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Bellevue Real Estate, Mortgage, and Economy 12/17/11

Posted on 17 December 2011

Here is the Bellevue Real Estate Report for December 17, 2011:

Interest Rates Improve A Small Amount This Week: The US rate markets have continued to improve but only a small amount and are essentially stagnant. The 10 yr note has a brick wall at 2.00% and another at 2.12%. We have been in this range for over a month and, against all the negativity out of Europe’s fumbling, long term rates have not broken in to new territory. The fears of debt defaults in Europe have lessened a little while the US economy has shown improvement albeit small; Europe will continue to keep US rates low but pulling the other direction is what appears to be a better economy in the US. Neither issue is a lock, the end result is current stagnation in the interest rate sector. In past moves when the 10 yr Note traded below 2.00% it lasted just three days before it moved back over 2.00%. It is flirting with these levels again. This time down may last longer as investors begin to wind down for the year; with Europe a constant ticking bomb investors and traders are not likely to back off their move in to bonds which keeps rates low. Technically the bond market is still holding a favorable bias, mortgage markets slightly so but still in decent shape from a technical trading perspective.

“Whistle while you work.” Snow White. That’s something more people have been able to do lately, as Initial Jobless Claims have now fallen below 400,000 – a level that historically is associated with an improving job market – for five out of the last six weeks. And that wasn’t the only bit of good news the markets saw last week. Read on for details.
Not only was last week’s Initial Jobless Claims reading of 366,000 the lowest level since May of 2008, there was a double dose of good news in the manufacturing sector, as both the Philadelphia Fed Index and the Empire State Index were both well above expectations. Normally, good economic news causes money to move out of Bonds and into Stocks as investors like to take advantage of gains…and this would typically hurt home loan rates, as they are tied to Mortgage Bonds.
However, the continued uncertainty out of Europe helped keep Bonds and home loan rates on an improving trend, as the US Dollar and US Bonds (including Mortgage Bonds, which home loan rates are based on) are benefiting from safe haven buying. Ultimately, Europe needs to provide a large financial backstop for their banks and sovereign debt in order to fix their problems longer-term. Until this happens, uncertainty should benefit the US Dollar and US Bonds, and keep home loan rates relatively low.
One factor that we can’t ignore, though, is inflation. Despite the Fed stating again last week that inflation is moderating, core consumer level inflation has continued to inch higher every month. Also, last week’s Producer Price Index showed that inflation at the wholesale level was slightly higher in November. Remember, inflation is the arch enemy of Bonds and home loan rates, because if inflation rises, investors in Bonds demand a higher yield to offset the lost buying power inflation imposes on a fixed payment. And as home loan rates are tied to Mortgage Bonds, this would mean home loan rates move higher.
The debt crisis in Europe is not getting better, its actually worsening after the EU summit fumbled again with nothing but way out plans. Moody’s said on Monday that last week’s euro crisis summit didn’t provide new measures which would lead to a resolution of Europe’s debt problems, and it would review European Union sovereign ratings in the first quarter of 2012. S&P said before the meeting that it may cut the credit rankings of euro members. ECB President Mario Draghi announced the plan to offer lenders unlimited funds for three years after the central bank’s policy meeting on Dec. 8. The result has Spanish and Italian notes better today, leading gains in euro-area debt, on speculation banks bought the securities to use as collateral when the European Central Bank starts offering three-year loans next week.

Real Estate Miscellaneous Stats:
Flipping At The Center Of Real Estate Melt Down: There have been a number of great pieces done by different sources explaining the reasons behind the Real Estate Market Melt Down. My favorite so far is a CNBC documentary titled, ‘House of Cards’. One of the favorite objects of scorn lately is Fannie Mae and Freddy Mac. It has been my personal opinion that Fannie and Freddy could have survived as viable, in spite of real significant problems, if it were not for the private label mortgage products that gave easy access to funds. These loan programs were called Alt A, A- and sub prime. These loan products could instantly turn the average Joe in to a Real Estate investor. The ease of entry in to this career and the implosion in the stock market made the Real Estate market ripe for over expansion and an inevitable collapse. Fannie and Freddy desperately needed reform but they were not offering the 0% down investment property loan programs with stated income and even No Income No Assets. Fannie and Freddy were at jeopardy due to an overheated market but they were only a small percentage of the problem.

