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Jim Klinge
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701 Palomar Airport Road, Suite 300
Carlsbad, CA 92011

Category Archive: ‘Interest Rates/Loan Limits’

Effect of Higher Rates

With mortgage rates bouncing back into the mid-4s (with no points), JBREC published this article on the effect of higher rates on home sales:

Mortgage rates have risen 1.0% or more ten times in the last 43 years, with little impact on home sales and prices when the economy was also strong. Here is the paper we shared with our clients a few years ago. Historically, rising confidence, solid job growth, and higher wages have more than offset reduced demand for housing resulting from higher mortgage rates. When rates rise during a weak economy, home sales and prices get crushed.

Today’s economic backdrop clearly supports continued home buying demand. Confidence among consumers and businesses continues to hit multiyear highs. Job and wage growth remains solid, with an increasing number of workers rejoining the workforce.

Home builders agree. In our survey of 300+ home builders this month, 85% said sales would decline less than 10% if rates were to rise all the way to 5.0%. Twenty-nine percent (generally luxury and active adult builders whose buyers are quite affluent) don’t believe sales will fall at all.

Builder stocks typically overreact very strongly to rising and falling rates, so don’t follow builder stock prices to assume what will happen to new home sales and pricing.

For perspective, mortgages rates have increased from 3.78% in September 2017 to 4.32% today, equating to a 6.7% increase in one’s mortgage payment.

Rates rose even more last spring, jumping from 3.41% in July 2016 to 4.30% in March 2017 (11.5% spike in mortgage payment). Despite rising rates, housing had its best spring since 2013 last year, with a strengthening economic backdrop more than offsetting reduced demand from higher rates. All signals point to a similar scenario for builders as we kickoff spring 2018, with rising rates unlikely to ruin housing’s recovery.

Link to article

Posted by on Feb 10, 2018 in Interest Rates/Loan Limits, Jim's Take on the Market, Market Conditions | 0 comments

Rising Mortgage Rates

Mortgage rates have risen almost one-half percent this year, and are around 4.50% with no points today (conforming and jumbo).  Because rates haven’t moved much in recent years, the half-point increase sounds dramatic, and could cause a few people to reach for the panic button.

But there’s no need to panic.

During the Frenzy of 2013, rates went up higher in less than half the time of the current increase:

But home prices didn’t back off – instead, our NSDCC median sales price has risen 40% since July, 2013!

But aren’t we closer to a new market peak now, and higher rates will just be the beginning of the end?  After all, the last two readings of the SD Case-Shiller have declined month-over-month, and those are calculating county-wide sales that are generally lower priced than NSDCC.

While the higher-rates/higher-prices/tax reform/insert-your-favorite-doom will likely cause nervous buyers to pause, the market has always been made by the buyers with less caution and more horsepower.

They might be more selective going forward, which means only the cream-puffs will be selling for retail, or retail-plus – the inventory of those is too tight, and the competition will drive the sales price.

It’s the sellers of homes that are lingering unsold who might want to sharpen their pencil on their list price.  Once you’ve been on the market and not selling for 2-3 months, do you really need to keep pressing for that extra 5% to 10% on top of what the last guy got – and risk not selling at all?

If higher rates do become an issue, it is a problem that is easy to fix, unlike tax reform or higher prices.

Buyers can either opt for a 5-year or 7-year fixed rate to stay under 4%, or ask the seller to buy down the rate.  Sellers who are getting a 5% premium over last year’s prices shouldn’t mind paying 1% or 2% to make the deal.

Posted by on Feb 5, 2018 in Frenzy, Interest Rates/Loan Limits, Jim's Take on the Market, Market Conditions, North County Coastal, Sales and Price Check | 2 comments

Mortgage Rates at 3-Year High

Another increase in rates today but the rate-setters for the mortgage companies have to be a bit gun-shy, and as a result, there is probably at least an 1/8 of a point priced in.  Once we get past the Fed meeting that’s underway and Trump’s State of the Union tomorrow, things might settle down.  The mortgage guys aren’t as optimistic:

From a week and a half ago, most borrowers are now looking at another eighth of a percentage point higher in rate.  In total, rates are up the better part of half a point since December 15th.

This marks the only time rates have risen this much without having been at long term lows in the past year.  For example, late 2010, mid-2013, mid-2015, and late 2016 all saw sharper increases in rates overall, but each of those moves happened only 1-3 months after a long term rate low.

The current trend continues to offer false hope with potential ceilings that are quickly broken.  Rates have then had a challenging time getting back below those levels.  This is classic  behavior for these sorts of big, serious market movements and part of the reason we’ve continued to advocate a defensive stance despite periodic victories.  Such victories are bound to occur in any interest rate environment.

We need to see bigger victories and more of them if it’s going to make any sort of sense to be anything other than defensive when approaching the current interest rate landscape.  Lock early and plan on rates moving higher until we see a broad shift in momentum.

Link to MND

Posted by on Jan 29, 2018 in Interest Rates/Loan Limits, Jim's Take on the Market | 1 comment

Doom Ahead?

