As we move into August, mortgage interest rates are dropping slightly,responding to rising concerns about a softening housing market.Homes sales down, mortgage rates down As we move into August, mortgage interest rates are dropping slightly, responding to rising concerns about a softening housing market. Sales of new and existing homes have been dropping sharply over the past two months. That sparked a major drop in stock values in late July.
At the same time, underwriting standards for mortgages, particularly subprime loans, are tightening dramatically. Many lenders are exiting the subprime products arena, especially the formerly popular and risky 2/28 ARM loans – mortgages with a fixed rate for the first two years before reverting to an adjustable-rate loan for the remaining 28 years. However, 2/28 and other hybrid mortgages are still offered by some lenders, but those lenders are much more diligent in only qualifying borrowers who are in a financial position to make their monthly payments after they increase.
The average rate for a 30-year, fixed-rate mortgage in early August is down to 6.69 percent, according to Freddie Mac, a major government-sponsored buyer of home mortgages. Last year at this time, the rate for a 30-year fixed mortgage was 6.72 percent – slightly higher than the current rate. The rate for a 15-year fixed mortgage is 6.37 percent. For a 5-year hybrid mortgage, it’s 6.30 percent. The average points (fees) for all these loans are 0.4 percent of the loan.
“Mortgage rates are easing on market concerns that a further weakening of housing demand will delay any recovery in the sector,” said Frank Nothaft, Freddie Mac’s chief economist. “For example, building permits fell last month to the slowest pace in a decade, and more recent data on sales of existing homes show a fourth consecutive monthly decline. Several factors are contributing to the softening in housing markets. In addition to the tightening of lending standards, especially on subprime loans, the 40 basis point jump in rates on 30-year fixed mortgages in June may have deterred potential buyers.
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Family structure changes impacting home buying, financingChanging family structures are impacting home buying and financing preferences. Many Baby Boomers are now empty-nesters and are seeing their parents aging. Such factors influence decisions on the type and location of housing they now need and want. “Boomers will drive housing for at least the next 20 years,” said Tim Sullivan, president of Sullivan Group Real Estate Advisors. Housing units sold to or occupied by 55-plus households will account for more than 370,000 housing starts this year, according to a report from the National Association of Home Builders.
Households headed by someone age 55 or older account for 21 percent of new homes sales and 18 percent of the total new home buying market. Senior-oriented communities, including both age-qualified and non-age-qualified, account for about six percent of the total home buying market. “There are more elderly people everywhere on earth,” said Andrew Zolli, a consultant for NAHB. “People are living longer and having fewer children. The United States now has the largest number of older and younger people in its history, creating an `hourglass’ that will affect the workforce, health care and culture.”
Increased longevity means that many people will have to work more years than they planned, and that companies will see a rise in older, yet healthy and energetic employees. Boomers will take advantage of this longevity bonus by creating a whole new life stage that is neither all work nor all leisure, Sullivan said. That trend will influence the home buying and financing decisions of persons entering their senior years.
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Status of proposed zero-down FHA mortgage The plan for FHA (the Federal Housing Administration) to introduce a zero-downpayment mortgage is being questioned by the Government Accountability Office. In a report to Congress, they warn that introducing zero-down loan products at a time of stagnant or declining home prices could increase the risk of default. They believe an initial pilot zero-down program would be advisable.
“Because of the risks and uncertainties, we continue to believe a prudent way to introduce a zero-down product would be to limit its initial availability such as through a pilot program,” a GAO spokesman said. However, The Department of Housing and Urban Development (HUD) disagrees. “The FHA is well prepared to offer a zero-down program and a pilot program in unwarranted,” said Brian Montgomery, HUD’s assistant secretary.
A zero-downpayment FHA mortgage would be a positive and progressive step forward in helping more families become homeowners. The offering of this new type of FHA home financing loan would be consistent with the government’s pledge to encourage a higher rate of homeownership in the nation.
In late July, the Senate Banking Committee drafted an FHA reform bill that cuts the FHA downpayment requirement to 1.5 percent and raises FHA loan limits. We’ll be watching the development of these proposals. On July 31, the Senate Banking Committee canceled a mark-up of the Federal Housing Administration reform bill after key Republicans complained about the process and wanted more time to work on the bill.
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Problems with `A' quality mortgage borrowersThere have been recent reports from major lenders that significant payment problems are being experienced by borrowers of “A” quality mortgages, in addition to the subprime loans. However, it’s seldom noted that in many cases where high creditworthy borrowers are encountering problems it’s a second mortgage that creates the problem – originated in “piggyback” mortgage transactions.
This is a way many borrowers acquire a home with minimal downpayment and escape paying for private mortgage insurance. They simply apply for two mortgages simultaneously, a first and second loan. With such small initial equity and with home values declining in some areas, it’s inevitable that some of these deals will result in delinquencies.
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Opportunity for condo buyersA couple of years ago, condominiums were among the hottest selling niches in the super-charged real estate market. Today, condo sales are sluggish, prices have leveled out or dropping in many markets, and inventories are growing dramatically. Those factors can be good news for today’s prospective buyers of condos. They now have far more units to choose from than were available a year or two ago, prices are dropping to more realistic levels in many markets, and buyers have more negotiating clout.
Condo prices nationwide are dropping at an annual rate of about 0.5 percent, according to a report from the National Association of Realtors. The number of sales is off nearly 7 percent from last year. “New condo markets have been receding largely due to excessive inventory,” it was noted in a report from the National Association of Home Builders.”
One business is actually benefiting from the tight condo sales market. More and more builders and developers of new condos are turning to auction companies to liquidate their inventory of unsold units. “It doesn’t take developers long to figure out what an extra 12-month holding period will cost them,” said Louis Fisher, managing director at the auctioning firm of Sperry Van Ness Accelerated Marketing Company.
The same scenario is being played out in the condo resale market, with owners being anxious to sell and willing to make concessions and negotiate prices. It should be noted that condo prices are not falling in all markets. Some areas, particularly in west and east coast communities, prices are continuing to slowly climb. [
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