The summary of the Fannie/Freddie report from wsj.com:
The paper proposes gradual increases in minimum down payments so that Fannie and Freddie buy loans with a minimum 10% down payment. Currently, borrowers can make smaller down payments if they purchase mortgage insurance. The paper also recommends raising gradually fees that Fannie and Freddie charge to lenders, in order to make mortgages that aren’t government-backed more competitive. It calls for slowly reducing the maximum loan limits the firms can purchase but doesn’t specify how far those loan limits should drop.
Current federal law allows the companies to guarantee mortgages of as much as $729,750 in some high-home-price areas and will expire Oct. 1. The administration recommends that Congress not renew the law. The move would drop the ceiling to $625,500. While not being specific, the administration’s paper calls for further reductions in that ceiling over the next several years. Mortgages above the ceiling are known as jumbo loans and usually require a higher interest rate.
The administration also says banks should be required to hold more capital to withstand future housing downturns, and the paper calls for “more conservative underwriting standards that require homeowners to hold more equity in their homes.”
The paper also calls for reducing the role played by the Federal Housing Administration, a New Deal-era agency that has been at the heart of the administration’s efforts to help Americans secure low-down-payment mortgages in the wake of the mortgage market’s collapse three years ago. The FHA doesn’t lend money to home buyers but insures lenders against default; in exchange for that backing, borrowers must pay annual insurance premiums. The administration says it will increase those fees later this year.
Because the housing market remains fragile, those measures would be phased in gradually. The administration believes Fannie and Freddie are past their peak losses, and the vast majority of those have stemmed from loans it bought as the mortgage boom turned to bust.
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My thoughts:
1. If they let the maximum loan amount expire on October 1st, and the new maxium loan amounts drop $100,000 or so, it should create a real frenzy in the $800,000 to $1,000,000 range between now and then. We’ve already seen that buyers would rather wait, than pay too much, so I don’t think every listing in that range is going to sell just because it’s for sale.
2. The costs of obtaining a mortgage are going to increase. Between Fannie/Freddie gradually raising fees they charge lenders, more-costly mortgage insurance, and rising interest rates, buyers will fret that they better get in now before loans get more expensive.
3. The banks will be slow to roll out private securitization, drying up the availability of mortgages in general.
Many sellers will likely stay ignorant, just hoping for a miracle to fall in their lap. But for those who are willing to put an attractive price on their home, especially in the $700,000 to $1,100,000 range, they should find an exuberant audience.
It boggles my mind when people (not singling you out, Jim) say “better get in now before rates rise.” When rates rise PRICES GO DOWN. LOWER PRICES ARE BETTER!
What the USA needs is better education so people can think for themselves and question what they hear from the media and those who sell.
grizzly,
Here’s some “buy now” sayings to expect this summer…
1. Rates are starting to going up. Better buy now.
2. FHA is going to raise down payment requirements. Better buy now.
3. FHA isn’t going to allow loans as big as they used to. Better buy now.
4. Banks are going to be harder to qualify for mortgages with. Better buy now.
5. Supply of houses is being constrained by the banks. Better buy now. (So you can get an easy gov mortgage)
6. Etc Etc Etc
The truth is that there’s a large amount of houses banks aren’t foreclosing on and there’s a large amount of people not paying their mortgage. The other side of the coin is that there’s a lot of people on the sideline waiting for a chance to buy. Once government decideds to stop supporting the deadbeats things are going to change.
The things people looking to buy have on their side is…
1. We pay taxes. (Have to keep the credit score up. Eventually this will become too exciting for gov to ignore)
2. We have money.
3. We pay our bills.
Jim, I don’t quite understand why we’d see so much exuberance in the 700K to 1 million range. When you posted stats of percent downs on these high priced homes they all had high cash down payments and very few were FHA/VA. If FHA/VA lowers their limit it would seem to make no difference since there aren’t many high end home buyers that are using these type of products. Maybe I’m missing something though.
