Blog - Archive for April, 2011

Rent vs Buy

April 21st, 2011

The following article is copied from the California Association of Realtor website. Contact L.A Metro Home for your Real Estate needs. Paul Cruz

Renting Versus Buying: 2011 

This year California housing market conditions make a strong and compelling case for homeownership. With prices still well below the historic highs of just a few years ago and attractive mortgage rates, qualified buyers have a unique opportunity to own their own home. As seen below, a rigorous analysis of renting versus buying hears this conclusion out. As shown in the following chart, the monthly housing costs (principle, interest, taxes, and insurance or PITI) associated with buying a median-priced home of $301,430 is $1,590 (Fourth Quarter 2010 median priced home in California).  This assumes the buyer is making a 20 percent downpayment and financing with a 30-year fixed rate mortgage at 4.62 percent. In comparison, the median rent on a three-bedroom two-bath apartment with renter’s insurance in California is $1,810. That means buying a home would save the homeowner $220 per month when compared to renting and the homeowner would save over $2,600 a year.

click on graph for larger view   rentvsbuy2011.graph3.rev

In addition, existing tax laws allow homeowners to itemize and deduct the mortgage interest and property taxes from their taxable income. For example, compare the tax implications for two households both earning $63,430 a year, the minimum income required to purchase the statewide median-priced home of $301,430.* The household that purchases the home with a 20 percent downpayment and finances the mortgage at the current rate of 4.62 percent will receive a tax deduction of over $14,000 in the first year of ownership. The renter household will most likely utilize the IRS Standard deduction of $11,400, $2,600 less than their homeowner counterparts. The homebuyer reduces their total tax liability by $400 compared to the renter in the first year of ownership. Accounting for the out-of-pocket savings as well as the tax savings, the homebuyer saves over $3,000 in their first year of ownership.

click on graph for larger view
rentvsbuy2011.graph4.rev

The mortgage rate is a significant factor in determining just how much a homebuyer can afford. Today’s low mortgage rate environment tips the scale—for some—in favor of buying versus renting. For a home priced at $400,000, with a 20 percent downpayment and a 4 percent mortgage rate, the monthly PITI will be $1,990 for the homebuyer. The monthly PITI jumps to $2,180 at 5 percent and to $2,380 at 6 percent. For each one percentage point increase in the mortgage rate, the payment goes up by almost $200 under these assumptions. Even for a lower priced home at $200,000, the difference in the monthly payment is significant as each percentage point rise in the mortgage rate tacks on $100 to the monthly PITI.

click on graph for larger view
rentvsbuy2011.graph6.rev

Of course, there are many other socioeconomic benefits that homeownership brings to communities. And there are other costs associated with homeownership above and beyond the downpayment and monthly PITI. So as long as one has considered all of the costs and benefits of owning a home and is in the financial position to do so, there are some pretty compelling reasons to strive for the “American Dream.”

Weekly Update from Catalyst Lending

April 11th, 2011

Thanks to my friends at Catalyst lending for providing this weekly market update. Great news letter below has us ask ourselves are we following the multitudes? It may be time to separate ourselves from the pack and take action. Paul Cruz

Keeping you updated on the market!
For the week of

April 11, 2011


MARKET RECAP

Are delinquency and foreclosure rates really falling? Based on this past week’s data releases, it appears they are.

Hope Now, an alliance of mortgage servicers and home-retention counselors, reports that the number of loans classified 60 or more days delinquent fell to 2.78 million mortgages in February from 2.95 million in January. Freddie Mac reports that less than 4 percent of its single-family home loans are at least three payments behind or heading into foreclosure, which is less than half the year-ago rate.

Two more government agencies – the Office of the Comptroller of Currency and the Office of Thrift Supervision – offer more proof that delinquencies and foreclosures are on the mend. They report that the percentage of mortgages classified as seriously delinquent fell in all four quarters of 2010, while seriously delinquent mortgages at the end of the year dropped to a level unseen since the second quarter of 2009.

