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Hat tip to Booty Juice for supplying more evidence on the impact of mortgage rates on home prices.

http://seekingalpha.com/article/278146-interest-rates-do-not-affect-home-prices

An excerpt:

At first glance, this is one of those things that makes perfect sense:  The same mortgage payment translates to a larger loan value when rates are low. But how does this hold up under statistical scrutiny?

The answer shocked me: They don’t. In fact, history shows the exact opposite is true.

Home prices tend to go up with interest rates:

How Is This Possible? There are two things I can think of to explain what we’re seeing. Either interest rates don’t matter as much as other factors in determining housing prices and the correlation is merely coincidence; or, higher rates harbor, or are harbored in, conditions that favor housing.

The first case isn’t too difficult to imagine. There are many factors that can affect housing: personal income, general economic conditions, supply vs. demand, family formation, population growth, technological innovations like the automobile that enabled suburbia, and so forth. Interest rate consequences can easily be lost in the mix. Maybe, if all other factors were held constant, we’d see a negative relationship to validate conventional wisdom.

The second case is more difficult to explain. Can high rates actually benefit housing prices? High interest rates provide incentive to save. More savings mean healthier consumer balance sheets, better credit and more equity to put down on a home. So higher rates should influence the relative mix between debt and equity capital, but it doesn’t necessarily influence total asset prices.

Click here for more: 

http://seekingalpha.com/article/278146-interest-rates-do-not-affect-home-prices

JtR:  The 1998-2007 mega-boom was fueled by several additional factors besides improving rates – more favorable taxation that encouraged flippers, exotic neg-am terms with fog-a-mirror qualifying, and 100% financing.

Rich T. noted that in the past there hasn’t been a significant relationship between rates and pricing:

There’s actually very little correlation between interest rates and home valuations, and if anything, homes have tended to get more expensive in rising rate environments (due to rising rates typically being accompanied by rising wages, as well as other external factors).  However, I think that a sufficiently steep and abrupt rate rise could really hurt home prices.

But recall that I am more concerned with minimizing monthly payments than the purchase price.  If rates rose enough to really impact prices, it’s likely that those higher rates would have affected monthly payments even more.  So for a long-term, heavily leveraged purchase, the threat of rising rates is a reason to act sooner rather than later.

tj & the bear agrees, saying that this time it is different:

J6P now has no useful equity, which means any purchase has to be financed in it’s entirety. That puts pricing directly tied to income via the payment, which in turn is determined by rates. IMHO any significant rise in rates will have just as dramatic an effect pushing prices downward as the original drop in rates did in pushing prices skyward.

The FedGov has thwarted previous bear campaigns with the various can-kicking devices in support of big banking, would they let interest rates get away from them?

Last week the Fed stated that they plan to keep rates low through the end of 2014. 

If something went crazy and mortgage rates did start rising, they would have to go up more than 1% to alarm home buyers.  Purchases of homes at an effective rate of 50% off with inflation will still be attractive.

But let’s imagine that rates did hit 5% or higher – what would sellers do?

Let’s examine who is selling today.  Short sales and REO listings only comprise 10% of today’s NSDCC detached inventory for sale.  The rest are probably split between long-termers with substantial equity and those looking to get out with enough for a steak dinner.

If prices went down, those with little or no equity would just stop making payments – then it would be up to the TBTF banks to decide whether they want to cause a foreclosure tsunami, or let the defaulters ride for free as long as they mow the lawn.  You can guess which path they’ll take.

The long-termers with substantial equity?  One more notch down and forget it – they aren’t going to give them away!

The initial scramble to buy something – anything - once rates went up would be exciting, but short-lived.  Fear/greed would overcome buyers who have been very patient, and they’d gladly get back on the fence in anticipation of plummeting prices.

Consider who the sellers would be – only those that need their equity to keep breathing.  The FedGovBigBank troika will take care of the rest.

If mortgage rates start rising, it’ll likely cause fewer and fewer sales.  There is probably enough organic demand who will keep buying with cash or big down payments to have pricing look statistically flat or lower.  But if there are few houses to buy, who cares.

From MND:

From Reuters:

Republicans and Democrats in the U.S. Congress have agreed on a measure that would increase the maximum size of mortgage loans that can be insured by the Federal Housing Administration, a key funding source for U.S. home loans.

The measure to raise the loan limits backed by the FHA still has to pass the Republican-led house and Democrat-controlled Senate before it becomes law, but the agreement by a bipartisan panel of lawmakers from both chambers indicates a strong likelihood of final approval.

The agreement reached among House and Senate leaders excludes those loans guaranteed by Fannie and Freddie, which provide about half of the funding of all U.S. residential home loans. The deal would only impact FHA’s loan limits, restoring the cap for mortgages the government insures to as high as $729,750 in high-cost real estate markets through 2013.

