The Credit Pendulum To Move Faster?

My how time flies. The housing boom America experienced in the past is now almost a decade old. If anyone can remember that far back, the boom was made possible in part through an unregulated market for home loans which brought us such programs as "no money down -- we don't ask about your income -- low credit score -- you can't believe how low your payment will be" adjustable rate loans. Basically, if you could breathe then you could purchase a home. The subsequent housing crisis ended all semblance of this easy credit as the credit pendulum swung drastically the other way. For some time you needed not only to fog a mirror to purchase a home, you needed to walk on water. For a while the secondary market in which lenders were able to sell loans to unsuspecting investors totally disappeared and government alternatives such as FHA, Fannie Mae and Freddie Mac dominated the residential finance markets. For years readers have been asking, when will credit loosen again?

My answer has been very standard. There were two conditions that must be in place for credit to ease. First, the real estate market must get stronger. After all, it is real estate that secures these loans and if the investment is not stable, lenders will be more reticent to lend. Secondly, rates must rise. You may be tempted to think that lenders were waiting for rates to rise so that they could make more money on each loan. However, these loans are typically originated to be sold on the secondary markets to alleviate market rate risk. Rates needed to rise so that lenders were not inundated with refinances. If lenders don't have time to process the applications they had in their pipeline, why would they loosen credit standards to bring more in? Well, if you read the article in the news section -- this is exactly what has been happening. In the long run credit standards have been easing very, very slowly. But now that the real estate market is stronger and rates have risen to slow refinances, the trend potentially can accelerate. Keep in mind we are not talking about returning to the standards of the boom times of yore, but we expect standards to get more reasonable if these trends continue.

 

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Is This What It Feels Like?

The Great Recession officially started in December of 2007. It officially ended in June of 2009, according to the National Bureau of Economic Research. However, the economic recovery since that time has been anemic to say the least -- "In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity," the NBER reported in September 2010. After meandering around for over three years since the end of the recession, the economy seems to be returning closer to a normal recovery pattern. This is an extremely long time for a period of returning to normalcy. There is some good news regarding this struggle we have had. For one, the overall recovery has been weaker than normal, yet should last longer than a normal recovery. And we have already seen that interest rates have stayed lower for a longer period of time.

As a matter of fact, this period of record low interest rates is absolutely unprecedented in our history. We will note that oil prices have fully recovered from recessionary prices a while ago. It was only recently that rates started to rise. So the next question is--will rates continue to rise as the economy gets stronger? The most important data to watch in this regard are the employment numbers and releases within the real estate sector. Certainly, these two factors are tied because as one gets stronger so does the other. Right now, we are not seeing numbers that show our economy is overheating. Retail sales are still struggling, especially outside the automobile sector and energy expenditures. Car sales continue to be in recovery mode along with the real estate markets. The bottom line? Yes, the recovery seems to have reached a new phase, but this is not a strong recovery as of yet. We are still in danger of influences that could scale back the recovery and if these scenarios occur, rates could continue to stay low. However, if momentum continues to build, rates could continue to increase in the short run.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Why Predictions Don't Work

In the past couple of months we have seen how futile it can be to try and predict the future. If one were to look at the stock market for the first half of the year, everything seemed to be coming up roses. Who can complain about a ten percent increase in the major stock indices in just six months? On the other hand, many analysts predicted that the price of oil would come down this summer. Events in Egypt reminded us quickly that predictions are useless. Oil moved up significantly at the end of June. The next question is whether higher gas prices will cause the economy to slow down while consumers adjust their spending patterns. The same can be said about interest rates.

Many analysts predicted that long-term rates would rise this year. Few predicted the scope of the rise as rates on home loans have moved up from historic lows overnight. Will this increase affect consumer spending? In the short run it appears that consumers are coming off the fence and purchasing homes in reaction to the increase in rates. This is giving real estate another shot in the arm. But what about the long-run? For a year we have warned consumers that there would be no notice when rates rise and the sale on America's real estate ends. We could not predict when and how quickly it would happen. Now we know. The good news is that rates are still low when measured against historical patterns. Those who are older remember rates on home loans which were 15% or higher. Today, we will not predict whether higher oil prices or interest rates will slow the economic recovery which finally seems to be gaining steam. But we certainly will hold out that possibility.


Mike Ervin
mike@mikeervin.com
www.mikeervin.com
(650) 766-8500
NMLS # 282715

The Link -- Higher Home Prices & Rates

For the past two weeks we have assessed the reasons that home prices are rising. Without rehashing this data, suffice it to say that home prices are rising because the real estate market is finally recovering from a horrible slump. Many analysts are now debating whether recently rising interest rates may put a halt to the real estate recovery and the stock market rally as well. In our mind there is a direct relationship between rising home prices and higher rates. Why? For the past three plus years, we have seen a tepid economic recovery from a very deep recession. If one looks at the numbers today, the recovery still does not look strong. The economy has grown at an average of just over 1.0% for the past two quarters. That is not exactly robust numbers. The difference is that today the economy is being supported by positive growth from the real estate markets.