The detractors remain unconvinced: they counter that last year’s moratorium on foreclosures has skewed the numbers, and that delinquencies and foreclosures are set to rise. Even the OCC and OTS say that they expect foreclosure activity to increase in 2011 as moratoriums thaw.

That could very well be the case, but we think there is more at work here than just a thawing of moratoriums. Payroll employment and economic growth have posted strong gains over the past few months. That means more people are able and willing to service their obligations, including mortgage obligations.

Pricing could be the wild card in the delinquency-foreclosure trend. Admittedly, the news on national home prices has been weak over the past couple months. However, real estate is local. Home prices in West Virginia are up over 5 percent year-over-year, and they’re up over 4 percent in New York and North Dakota . The usual suspects – Arizona , Florida , Michigan – have posted double-digit declines. That said, Arizona and Florida were two of the most overbuilt states; Michigan is one of the most economically depressed. They’re not representative of most real estate markets.

Therefore, we will stick by our guns: stable and improving prices will prevail. We are encouraged by the sharp decline in the rental vacancy rate, to 6.2 percent in the first quarter of 2011, which suggests to us that excess supply is being absorbed. In fact, the vacancy rate is back to early 2008 levels, and is not far above the rate in 2006 (around 5.7 percent). As the vacancy rate falls, rents will rise and this will help support home prices.

 

Economic
Indicator
Release
Date and Time
Consensus
Estimate
Analysis
International Trade
(February)
Tues., April 12,
8:30 am, et

$43.5 Billion (Deficit)

Moderately Important. Rising energy prices has pushed the deficit higher in recent months.

Import Prices
(March)

Tues., April 12,
8:30 am, et

2.0%
(Increase)

Important. Food and energy are responsible for most of the increase.
Mortgage Applications Wed., April 13,
7:00 am, et

None

Important. Purchase applications hit a 12-month high, portending an improving sales outlook.

Retail Sales
(March)

Wed., April 13,
8:30 am, et
0.4%
(Increase)
Important. Sales are flattening, but remain up overall on rising price inflation.
Producer
Price Index
(March)
Thurs., April 14,
8:30 am, et
All Goods: 0.7% (Increase)
Core: 0.2% (Increase)
Important. Producers are showing less willingness to absorb higher energy costs.
Consumer
Price Index
(March)
Fri., April 15,
8:30 am, et
All Goods: 0.4% (Increase)
Core: 0.2% (Increase)
Very Important. Prices rising at the current rate will pressure interest rates to go higher.
The Wise Words of Ludwig von Mises

Who in the world is Ludwig von Mises? He was an Austrian economist who was known for his contrarian views on how markets and people work. Mises had many insightful views on business. Here’s one: “ It is not correct foresight as such that yields profits, but foresight better than that of the rest. The prize goes only to the dissenters, who do not let themselves be misled by the errors accepted by the multitude.”

Long-time readers will recognize a Misesian theme in some of our writings. For the past year, we’ve been counseling people to act, and not to wait until all signs point up, because when everything looks positive (or when everything looks negative), the multitude is in control.

We argue that today a “multitude” of negativity still pervades the market, making it a buyer’s market. (We could have said there was a “multitude” of positivity in 2006, which made it a seller’s market.) The problem is, it’s difficult to stand against the multitude, even though it’s often in our best interest to do so. Most people simply find it too uncomfortable to separate themselves from the crowd and look past today’s problems to today’s opportunities.

Fortunately, to be a successful dissenter, we only have to be mostly correct, not completely. We feel mostly correct in saying that buying real estate at today’s prices and at today’s rates will prove very profitable a few years from now.

 

How to fix the mortgage mess

April 4th, 2011

Wells Fargo’s John Stumpf: How to fix the mortgage mess

By John Stumpf, chairman, president, and CEO, Wells FargoApril 4, 2011: 6:09 AM ET

FORTUNE — For most Americans, their home is the largest and most important investment they will ever make. Ensuring that they have the right kind of mortgage is critical to their financial well-being and — as we’ve seen recently — critical to our entire economy.