The agreement follows a polarizing debate over the size of mortgages the federal government should back. The measure to increase the legal limits on the size of mortgages the FHA can insure was included in a bill to fund a large swath of government programs, from food inspection to law enforcement, that is seen as must-pass legislation for many lawmakers.

The legislation containing the amendment extends funding on a temporary basis for many government programs through Dec. 16, giving Congress additional time to finalize funding levels.  The House and the Senate must pass the bill by Nov. 18, when current funding expires.

Budget battles have raised the possibility of a government shutdown twice so far this year, as Republicans have pushed for steep spending cuts. Aides say they do not anticipate that this bill will lead to another round of budget brinkmanship.

The divisive debate on the loan limits will continue to play out this week as lawmakers push to pass the short-term funding measures. The Senate had pushed a measure that would raise the maximum size of a home loan backed by Fannie Mae, Freddie Mac and the FHA to $729,750.

The House did not include the higher limits in its bill to fund federal agencies through next September, instead favoring to keep the cap at $625,500.

Although NAR is urging realtors to contact their congress-people to whine about how lowering the loan limits will cause the world to end, it appears that Fannie/Freddie/FHA max loan amounts will be dropping next week. 

Hat tip to DS for sending this along, from Yahoo Finance:

On Oct. 1, the size of mortgages eligible for purchase by Fannie Mae and Freddie Mac will shrink. That isn’t necessarily a big deal in most parts of the country; the new lower limit of $625,500 — down from today’s $729,750 — still is big enough to cover most homes in almost all markets in the United States.

Furthermore, mortgage bankers are stepping up with new money to cover those bigger loans, reports Mortgage Daily. “Programs here and there are popping up,” says publisher Sam Garcia. He reports that some new lenders, including TMS Funding and New Penn Financial LLC, are launching programs that will make mortgages as big as $2 million available to lenders with good credit scores and enough cash to keep up with the payments. And many existing mortgage lenders currently will make those so-called “jumbo” loans and just keep them in their portfolios instead of selling them.

But those loans will cost more. Currently the difference between rates on so-called conforming loans and private-made loans is about 0.64 percent. Over the last two years that spread has been as low as 0.48 percent and higher than one percent, says Garcia.

So in some pricey places, the new limits will really pinch borrowers. Those limits vary from market to market and are determined in part by local housing prices. In expensive housing markets where prices have fallen, the limits will drop the most.

Hardest to be hit, according to a new analysis by Move.com, will be San Diego, where loans up until $697,500 qualify for Fannie and Freddie until Sept. 30. On Oct. 1, that limit drops to $546,250, a $151,250 difference.

Folks there who want to borrow a bunch for a home will see their costs rise significantly.

A San Diego homebuyer who needs $600,000 would pay $2,937 a month for a 30-year loan at today’s rate of 4.18 percent, according to Bankrate.com. Starting next month, if rates stay stable and that borrower goes to a private lender, he would pay $3,155 a month. That’s $228 more a month, or $82,080 more over 30 years.

Some buyers (and lenders) may try to get around that by piggy-backing loans; piling a smaller non-conforming loan onto a conforming loan.

Here are some other areas, most often searched on Realtor.com, that could see significant changes in their loan limits, according to the Move analysis.

Excerpted from the latimes.com:

The Federal Reserve’s latest effort to prop up the economy has dropped mortgages into once unthinkable territory, with 30-year fixed-rate loans available for less than 4% — a record low.

For people lucky enough to still have their credit ratings, bank accounts and home equity in good shape, the change means the opportunity to refinance at rates that once seemed unimaginable.

“I can remember when I thought 7% was a great loan,” said Roger Hornbaum, a retired city of Orange employee who has already refinanced his home on California’s Central Coast twice since purchasing it last year. “After the news this morning, maybe I’ll be getting another call from [my mortgage broker] and be trying it again sometime soon.”

Hornbaum’s broker, Jeff Lazerson of Laguna Niguel, said clients who pay closing costs and a 1% fee to him are refinancing into 30-year fixed-rate loans at 3.75%.

Of course, these days many people are in no position to buy or refinance a home. Many can’t meet the stringent lending standards that have prevailed since the housing bust and bank bailout, or they owe so much more than their house is worth that they can’t get a new loan at a better rate.

“The phone is ringing off the hook with people who want to refinance,” said loan officer Darin Hardin at Premier Mortgage Group in Ladera Ranch. “But the property values just aren’t there.”

The record low rates are driven by the Fed’s announcement Wednesday that it would load up on purchases of long-term government bonds and mortgage securities. The extra demand was intended to drive down long-term interest rates, including those for home loans — and it worked.