From – an excerpt:

When real estate investors get this confident, money manager James Stack gets nervous.  U.S. home prices are surging to new records. Homebuilder stocks last year outperformed all other groups. And bears? They’re now an endangered species.

Stack, 66, who manages $1.3 billion for people with a high net worth, predicted the housing crash in 2005, just before prices reached their peak. Now, from his perch in Whitefish, Montana, he says his “Housing Bubble Bellwether Barometer” of homebuilder and mortgage company stocks, which jumped 80 percent in the past year, once again is flashing red.

“It is 2005 all over again in terms of the valuation extreme, the psychological excess and the denial,” said Stack, whose fireproof files of newspaper articles on bear markets date back to 1929. “People don’t believe housing is in a bubble and don’t want to hear talk about prices being a little bit bubblish.”

As the housing market approaches its key spring selling season, Stack is practically alone in his wariness. While price gains may slow, most analysts see no end in sight for the six-year-old recovery.

There are plenty of reasons to be optimistic. The housing needs of two massive generations — millennials aging into homeownership and baby boomers getting ready for retirement — are expected to fuel demand for years to come if employment remains strong. Sales in master-planned communities, many of which target buyers who are at least 55, reached a record last year, according to John Burns Real Estate Consulting. Last month, a gauge of confidence from the National Association of Home Builders/Wells Fargo rose to the highest level in 18 years, and starts of single-family homes in November were the strongest in a decade.

“As soon as homes are finished, they’re flying off the shelf,” said Matthew Pointon, Capital Economics Ltd.’s U.S. property economist.

Stack has a different perspective. While the market might gradually correct itself, history shows that it’s more likely to “come down hard” with the next recession, he said. He described the pattern as a steep run-up in housing prices spurred by low interest rates. The last downturn came about when economic growth slowed after a series of rate increases, exposing the “rot in the woodwork” and prompting loan defaults, Stack said.

He noted that the Fed has projected three rate increases for this year, and said that “raises the risk that today’s highly inflated housing market will again end badly.” He’s watching homebuilder stocks closely because they’re a leading indicator, peaking in 2005, the year he called the crash — and the year before home prices themselves hit a top.

Link to Article

Jim: Of course today’s environment feels irrationally exuberant – it’s hard to believe how well we have done since our pricing recovery began in 2009!

But his reasoning that higher mortgage rates would “Raise the risk that today’s highly inflated housing market will again end badly” is off-base.  Rates were coming down during the mortgage crisis – it was the fury over the neg-am loans that caused borrowers to think their payment was going to go through the roof, burn the house down, and kill their family.  Borrowers who could only afford their initial minimum payment on the ARM then panicked at the first adjustment and hit the eject button.

Neg-am loans are now illegal, and I haven’t seen or heard of any ez-qual loans available at conforming rates – everybody who bought a house in the last nine years had to prove they could afford it, and their payment is fixed.  Besides, we learned last time that just because their home value went down, people don’t panic and sell their house as long as they can afford it.  People have to live somewhere, and we like it here.  If a full-blown depression happened and we had another run of defaults, the government will provide another safety net and just tell banks not to foreclose.

If rates go up to 5% or 6%, it will probably stall the market, causing prices to bounce around.  But there won’t be enough sellers who will dump on price that it would cause a major event.  There could be a skirmish here and there caused by boomer liquidations occasionally.  But that’s it.

Posted by on Jan 23, 2018 in Forecasts, Interest Rates/Loan Limits, Jim's Take on the Market, Mortgage Qualifying, Rancho Santa Fe | 0 comments

Kayla’s Open House Report

Mortgage rates went up 0.25% this week, which means someone who is borrowing $750,000 will be looking at an extra $109 per month.

To put it in perspective, the payment goes up from $3,581 to $3,690. If that’s comfortable payment, the extra bump isn’t that big of a deal.

Rates going up to 4.50% probably won’t be either.

Posted by on Jan 20, 2018 in About Kayla, Bubbleinfo TV, Interest Rates/Loan Limits, Jim's Take on the Market | 1 comment

Fed Hikes, Mortgage Rates Drop

With the new Fed transparency, these rate hikes are telegraphed well in advance now and priced in by the market. Free enterprise is working – the competition between Chase, Wells Fargo, and Bank of America is keeping rates in check.  BofA is quoting 3.875% and no points for 30-year jumbos today – and we’ve had three Fed hikes this year (doubling from 0.75% to 1.5% today)!

From MND:

Mortgage rates fell fairly quickly this afternoon following the Federal Reserves updated economic projections.  While it is indeed true that the Fed “raised rates” this afternoon, there are two reasons that doesn’t matter.

First of all, the rate the Fed adjusts (aptly named, the Fed Funds Rate), governs only the shortest-time frames (overnight loans among big banks).  Although its effects radiate to longer-term debt like mortgages, the two are far from joined at the hip.  Short term rates often move one direction while long term rates move another.

More importantly, EVERYONE responsible for trading the bonds that govern interest rates (and I do mean every last person without a single exception) was well aware that the Fed would be hiking rates today.  No Fed rate hike has been better telegraphed during this cycle.