That means we have to solve the Fannie Mare and Freddie Mac problem and eventually figure out the proper role of the federal government in supporting a secondary market for home mortgages. Doing that right is one of the most important issues facing Congress and the Obama administration.How to fix the mor

mortgage_charts.jpg

Some people ask, Why do we even need a secondary market for home mortgages? Why don’t we just go back to the good old days before those markets existed and require banks to hang on to all the mortgages they create?

Let me tell you why. When I went to buy my first house in 1976, mortgage money was hard to find. In fact, it was rationed. Banks simply didn’t have the deposits on hand to meet the demand. That was 35 years ago, and we don’t want to go back to those “good old days.” Mortgage rationing is not the future we want for our customers, their children, or their grandchildren.

Consider these facts: There are 76 million homes in the U.S., of which 51 million have mortgages. Taken together, those mortgages represent a debt of $11 trillion. That’s a level of debt that banks can’t afford to hold on their balance sheets alone. As a nation, if we want to make home ownership broadly available and affordable, we need a secondary mortgage market that operates fairly and efficiently for all parties.

Freddie Mac and Fannie Mae were created in part to help achieve those goals, but they’ve run into big trouble along the way. They now own or guarantee nearly 31 million home loans, worth more than $5 trillion. Their role is so critical in mortgage finance that the federal government bailed them out in 2008 to the tune of what might end up to be more than $250 billion.

So as Fannie and Freddie unwind, as they certainly will, what principles should shape the future of home financing? I believe the answer comes in three parts. First, all parties involved in making and investing in mortgage loans need to share a financial interest in the quality of those loans. That includes the customer taking out the loan, the financial institution or broker originating the loan, and the investor who ultimately owns the loan. All parties need to have skin in the game. If originators don’t have a financial interest in the loan, they will have less concern for its quality, and poor lending decisions will happen and be passed along to investors. That creates a house of cards.

A healthy debate is already taking place about how much a homeowner should put down and how much a bank should keep on its balance sheet when it bundles and sells mortgage loans. There is no magic number out there, but I can tell you one thing: The more the risks and rewards of a mortgage loan are shared by all parties — and the better those risks and rewards are understood — the better the quality of the loan will be.

Will this mean higher down payments for homeowners and more financial skin in the game for banks? Probably so, but the long-term costs for homeowners, bankers, and the economy will be dramatically lower. Just look at what past mortgage paractices have cost all of us.

Second, whatever role the federal government assumes in mortgage finance going forward, its role needs to be explicit, not implicit. Currently federal backing for Fannie and Freddie is implied because they are “government-sponsored enterprises.” It needs to be crystal clear for investors around the world whether GSE loans are backed by the full faith and credit of the United States. If they are, consumers would benefit from worldwide liquidity for mortgage products. To protect taxpayers, adequate levels of private capital should be required to take the risk of loss. In this way, the federal government would only act as a “catastrophe risk” backstop much like the role the FDIC plays in protecting bank deposits up to a certain limit. Banks would pay a fee, just as they do for FDIC insurance, and the homeowner’s mortgage would be guaranteed up to a certain amount by the federal agency providing the insurance.

And third, as we move forward in a post-GSE marketplace, we need to make sure we have uniform underwriting and servicing standards for mortgage loans, and more common products for what are called conforming mortgage loans. An efficient secondary market depends on relatively standard products and processes. Otherwise every batch of loans has to be examined in detail for its unique qualities, an examination that results in higher transaction costs and ultimately less attractive investments. The lack of standardization drains the lifeblood out of secondary market operations.

Mortgage financing is a big deal for millions of Americans and for our economy overall. All sides should be looking for solutions that will help all Americans. The path forward will not be easy, but I truly believe the solutions can be found. It will require hard work, courage, and cooperation across the board.  To top of page

http://money.cnn.com/2011/04/04/real_estate/john_stumpf_mortgage.fortune/index.htm

Market Recap from Catalyst Lending

April 3rd, 2011

Keeping you updated on the market!
For the week of

April 4, 2011


MARKET RECAP

The monthly S&P/Case-Shiller home-price index always attracts a good deal of media attention. This month’s edition was no different. In fact, because of a strong pessimistic bias, it probably drew more attention than it should have.