The yield on the 10-year Treasury bond, which serves as a benchmark for fixed mortgages, had closed at 1.94% on Tuesday. By the end of the day Wednesday it had dropped to 1.86%, and it plummeted Thursday to 1.72%, setting a record low before rising again Friday to 1.83%.

For a 30-year fixed-rate mortgage, the typical rate for solid borrowers had been 4.09% last week and early this week, according to mortgage finance giant Freddie Mac. That’s within a whisker of the record low of 4.08% set in 1950 and 1951. The Fed’s action dropped it well into record territory.

Mortgage professionals said many companies were making loans slightly more expensive Friday because their loan pipelines were full of more refinance requests than they could easily handle.

But should the 10-year Treasury yield stay low, there appears to be room for mortgage rates to fall further, industry experts said.

With a 1-year-old daughter, Joseph and Allison Dillard would normally be prime candidates to stop renting and buy a house.

He is a software engineer and she has a master’s degree in mathematics that should allow her to find work when their daughter is older. They have saved enough money for a 20% down payment on a single-family home in Mission Viejo or Laguna Hills, or perhaps a town home in Irvine, she said. And they have been pre-approved for a loan through Hardin, the Ladera Ranch mortgage banker.

Having looked at homes off and on since early this year, the Dillards stepped up the search this month after Joseph settled into a better new job at Google Inc.’s offices in Irvine. But they haven’t taken the plunge into ownership.

“The mortgage rates are so low but we’re worried, because we don’t know much further housing prices will fall,” said Allison, 30. “We’re trying to gauge the potential risks and benefits.”  In any case, the Dillards figure, the economy’s precarious state means they’ll have at least another year before interest rates rise significantly.  “It doesn’t seem like they’ll be jumping up any time soon,” she said. “So that’s not motivating us to do anything right away.

(please see comment section for discussion)

Three people have already sent me copies of the N. Y. Times’ article on lower loan amounts.

We’ve already covered it here, but let’s look at a simple comparison, using WFB rates at 1 point cost:

Monthly payments on $697,500 at today’s 4.625% super-conforming rate = $3,586/mo

Monthly payments on $697,500 at today’s 5.125% jumbo rate = $3,798/mo

Difference = $212 per month.

The actual difference is never mentioned in the article.  Instead, David the reporter (who I like a lot) published interviews with the typical bimbos.  Examples:

1.  “We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo, a loan broker. “This snowball that’s been rolling downhill is going to pick up some speed.”

2.  Even those who bought ahead of the changes, scheduled to take effect Sept. 30, worry about the effect on values. Greg Peterson recently purchased a house in Monterey for $700,000. “That doesn’t get you a palace,” said Mr. Peterson, a flight attendant.  He qualified for government insurance, which meant he needed only a small down payment. If that option is not available in the future, he said, “home prices all around me will plummet.”

3.  “Reducing the limits will put more downward pressure on prices,” said the N.A.R. president, Ron Phipps. “I just don’t think it makes a lot of sense.” But he said that in contrast to last year, when a one-year extension of the higher limits sailed through Congress, “there’s more resistance.”

4.  Heidi Daunt, with Treehouse Mortgage, said loans too large for a government guarantee currently carried interest rates of at least 6 percent, more than a point higher than government-backed loans.  “That can definitely blow a lot of people out of the water,” Ms. Daunt said.

Blow a lot of people out of the water? 

It’ll cost them $212 more per month, or buyers can lower their purchase price by $40,000 and have the same payment as before.  If $212 per month ‘blows them out of the water’, then they shouldn’t be looking in that price range anyway!

Sellers aren’t going to care about lower loan amounts, they’ll shrug it off as nonsense.  When they really want to sell, then they’ll knock off the 10% to 20% extra pad in their list price that they’ve been sitting on all year. 

Of course, that’ll cause the pundits to race to the podium to declare victory once again, and point out that they predicted it.  But the main problem in real estate today is that the list prices are too high - not loan limits, weakening demand, or unemployment.

I spoke with Eric Wolff yesterday at the North County Times, and was reminded what all reporters are up against.  They want and need entertainment and sensationalism, because that’s what sells.  David’s quotes above sound a lot sexier than reporting a measly $212 per month difference, and the real estate ‘profession’ is happy to oblige with idiotic ramblings.

So to assist reporters with searching for the truth, here is the media press-kit guide to determine if a realtor qualifies to be quoted in the article being written:

1. Have you ever sold a house before?

2. Do you make a living by selling houses?

3. How many sales did you close last year? (62)

4. How many sales have you closed this year? (23)

5. Are you on the front lines talking to buyers and sellers every day?

For buyers and sellers who are searching for qualified realtors who can assist them with pertinent, valuable advice – use the same questions.

