FHA Mortgage Changes

This is important news for both buyers and sellers!

The mortgage insurance is going up on April 1st and on June 3rd they are going to make the mortgage insurance premium stay for the life of the loan!

The increase in rates isn't as much of a shock to me as making the mortgage insurance stick around for the life of the loan. This means that even if you have paid down the loan to 50% of the value of the house, you are still going to be paying 1.35% of the original loan amount every year for mortgage insurance. Over the 30 year life of the loan this will add up to a huge amount of money. For every $100,000 of loan a buyer will be paying $112.50 per month or $1,350 per year in mortgage insurance. That adds up to $40,500 over a 30 year loan, just for the mortgage insurance! And that is for every $100,000 in loan value, so a $300,000 loan would now cost you an extra $121,500 over the life of the loan.

You can refinance out of the loan at a later date, but right now interest rates are at a record low. Who knows where they will be when you are ready to refinance out of this FHA loan.

It should be obvious why this should matter to a buyer. If they are purchasing a home with an FHA loan, they need to do it quickly to avoid the increase in mortgage insurance and the mortgage insurance for the life of the loan.

For a seller, there are less obvious reasons that this is important to them. Obviously, if they are going to sell one house and buy another one with an FHA loan they will need to move very quickly. But here is the less obvious impact to sellers. As more buyers hear about this impending shift in the cost of their FHA loan and the date looms closer, they will start to feel even more pressure to get a home under contract. The article below suggests that if a buyer wants to avoid the increase, they should be under contract by March 25th. If this follows a similar pattern of the federal tax credit that ended on April 31st 2010 then buyers will pick over the inventory leading up to this date and prices will get pushed up. By the last few weeks it was a bit of a feeding frenzy.

Now, I don't expect it to be quite as crazy as it was in April 2010 but I do expect it to have an impact leading up to the April 1st date as well as the June 3rd date. Then again, even though the dates are split two months apart we have been suffering with a very low level of inventory in the market for over a year now. This might create a frenzy of activity, especially in the first time buyers market and the mid level move up market. I would expect to see a lot of pressure for any homes under the $500,000 price range. If a seller is thinking about selling in this price range, listing by March 15th would be a good plan. Listing after June 3rd might have their home entering a market where many of the summer buyers were pulled forward into the spring months and their property is now at a disadvantage.

I not big on trying to "time the market" but I do think it is my responsibility to take notice of the big items that might have a financial impact for my clients.


Here is the article that inspired my post:

FHA mortgage premium to rise on April 1

Borrowers who want to get a mortgage insured by the Federal Housing Administration should act quickly to avoid changes the agency is making to shore up its faltering insurance fund.

The U.S. Department of Housing and Administration announced the changes on Wednesday but didn't announce the effective dates until Thursday.

Here's the timing: FHA will raise the annual mortgage insurance premium on most loans that have a case number starting April 1 or later. To get a case number before the April 1 deadline and avoid the increase, borrowers should apply with a lender no later than March 25, says Julian Hebron, vice president with RPM Mortgage in San Francisco.

On most FHA loans, the annual premium will increase by 0.10 percentage point, or $100 per year for each $100,000 in loan amount.

For loans greater than $625,000 with a term longer than 15 years, the increase will be 0.05 percentage point, or $50 per year for each $100,000 in loan amount.

The premium itself varies depending on the loan size, term and loan-to-value ratio, but here's an example:

For a $500,000, 30-year loan with a loan-to-value ratio greater than 95 percent, the new premium will be 1.35 percent, or $6,750 per year, up from 1.25 percent, or $6,250 per year. On a monthly basis, the premium increase amounts to about $42.

For a chart showing premiums increases for various loan types, check out Hebron's blog at tinyurl.com/as4xsqb. These premium increases do not apply if a borrower refinances an existing FHA loan that was endorsed on or before May 31, 2009, into a new FHA loan under the streamline refinancing program.

FHA is not changing the one-time premium borrowers pay up front; it remains at 1.75 percent of the loan amount.

Bigger hit

In a potentially bigger hit, FHA borrowers will have to continue paying annual mortgage insurance premiums for a longer period of time - in most cases for the life of the loan.

This change will apply to new loans with case numbers starting June 3. To avoid this change, borrowers should try to apply by May 24, Hebron says.

In the past, FHA automatically canceled mortgage insurance on most loans when a borrower, anytime after five years, had made enough payments to reduce the balance to 78 percent of the original loan amount.

A borrower taking out a 30-year loan with 10 percent down could usually eliminate mortgage insurance after about six years making normal payments, or after five years if they made extra principal payments, Hebron says.

(If the original loan term was 15 years or less, the five-year rule didn't apply; FHA would cancel the insurance when the balance dropped to 78 percent.)

In the future, if the borrower starts off with a loan-to-value ratio above 90 percent, FHA will collect the premium for the life of the loan. If the original ratio is between 78 and 90 percent, FHA will cancel the premium if the balance drops below 78 percent of the original loan amount anytime after 11 years.