Real estate is a big part of the economy that fuels important behaviors such as consumer spending. When someone buys a house, they also tend to purchase furniture and undertake home improvements. We believe the markets are thinking about the future, not the past two quarters. Two years ago when economic growth slowed down, there was significant talk of another recession. Today, you don't see the same level of fear. Home prices are up because the real estate markets are recovering. Rates are up because the economic recovery is on more sound footing with a real estate recovery supporting the upturn. The jobs report released on Friday was definitely indicative of this better news. Not only was the 195,000 jobs added more than forecast, the previous two months were revised higher by 70,000 jobs and hourly earnings had a solid advance as well.

Mike Ervin
mike@mikeervin.com
www.mikeervin.com
(650) 766-8500
NMLS # 282715

Why Are Home Prices Rising--Part Two

Last week we introduced statistics regarding rising home prices and introduced the first two reasons for this increase. These reasons included tighter inventory and an upward "bounce" from very low prices in certain areas of the country. This week we will present the second two reasons: economics and demographics. The economic rebound has been going on for years, but at a very slow place. However, this is the first year that the markets do not seem to be concerned with a threat of a double-dip recession. The rebound may not be strong, but it is enduring. This means that many families have seen their finances stabilize and confidence grow. Even more importantly, household formulation is up from recent lows and this causes increased demand for housing. Which brings us to the second reason--demographics. We will give you one projection released recently by the U.S. Census Bureau: The high series projects that the U.S. population will hit 400 million by 2044.

Today, the U.S. population is just over 315 million. So that means that as much as 85 million people will be added in the next 30 years, or close to one million per year. A perspective? In 1900 the U.S. population was approximately 76 million. So in 30 years we will have more growth than we had in the first 125 years. And while the economy was slumping, the population did not stop growing. This leads us to the final question -- will home prices keep rising in the short run? As we have presented previously, the shortage of inventory will disappear as prices rise and more homeowners (and banks) realize that they can get more for their homes and thus will offer them for sale. Recent data indicates that is happening. With more inventory, we are expecting the rise in home prices to slow down. However, with increased demand due to population growth, increased household formulation and confidence -- house prices could continue rising at a more sustainable level. Of a more immediate note, the employment report this week will be watched closely as the stock markets have experienced a wild ride while long-term rates have risen sharply over the past several weeks. We believe that the rise in home prices is actually very much related to the rise in rates. More on that next week.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Cell: 650-766-8500

mike@mikeervin.com

Why Are Home Prices Rising?

Statistics released this spring show that both new and existing home prices have risen significantly over the past twelve months. For example, the census bureau has indicated that the median price of a new home sold in April was $271,600, which was 8.3 percent higher than the previous month and 13.1 percent higher than one year ago. This is interesting news not only because it affects those in the market to purchase a home, but the economy in general. Wealth is created through rising home prices and this wealth has the potential to increase consumer confidence and thus consumer spending. Two questions arise from here--why are home prices rising and will they continue to do so? They are very interesting questions because just a few years back many were predicting that home prices would not recover for decades. In our opinion, it is also no coincidence that rates are rising at a time when home prices are rising and the real estate market gets stronger.

There are four reasons that home prices are increasing. For one, home prices dove down too low during the slump. In many areas the price of homes was below the replacement cost of purchasing a home. With so many foreclosures on the market, there was too much downward pressure on home prices. In addition, the cost of owning came in significantly below the cost of renting --especially when record low rates were factored into the equation. Investors across the nation recognized these economics and came in to purchase excess inventory to lessen the foreclosure issue and the equation quickly reversed. This caused the second reason for higher home prices--a tightening of inventory caused the price of homes being "bid up" in many cases. Across the nation, we have seen evidence of multiple bids on properties up for sale--especially at the lower or middle end of the market. This has created the opposite situation with regard to why home prices dove due to bank sales. In essence, reasons one and two have created a bounce in the market. The last two reasons? The economy and demographics. We will discuss these in part two of this series, as well as the future outlook for home prices.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

What Do Higher Rates Mean?

I do not mean to beat a dead horse here; however the topic of higher interest rates seems to be dominating the headlines of the financial world. While these articles dissect the possible effects of higher rates on the stock markets, business performance and more, the question we would like to focus upon is -- how do higher rates affect the average individual? There is no doubt that these rates may make home and car financing more expensive -- but by how much? As of recently, rates have risen a little more than .50% from rock bottom record lows. What does one-half of one percent cost? Using a base of $100,000, this would raise the cost of owning a home by approximately $42.00 per month. If one were financing $300,000, then the additional cost would be $125 per month. These numbers are presented before the effect of taxes is taken into account. Most homeowners can deduct the cost of interest. In this case we will assume a tax bracket of 25%, which would lower the cost of the increase to around $94.00 per month.

Another effect of the higher payment would be qualification for the home loan. Lenders limit qualification to a certain amount of one's monthly income. That ratio will vary widely based upon the details of the transaction and type of loan -- amount of down payment, credit score, etc. However; assuming that the person is already at the "limits" of qualification, then the $125 per month would lower the qualification by approximately $25,000 of the total loan amount. This entire analysis is truly an oversimplification, yet it is important to analyze. Homes have been as affordable as they have ever been and a half-of-one percent change will not change that. Keep in mind that we still are not predicting the future of rates. Finally, what about car loans? The change in the cost of owning a car would be much, much less than owning a home. This is because car loans are much smaller than home loans, they are based upon shorter term rates which have not changed as much and are many times offered at discounts as low as 0% in new car promotions. The conclusion? At today's rates, purchasing a car or a home is still a bargain. But depending upon the future of rates, the bargain may not last forever.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com