P.S. Here’s JtR’s rule-of-thumb: Buy at a price point where you are very comfortable financially, and can afford to spend an extra $500 to $1,000 per month on the house.  If you don’t spend that much some years, great, put it in savings.  But some years you will spend $6,000 to $12,000 on repairs, maintenance, and improvements, because there are no perfect houses.

Hat tip to DB for sending this along, from Reuters:

Bethany and Karl Schreiber are hunting for a nice big house in the pricey Washington, D.C., suburbs and they are facing a deadline: In just a few months their third child will be born, and the tiny two-bedroom they’ve been inhabiting will officially get too small.

But there’s a second deadline looming for them as well. Beginning on October 1, the government will dial back on the size of mortgages it guarantees in high-cost areas like San Francisco, New York and Washington.

After that, the maximum loan amount that Fannie Mae and Freddie Mac will back is scheduled to drop from $729,750 to $625,500. And that may make mortgages more expensive or harder to get for buyers like the Schreibers, who are shopping in the $700,000 range and would prefer to make a downpayment of 10 percent or less.

“If we wait a year, we may not be able to afford as big a house,” Bethany said in an interview. “Rates and housing prices are probably going to go up.”

The Schreibers concede their timing is mainly inspired by their own family circumstances. But others may be motivated to act now because of reduced government-backed loan assistance, housing experts say. Those programs were put in force as part of the stimulus package after the housing collapse.

“For people planning on exiting the market altogether (such as retirees), that is a compelling proposition,” says Stan Humphries, chief economist at Zillow. Home sellers may have to be patient to get the price they want. The curbs on government-backed loans could, at the margin, reduce the available pool of buyers, he said.

Read the rest of this entry »

From the wsj.com:

The Treasury market may be about to prove the haters wrong.

You can’t swing a dead cat these days without hitting someone warning about an imminent rise in rates on longer-term Treasury bonds—especially as the end looms for the Federal Reserve’s $600 billion bond-buying program. There are plenty of reasons cited for this expected aversion to U.S. government debt. Fiscal irresponsibility is one. Higher inflation is another.

Indeed, the Labor Department’s consumer-price index, which is being released on Friday, is expected to be up 2.6% in March from a year earlier. That is largely because of higher food and energy prices, though core inflation excluding those items is also expected to drift higher.

That would follow a string of reports this week that separately have shown producer prices and import prices are also on the rise.

Largely because of such concerns, some well-known bond investors like Bill Gross and Dan Fuss have cautioned that rates will rise once the Fed stops buying Treasury debt at the end of June.

After all, the Fed has purchased the equivalent of more than two-thirds of Treasury issuance since last fall. The worry is that when the central bank stops buying, no one else will step up, forcing rates higher.

Yet that reasoning seems flawed, given the unsteady nature of this recovery and the reaction in the markets when the Fed stopped buying bonds last year. If anything, rates have been rising when the Fed is buying, and falling when it isn’t—serving as both a gauge of growth prospects and a sign of how reliant markets and the U.S. economy have become on the Fed’s so-called quantitative-easing programs.

For example, the 10-year Treasury yield dropped from roughly 4% last April to 2.5% in August amid a growth scare following the end of the Fed’s first round of bond buying.

It is difficult to see why this time should be so different, although the labor market is in better shape than a year ago. The surprising weakness of first-quarter economic growth is a stark reminder of the recovery’s vulnerability.

When the Fed does exit from the market, investors just might pile back in. If history is a guide, Treasurys could yet surprise the bond gurus with their strength.

According to Freddie Mac’s (OTC:FMCC) latest Primary Mortgage Market Survey  (PMMS), all mortgage products increased this week except the 1-year ARM. This brings 30-year mortgage rates back to levels seen in May of this year, while the 15-year ties levels not seen since June. Even so, mortgage rates remain incredibly low.

The 30-year fixed-rate mortgage (FRM) averaged 4.86%, with an average 0.8 point for the week ending December 30, 2010, up from last week when it averaged 4.81 percent. Last year at this time, the 30-year FRM averaged 5.14 percent.

For the year as a whole, 30-year fixed mortgage rates averaged just below 4.7 percent in 2010, which represented the lowest annual average since 1955 when secondary market yields on FHA mortgages were above 4.6 percent and the average price of a home was $22,000.

For anyone who is waiting for mortgage rates to inch lower, the bond market faces a major hurdle this Friday, January 7, 2011 when the December Employment Situation Report is released.  Floating into and through this economic data release is a high risk event. Which means the best execution 30 year fixed mortgage rate could move 0.25% to 0.375% higher. It could also move back down firmly to 4.75% or even 4.50% if the bond market experiences a sustained recovery rally.