FHA mortgage premium to rise on April 1

Kathleen Pender

Here is the link to the full article:
http://www.sfgate.com/business/article/FHA-mortgage-premium-to-rise-on-April-1-4250685.php?goback=%2Egde_90005_member_211566523

Sacramento A Seller's Market Again – Nathan Sherman on Fox 40 News

A little over a week ago Fox Dennis Shanahan of Fox 40 News interviewed me to talk about how Sacramento has become a seller's market again. This is something that us in the industry have known for most of the year, but now all the market data is out to support that.

The market analyst's over at Zillow had identified Sacramento as the third hottest seller's market in the country!

You can see the two minute news spot here.

I had the good fortune to have the whole video shot in my upcoming listing at 1210 40^th Street. This is an amazing 5 bedroom 4.5 bathroom home in the Fab 40's of East Sac.

Here is the text summary from the Fox 40 site, but much more was covered in the video.

Real estate website Zillow recently listed Sacramento as the third hottest sellers’ market in the country, right behind San Francisco. San Jose was listed number one.

FOX40 visited with Nathan Sherman of Dunnigan Realtors in Sacramento, who confirmed what the Zillow ranking suggests.

“There is not nearly enough inventory, and buyers are struggling to get a home under contract,” Sherman said of the Sacramento market.

Year-over-year detached resale home prices in Sacramento County have been consistently positive over the past six months, according to DataQuick. The median price in November was $185,000. That is 17-percent higher than the price in November of last year. Potential buyers are finding themselves in bidding wars.

Sherman also said it is not uncommon these days to call a listing agent when a house comes on the market, and learn that the agent already has ten offers in.

People waiting for the right time to buy a home might be well advised to start looking soon, before things heat up even more.

As Sherman put it, “People were waiting for the bottom of the market. That has come and gone.”

http://fox40.com/2012/12/13/sacramento-a-sellers-market-again/

Less Foreclosures, Less Discounts

I read an interesting article in the Washington Post today. 

It was about the reduced number of foreclosures and the greatly reduced discount of buying a foreclosure. These have both been obvious to any agent that is active in the Sacramento market, but it is always interesting to see the national market and media realize it too. 

The quote that I like the most out of the article is “Zillow found that in Las Vegas and Phoenix, there is “no discernible difference” between foreclosure and non-foreclosure sales. Discounts have shrank to less than 1 percent in Sacramento, 3 percent in the Miami-Fort Lauderdale area and barely 4 percent in Los Angeles.”

While I never refer to Zillow for specific property prices, they are a huge number crunching organization and have a vast amount of data at their command. For them to state that the discount for a foreclosed property in Sacramento is only 1% is a pretty significant statement. 

The market has shifted greatly and inventory is down to less than one months supply, the lowest it has been in over a decade. Prices have been climbing since December and multiple offers are common. 

To top it all off, the national news is now reporting all about the tight market. 

The housing market has definitely shifted! 

Shadow Inventory

I don’t usually post about new articles that I see, but this one was very good and relevant to so many conversations that I’ve had recently.

The article is titled “Now You See It, Now You Don’t” and it is about the “shadow inventory” and the market condition.

Anyone that works in the real estate industry knows that right now we have very low inventory and lots of interested buyers. Sacramento currently has 0.8 months of inventory on the market.

The Months of Inventory is a reflection of how many houses are for sale and how many are being purchased each month and how long would it take for them all to sell at the current rate. The lowest Month of Inventory durring the boom was April 2003 and the highest inventory in the bust was September 2007. 4 months of inventory is a very balanced level with numbers lower than that being considered a sellers market and anything above that being a buyers market. Now we have seen several months in a row with inventory levels lower than 2.0 and even below 1.0!

What is the reason for this? Are the banks holding onto a lot of shadow inventory, covering the carrying costs, keeping the non-performing assets on their books (or just doctoring them so they don’t show up) and waiting for/manipulating the market to improve before selling them? Do they have hundreds of thousands of houses that they have foreclosed on and are going to dump them on the market when prices come up?

While I love a good conspiracy theory, I also believe that the simplest explanation with the least assumptions is often the best (a version of Occam’s Razor).

This article went into several detailed aspects and included that by all expert analysis there is only a minimal amount of bank owned properties that aren’t put on the market quickly. I have often seen bank owned listings that show only 1 day on market (DOM) but hundreds of combined days on market (CDOM). I look at the history and see that this was a short sale that sat on the market for months waiting for bank approval for the sale but finally ended in foreclosure. The bank then had their asset manager arrange for the clean out, new paint and carpet and listed the property for sale, all in less than 30 days (otherwise, the CDOM would be the same as the DOM).

The big issue that this article pointed to is that there is a different kind of shadow inventory and it’s not what I or most people consider or refer to as shadow inventory. It is all the properties that are delinquent on their payments and will most likely never become current. It is the houses in pre-foreclosure, foreclosure or short sale status where no payment is being made, the owners are getting further and further under water and the most likely outcome for them is foreclosure.

The article then goes further to point out that all the people that are living in a home in foreclosure, pre-foreclosure or a long, drawn out short sale process aren’t selling, they aren’t buying (and won’t be able to for a long time) and they aren’t even renting.