You can see how the subprime/alt-a products spiked. Much of this activity was due to the volume created by investors buying and flipping homes. Fannie and Freddy did get in to the ‘subprime’ business with some of their products but they were small players. A Federal Reserve Bank of New York study concluded that private label subprime loans were 84% of the total sub prime market. This information came from a Washington Post piece that you can see here http://www.washingtonpost.com/blogs/ezra-klein/post/barney-frank-didnt-cause-the-housing-crisis/2011/11/28/gIQANqLH5N_blog.html .
A new Federal Reserve study is pointing to flipping as a major contributing factor in the Real Estate Bubble. The study found that at the peak of the boom in 2006, 33% of all home purchases were done by someone who already owned at least one home. That is huge increase in market participation. The report also cites the use of non-traditional mortgage products as the instruments that made it possible for more people to buy with low down payments or otherwise easy terms. They note that in the ‘boom and bust’ markets such as Nevada, Arizona, California and Florida the investor participation rate was as high as 45%. In 2006 these markets had 20% of all loan originations by investors who owned three or more properties. The use of private label mortgage products gave investors the ability to bid up the prices on home and thus fueled the bubble. These borrowers were the first to default when the bubble burst. You can read the report here: http://libertystreeteconomics.newyorkfed.org/2011/12/flip-this-house-investor-speculation-and-the-housing-bubble.html .
Anecdotally this makes sense to me. I remember discussing strategies used in this area where investors would secure a home at the opening of a plat with a popular builder. By the time the home was complete they could sell it and make $80,000.00. I have a friend who did the same thing in South Florida and made $200,000.00 by waiting 1.5 years for it to me completed. But they had to have a way to close on the property while having a primary residence.
Real Estate Prices May Be More Stable: New reports suggest that home prices of non-distressed properties may be more stable than we have been led to believe. Barclay’s recently published the results of a study that shows distressed properties continuing to fall in value while non-distressed homes may even be increasing in value in some areas. Corelogic also published a report that gives similar information. They show that, while over all home values in the US are down 3.9% from last year, non-distressed properties where only down .5% this year. Barclay’s Stephen Kim sees a distinction between distressed and non-distressed properties developing in the market. This is a positive development even though distressed properties can continue to put pressure on non-distressed via appraisal issues. Another factor that is giving a false read on values is the predominance of sales in the lower price range. Home sales up to $250K made up 70% of all home sales this last quarter. Sales above $500K made up only 8% of the total sales. While this sector is typically lower, this is an unusually low number.
Loan Program Of The Week. New Portfolio Jumbo Loan: Guild Mortgage has just entered in to an agreement with a Jumbo Loan provider that offers some of the most flexible underwriting and creative provisions for loan approval. Here are a few bullet points:
• Loan Amounts Up to $5,000,000.00 and $10,000,000.00 on a case by case basis.
• True portfolio product with flexible underwriting policy. We just approved a loan that was declined with other portfolio lenders because of income problems.
• Asset Depletion can be used to supplement income. This can be done even if a client does not have a history of depleting assets on their tax returns. Income calculations from this source are based on age of the borrower. 4001K funds can only be used if the borrower is of retirement age.
• Pledged Assets can be used to reduce down payment. This allows the borrower to keep their assets invested. This can allow down payments as low as 10%. Pledge cannot come from a 401K, IRA or annuities.
This loan can be very helpful for high net worth borrowers that may not show a lot of income on their tax returns.

Bellevue Real Estate Report