Once again, falling home prices elevated fears of a double-dip recession in the home-buying market and a longer slog toward recovery than once anticipated. According to Case-Shiller, the average sale price of single-family homes in 20 major metropolitan areas fell 1 percent from December and 3.1 percent from a year ago. Only two areas – San Diego and Washington – recorded price increases year-over-year.

We offer our usual caveats with the Case-Shiller index: For one, it’s two months in arrears. Recent data on home prices have been less dour. In addition, 20 metropolitan areas is hardly a complete picture. Real estate is much more localized than it was during the recession. Even within major metropolitan areas, we see differences in pricing trends. So, yes, on a national level prices have fallen, and have fallen 31 percent since the 2006 highs. However, prices, like mortgage rates, can go only so low, and there isn’t much room on the downside, as many local markets have already shown.

It’s also worth noting that the pending home sales index rose 2.1 percent in February, which is encouraging when considering how miserable the weather was in February. What’s more, the pending home sales index has trended higher since bottoming in June, with contract activity 20 percent above the low point. More activity isn’t a price panacea, but it helps.

Shadow inventory has been the counterclaim, because it continues to apply downward pricing pressure. The good news is that shadow inventory is improving. CoreLogic reports that 1.8 million properties make up the shadow inventory of foreclosures, but that’s down 11 percent from a year ago. We expect this inventory to dissipate further, thanks to robust economic growth and a pickup in job creation and wage growth.

Low financing rates will also help the liquidation process. A quote below 5 percent on a 30-year fixed-rate mortgage remains the norm. To be honest, the norm has held longer than we had expected. That’s a good thing, to be sure, but it does tend to induce complacency and procrastination at times.

Buyers these days have to balance high inventory levels against the likelihood of higher mortgage rates. Excess supply is a persuasive argument to house shop at a leisurely pace. However, just because rising prices aren’t an immediate concern doesn’t mean rising mortgage rates aren’t. We noted in last week’s commentary that buyers have the best of both worlds – low mortgage rates and low home prices. We doubt we will be saying that this time next year.

 

Economic
Indicator
Release
Date and Time
Consensus
Estimate
Analysis
Federal Reserve
FOMC Meeting Minutes
Tues., April 5,
2:00 pm, et

None

Important. The minutes are expected to reveal a growing bias toward higher interest rates.

Mortgage Applications

Wed., April 6,
7:00 am, et

None

Important. Though lagging slightly over the past couple weeks, purchase applications remain in an uptrend.
Consumer Credit
(February)
Thurs., April 7,
3:00 pm, et

$3 Billion (Increase)

Moderately Important. Growth in non-revolving credit reflects increasing consumer confidence in the economy.

Wholesale Trade
(February)

Fri., April 8,
10:00 am, et
1.0% (Increase)
Moderately Important. Businesses continue to build inventory in anticipation of rising consumer demand.
Is It Really Only A Matter of Time?

Faithful readers of these missives know that we’ve been saying that it’s a matter of time before mortgage rates head higher (which puts us in the majority opinion). Indeed, since November, rates have headed higher, but not as high as many, including us, would have thought. Granted, we were right in saying that rates holding under 4 percent were unlikely, but that was an easy call. Four percent simply isn’t sustainable when inflation is the norm.

Inflation is the reason we still think rates are headed higher. Many market watchers have been lulled into a false sense of security because consumer and producer prices – though rising in the past two months – haven’t spiked out of control.

There are many variables that go into prices – productivity gains, technology, consumer demand – all of which can offset the increase in money supply that has occurred over the past two years. It can’t last forever. If we peruse any long-term chart of consumer and producer prices, we see that prices rise persistently higher. As a corollary, when we peruse a chart of the US dollar, we see a persistent drop in value.

Eventually, all the new money in circulation will begin chasing consumer goods, and then we will see an increase in price inflation. We expect the bond market to anticipate this event, which is why we think mortgage rates will head higher before price inflation becomes more of a front-burner issue.