According to the reports, if all the properties that are currently owned by banks but not on the market were listed tomorrow, we wouldn’t even notice it. On the other hand, if all the delinquent properties were foreclosed on in the next couple months and put on the market, that would make a huge impact and we would definitely feel it.

Of course, this hypothetical blood bath of massive foreclosures over a few months time isn’t going to happen for many reasons. The real reasons this wont happen and the conspiracy theory reasons include: foreclosure regulations, loan modification attempts, banks being too slow and bogged down, banks wanting to hold off on foreclosures until the properties are worth more, etc.

Many regular sellers don’t want to sell at the bottom of the market if they don’t have to, so they are sitting on their property waiting for the value to come back up. I’m pretty sure that the bottom of the market for Sacramento was in December 2011, but we still have a ways to go for many owners to have enough positive equity in their homes to do a regular sale.

Whatever the real story is, there isn’t enough inventory on the market and the banks are not sitting on vacant houses that they own but just don’t want to sell. My buyers are scrambling over the few properties that are on the market and competing with multiple offers. It is a brutal market and I look forward to getting back to something that could pass as “normal”. Fortunately, we live in a world of impermanence and this too shall pass.

You can read the full article here starting on page 14.

Monthly Payments of Home Buyers Almost at 1981 Levels?

OK, when I saw this headline I had to read the article.

Monthly Payments for Home Buyers

On October 6, 2011, in Economist Commentaries, by Lawrence Yun, Chief Economist

A home buyer purchasing a typical American home at the prevailing average mortgage rate today would have a mortgage payment of $698 a month. This figure is not much different from what a home buyer would have faced 30 years ago. In 1981, home prices were much lower but mortgage rates were reaching 18 percent. Today, home prices have come down by about 33 percent on average from the bubble years, but prices still remain comfortably higher than those of the 1980s. However, thanks to record low mortgage rates, the monthly payment obligations have been greatly reduced.

After reading the article I still didn’t believe it and had to run the numbers for myself. I decided to take real world numbers, here in Sacramento, on a listing that I currently have in Downtown. I mean, maybe this is true for a home in Columbus GA, but it can’t be true here…

The condo that I have listed at 958 Q Street is listed for $195,000. When it was first built in 1982 the units in it’s complex were selling for $55,000. Back then you had interest rates at 18%. If you did a 3.5% down loan like today’s common FHA loans, factoring in average rates for tax and insurance, your payment would have been $867 per month (not counting HOA or any possible PMI). Today you can get a FHA loan at 4% (one of my buyers just locked at 3.675 with no points!). That makes a payment of $1167 per month or about $290 more today than 30 years ago.

I was feeling pretty smug for about 5 seconds until I started to think about what $867 would have bought me 30 years ago compared to today. Going back to my youth when a quarter bought you a candy bar and now I think they cost a buck, I had to go to an online inflation calculator. $867 from 1981 after adjusted for inflation is $2150 today!

Well, me and my short lived smug self will just have to contemplate these numbers and the buying power of today’s interest rates over a long over due candy bar…

Mortgage Rates Below 4%

OK, being 40 years old I know of times when rates were 18% but I wasn’t yet buying houses in those years. I’m used to 8-12% for most of my adult life and seeing rates below 6% has been exciting. Now rates are dipping under the 4% mark and I’m in shock.

It makes me want to run out and refinance the few properties that I have and buy several more. Given that home prices are as low as they are, I’m not sure I’ll be able to resist the urge to buy more properties…

From CNN Money

“Mortgage rates have never been cheaper, with the 30-year rate falling below 4% for the first time in history.

The interest rate on a 30-year fixed-rate loan fell to 3.94% this week, the lowest rate since mortgage giant Freddie Mac (FMCC, Fortune 500) began tracking it. Meanwhile, the average for a 15-year fixed-rate mortgage also hit a record, falling to 3.26%.

"Average 30-year conventional fixed mortgage rates fell below 4% for the first time in history this week following a sharp drop in 10-year Treasuries early in the week as concerns over a global recession grew," said Freddie's chief economist, Frank Nothaft.”

Operation Twist

OK, I'm not a fan of the name of this new government plan. It will be amazing to see interest rates on mortgages go even lower than the historical lows that we are at and years from now in the real estate industry I'll be able to wistfully look back and say "I remember when interest rates were 4%" while we are at a then staggering 8% or something.

As with almost all things in the real estate market, I will wait and see what the future brings. If I only had a crystal ball...


From CNN Money
The Federal Reserve announced "Operation Twist" Wednesday, a widely expected stimulus move reviving a policy from the 1960s.

The policy involves selling $400 billion in short-term Treasuries in exchange for the same amount of longer-term bonds, starting in October and ending in June 2012.

While the move does not mean the Fed will pump additional money into the economy, it is designed to lower yields on long-term bonds, while keeping short-term rates little changed.

The intent is to thereby push down interest rates on everything from mortgages to business loans, giving consumers and companies an additional incentive to borrow and spend money.