When bond traders know what’s going to happen in the future, they’ll trade accordingly as soon as possible.  That means rates had long since adjusted to today’s rate hike–so much so that the hike itself was a non-event.  Again, it was the update economic projections that helped rates move lower this afternoon.  Fed Chair Yellen’s press conference played a major role as well.

Even before the Fed news came out, a weaker reading on an important inflation report helped bond markets get into positive territory on the day.  The net effect of the Fed and the economic data was a moderately quick move back to last week’s low rates.

Loan Originator Perspective:

Bonds are rallying following the Fed announcement today and weaker inflation data.   As of 4pm eastern, only a few lenders have passed along any of the gains.  So, I favor floating overnight and evaluate pricing tomorrow.  Hopefully this rally can continue.


Posted by on Dec 13, 2017 in Interest Rates/Loan Limits, Jim's Take on the Market, Mortgage News | 0 comments

NSDCC Upside Potential

Jumbo mortgage rates in the threes have helped to propel our higher-end market to new heights.  Of the 854 houses for sale between La Jolla and Carlsbad, 757 of them – or 89% – are listed over $1,000,000!

NSDCC Detached-Home Sales, Jan 1 – Aug 31

Total # of Sales
Sales Over $1M
Percentage of Sales Over $1M

The housing market – and its higher prices – are completely dependent upon mortgage rates staying ultra-low. Thankfully, hardly anyone needs to sell!

Here’s an interesting comparison:

The fixed-rate monthly payment on a $710,000 mortgage back in 2007 was the same as the monthly payment on a $1,000,000 mortgage today.  Yet, in spite of inflation, the San Diego Case-Shiller Index is about the same as it was in 2007!

With our prices still well under SF/LA/OC prices, and the market being flush with boomers who are retiring, we could have plenty of upside here.  The Fed is going to have to keep rates low, so as long as that happens, another 10% to 20% increase in prices is very feasible over the next five years.   Or at least until an extreme event happens, like a major earthquake, or some kook pushing the nuke button.

Look at how consistent the number of sales have been – there has been hardly any variation over the last six years (avg 2,103 sales).

This is where the stagnation would come in – prices could keep going up for the next few years, but with fewer houses selling – mostly because they don’t deserve the extra premium.

Posted by on Sep 7, 2017 in Interest Rates/Loan Limits, Jim's Take on the Market, North County Coastal | 4 comments

Fed Raises, Mortgage Rates Drop

Rates are under 4.0%, no points! From MND:

Mortgage rates fell convincingly today, though not all lenders adjusted rates sheets in proportion to the gains seen in bond markets (which underlie rate movement).  Those gains came early, with this morning’s economic data coming in much weaker than expected.  Markets were especially sensitive to the Consumer Price Index (an inflation report) which showed core annual inflation at 1.7% versus a median forecast of 1.9%.

Core annual inflation under 2.0% is a hot topic–especially today–considering that’s one of the Fed’s main goals.  This afternoon’s Fed Announcement did acknowledge the recent drop in inflation, but continued to suggest it was being held down by temporary factors.  The Fed also officially unveiled its framework for decreasing the amount of bonds its buying (though it didn’t announce a start to the program yet).

Bottom line: Fed bond buying is one of the reasons rates are as low as they are.  Markets know the Fed will eventually enact this plan and they’ve accounted for that to the best of their ability.  But as the Fed actually goes through the steps toward enacting the plan, it causes some upward pressure for rates.  That was the case this afternoon, but bond markets were nonetheless able to hold on to a majority of improvement seen this morning.  As such, the day ended with most lenders offering their lowest rates in exactly 8 months (a few days following the presidential election).

Posted by on Jun 14, 2017 in Interest Rates/Loan Limits, Jim's Take on the Market, Market Buzz, Mortgage News, Mortgage Qualifying | 0 comments

Fed Hikes, Mortgage Rates Lower

Mortgage rates fell at their fastest pace of the year following today’s rate hike announcement from the Fed.

If you’re wondering why mortgage rates fell while the Fed’s rate moved up, you’re not alone. Fortunately, the explanation is simple. Financial markets had already fully accounted for the chance that the Fed would hike rates today. They’d even gone a step further an begun to account for a faster pace of future rate hikes. And it was that future outlook that allowed for our pleasant surprise.

As it turns out, the median forecast among Fed members didn’t see the Fed Funds rate ending the year any higher than the previous batch of forecasts (both for 2017 AND 2018). While there was no way to know exactly how much markets had prepared for the forecasts to move higher, it was certainly more than “not at all.” In other words, rates had recoiled in fear over the past few weeks, expecting to see a very scary monster today. When the monster turned out to be cute and cuddly (relatively), rates calmed down quickly.

The average lender offered mid-day improvements that brought rates 0.125% lower, on average. In terms of conventional 30yr fixed rates, most lenders are back down to 4.25% now on top tier scenarios.

Read full article here:

Posted by on Mar 15, 2017 in Interest Rates/Loan Limits, Jim's Take on the Market, Market Conditions | 0 comments