatively small mortgage. He could pay all cash, but he’s using the mortgage to keep some money invested in the stock market. With this strategy, we can close on time and it doesn’t concern the seller. But the buyer has no financing contingency or appraisal contingency protections. If the appraisal is low or underwriting denies the loan, the buyer must still close using his cash or will most likely lose his earnest money.
Another strategy for a cash rich buyer is to close the purchase with cash and then immediately do a home loan after closing. We call this a “delayed financing loan.” This gives the buyer the advantages of a cash offer and the ability to finance the home later and recoup some of the assets used for the purchase. Note that all of the assets used for the purchase must be from the buyer’s own accounts. The buyer cannot borrow money from a relative or anywhere else. If any of the funds for the cash purchase (even only $1,000) are from an account not owned by the buyer, then this quick finance option is not available. If not all the funds came from the buyer, then the buyer must wait 6 months after closing the purchase to do a refinance loan. And note that interest rate pricing on the delayed financing loan differs from the first approach described above.
Waiving the financing contingency is an effective tool for buyers who don’t have the cash to purchase without a mortgage. But it can be a risky strategy if the buyer has not addressed financing first. At Dunwoody Mortgage, we can underwrite loans with a “to be determined” property. Once approved, the buyer can confidently waive the financing contingency and offer a relatively short closing date. This is a great way to strengthen your offer versus your competition. Not every mortgage lender can offer TBD underwriting.
Are you buying a home in Georgia and want to win the bidding war? Call me about one of these options today. I’ll work with you to help you win the contract and close on your new home as soon as possible. (And for good measure, here are a few more creative Realtor ideas for winning the contract. I can help you with #4!)
A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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