I know that with the stock market rising many people think they could make a better return on assets than putting a big down on a home but I’ve yet to see evidence that high net worth home buyers are putting minimum down payments. Maybe there is a group of people in this boat that are just waiting, but that seems like speculation rather than fact at this point.
This is a bigger set up than the measly tax credit that spiked the market last year. And, the market that is buying the +$700K is going to freak-out. These are informed and prudent people who know about finance & interest.
So, big spike in prices and number of sales which helps clear more inventory in the middle range. Then, a big hangover again with a seasonal downward drift after November. Followed by a steady plateau underpinned by a robustly growing economy with a nearly total absence of new housing inventory. Meaning inflation, meaning home prices will rise with inflation.
Meaning, buying now is a smart move. The hype about interest rates rising and depressing sales prices is vastly overstated.
Just so we’re clear, you’re predicting a spike in prices and sales? Your rationale being that prices exist in isolation of supply of credit? Interesting.
livinincali,
Yes, very few high-enders are using FHA/VA due to their excessive mortgage insurance. Fannie/Freddie is different than FHA/VA, with 20% down there is no mortgage insurance, and preferred rates.
Virtually every buyer in SD today is trying to stay under the max Fannie/Freddie $697,500 because those rates are roughly a half-percent lower than jumbo rates.
FHA/VA are the low-down-payment programs that the government will insist stay around so they can say they don’t discriminate against poor people, but I don’t exactly get the correlation.
(not singling you out, Jim)
I appreciate that grizzy, thanks.
I probably have it worse than anyone on this topic.
Here we openly discuss how to be well-educated about your decisions, especially on pricing, and as a result, have a great group of buyers ready and waiting for the right house to come along.
When they come up, we regularly get beat out by buyers getting lousy advice (mostly from their agents) – and paying 5% to 15% more than we will.
So YES to your:
What the USA needs is better education so people can think for themselves and question what they hear from the media and those who sell.
I always hear people claim that the higher the interest rate, the lower the home price. This makes perfect logical sense given that most people buy based on what they can afford each month.
But I’ve never seen any actual evidence for this. The corollary of this theory is that low interest rates lead to higher real estate values, but I see no evidence of this either. Does anyone actually have any hard evidence that higher interest rates will cause home values to drop?
(See this blog post )
my link didn’t work: http://blog.lucidrealty.com/2010/02/22/will-rising-interest-rates-kill-the-real-estate-market-2/
My defense on this is probably due to getting an offer (thanks to Jim’s partner Richard) accepted just yesterday, here’s hoping prices don’t drop too much more…
Any evidence would be bumpy and imperfect, because sellers don’t give a hoot.
Rates and prices have both gone down together the last few years.
Thanks Matt for mentioning Richard publically, he has been doing an outstanding job for our clients (3 sales this week), and deserves recognition.
But I’m a little uneasy about him being called “partner”. We’re more like Batman and Robin.
I think requiring people to put more money down will make it harder for some people to buy. That’ll mean prices will have to come down for those starting out.
I wasn’t sure what the right term was. He always claims he is your boss…
“Virtually every buyer in SD today is trying to stay under the max Fannie/Freddie $697,500 because those rates are roughly a half-percent lower than jumbo rates.
FHA/VA are the low-down-payment programs that the government will insist stay around so they can say they don’t discriminate against poor people, but I don’t exactly get the correlation.”
Ok so what were saying is that Freddie/Fannie lowering the limit by $100K will cause a dash of high end buyers to save themselves 0.5% in interest rates. It seems like a plausible theory but just in the last 3 months we’ve seen 30 year fixed mortgages loans go from 4.25% in early November to 5.05% today. While that rise is somewhat unpredictable I still don’t see much evidence that higher rates are causing buyers to hurry up and get out there and buy right now.
I know people said rates going up would create a sense of urgency in buyers but sales numbers so far say things are about the same as last year during this time. Maybe it’s just not enough well priced inventory out there but the argument was higher rates would get buyers to rush out and pay the seller’s pricing. I’m not saying it won’t happen but so far the evidence isn’t very promising.
