Real Estate, Home Loan Mortgage Rates, and the Economy

It you have been listening to the national media talk about the continued decline in home prices and think it is safe to wait for the bottom a little longer, think again. There are two major components: price and payments.
For price, you need to forget the national media, and even the local news, and consider your specific neighborhood of interest and your price range. We have hit bottom in many areas of San Diego already. In fact, for homes priced under $430,000, it is an extremely hot market throughout most of San Diego. Supply and demand are reasonably balanced up to $900K and then prices get weak due primarily to the difficulty in getting a loan.
For payments (what it is actually going to cost you to live in the house), you need to pay close attention to interest rates. The table below shows the differences. A few short weeks ago, you could get a loan at 4.375% and pay $2,082 per month in principal and interest on a loan of $417,000. Today, the same loan will run about 5%. To make the same monthly payment, you can now only get a loan of $387,842. A decrease of 7%.

San Diego home values are not going to drop faster than interest rates will go up. If you’ve been thinking about getting into your first home or especially if you want to buy up in a down market, now is the time to take action. Get pre-approved by your lender first so that you and your Realtor are only looking at homes you can afford.

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The Federal Reserve Board on Monday announced final rules to protect mortgage borrowers from unfair, abusive, or deceptive lending practices that can arise from loan originator compensation practices. The new rules apply to mortgage brokers and the companies that employ them, as well as mortgage loan officers employed by depository institutions and other lenders.

Today, lenders commonly pay loan originators more compensation if the borrower accepts an interest rate higher than the rate required by the lender (commonly referred to as a “yield spread premium”). Under the final rule, however, a loan originator may not receive compensation that is based on the interest rate or other loan terms. This will prevent loan originators from increasing their own compensation by raising the consumers’ loan costs, such as by increasing the interest rate or points. Loan originators can continue to receive compensation that is based on a percentage of the loan amount, which is a common practice.

The final rule also prohibits a loan originator that receives compensation directly from the consumer from also receiving compensation from the lender or another party. In consumer testing, the Board found that consumers generally are not aware of the payments lenders make to loan originators and how those payments can affect the consumer’s total loan cost. The new rule seeks to ensure that consumers who agree to pay the originator directly do not also pay the originator indirectly through a higher interest rate, thereby paying more in total compensation than they realize.

Additionally, the final rule prohibits loan originators from directing or “steering” a consumer to accept a mortgage loan that is not in the consumer’s interest in order to increase the originator’s compensation. The rule will preserve consumer choice by ensuring that consumers can choose from loan options that include the loan with the lowest rate and the loan with the least amount of points and origination fees, rather than the loans that maximize the originator’s compensation.

The final rules are effective April 1, 2011

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Mortgage Backed Securities (MBS) prices are down (which will push interest rates up), on no data. This follows a strong rally on Friday, sparked by the terrible US Unemployment Report. Friday’s report saw a -131k Nonfarm Payrolls and a stagnant 9.5% Unemployment Rate. There was also a huge revision to the previous Nonfarm number (-221k, from -125k).

Now the market is eyeing tomorrow’s Fed rate decision. No one expects the Fed to move rates tomorrow, but word out of this meeting is very important. We will be looking for the usual topics, such as inflation, employment, etc. but we will pay specific attention to the wording around quantitative easing. If you recall, the Fed purchased a total of $1.25 Trillion in MBS securities during 2009 and the first quarter of 2010. Some of these securities have matured and/or otherwise been paid off of the Fed’s balance sheet. Some have assumed that the Fed would simply allow this part of the balance sheet to shrink naturally, but lately rumors are spreading that the Fed may resume purchasing MBS in order to replace these retired assets. Word of this possible move drove rates a bit lower last week, but new rumors over the weekend have put some doubt in the minds of traders. Watch extra-close for word about this in tomorrow’s Fed announcement.

Other than the Fed announcement, we will also have some data and a note auction tomorrow. Q2 Productivity (est. 0.1%) and Wholesale Inventories (est. 0.4%) are out tomorrow at 6:30am and 8am MT respectively. There is a $34B 3yr Treasury note auction at 11am MT. Watch for the Fed announcement and the auction to likely be the highlights, but a large miss on either of the data points could cause movement. If the Fed does decide to re-open the MBS purchase program in any capacity, we may see rates drop lower, while the opposite stance would likely send rates higher in the near-term

[This report is sponsored by the Grandmaster Store for Karate Gi.]

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