I think it’s about time for you to get your own blog.
“But I’ve never seen any actual evidence for this. The corollary of this theory is that low interest rates lead to higher real estate values, but I see no evidence of this either. Does anyone actually have any hard evidence that higher interest rates will cause home values to drop?”
It’s been 30 years of steadily failing interest rates, so the last time we had an environment of a possible long term rise in interest rates was back in the 1970’s. The question becomes how closely do we resemble the 1970’s today. Labor managed to win quite a few concessions on wages back then and the 2 income household started to become a reality.
If we can expect wages to rise in the current environment and the unemployment rate to go down maybe home prices will rise with rising interest rates. If wages fail to keep up with inflation and rising interest rates I find it difficult to come up with an argument for rising home prices. Not to say it won’t happen but household formation and house buying comes from jobs with wages that support affordability.
Affordability measures which have come down to reasonable levels are mostly a function of lowering the interest rate right now. It’s probably why there a fair amount of focus on what a rising interest rate does to the housing market.
Look at the math
350K @ 4.25% = 1721 so an income of 60K/yr and a gross ratio 35% makes it affordable.
350K @ 5% = 1878 so it takes an income of 64.5K/yr to hit that same ratio or a home price of 320K to hit that same 0.35 ratio
350K @ 6% = 2098 so it takes an income of 71.5K/yr or a home price of $290K to hit that ratio.
1% interest rate change = 7% more income or 10% less home price to stay in the affordability zone.
We’d be moving in RIGHT NOW if there were more well priced quality inventory. I’m talking about a house that doesn’t back up to a 6 lane highway or on less than a postage stamp looking into the neighbor’s bathroom. I’ll take a trashed house in the right location and with good layout if the price right. Interest rates, as long as they don’t go sky high, fear of depreciation, NEITHER are affecting our decision. It’s the inventory!
Regardless of interest rates (or perhaps matching them in ratio) inflation (as experienced in the 70’s and 80’s) is coming back into fashion. The The U.S. fiscal deficit currently exceeds 10% of the GNP of the United States, shows no sign of reducing and has been that high for a while. To see how this will affect the property market compare the ratio of property prices to gasoline prices from 1970 to the present. If you smooth out the line you will see a correlation, have you noticed gas prices reducing? With inflation at 6% your house price will have doubled and your mortgage payment in real terms halved after you are just over one third of the way through a 30 year mortgage. Property prices HAVE to rise due to this inflation and the increase in the population of the U.S., it may not happen this year or next year but it is INEVITABLE.
Sorry, make that the trend is INEVITABLE 😉 For examples of this I am recieving more money on one of my properties in annual rental than I paid for it 20 years ago, or ask Jim to compare the recent sales price of his moms house versus the original purchase price. Inflation makes the purchase of hard assets like property very cheap over the long term.
Matt: where have you been the last 10 years? The entire bubble (and the latest criminally ignorant government intervention) was based on continually cheaper lending that kept the monthly costs the same while the price went higher. Put another way, the monthly cost of owning a given property is relatively unchanged in a decade or two because the rates and lending programs went lower and became more stupid.
same monthly payment = higher price x idiotic loan.
Now rates can only go up and this will work in reverse.
same monthly payment = lower price x less idiotic lending
andrewa: I know lots of people (like Sully) who are getting half as much in rent (or 0, like Sully) for spaces in their 4 year old strip malls or rental properties as they did recently. A good friend has had every tenant ask him to lower their rent. If you’ve held a property for 20 years, you’ve been a beneficiary of the continually lowering rates… so have almost all of the finance industry, especially private equity and hedge funds. With rates rising, things purchased now at a high price aren’t going to look nearly as attractive and it’s going to be a lot harder finding someone to pay a rent that will cover or buy at an even higher price (the PE moto “buy high, sell higher” will revert to common sense “buy low, sell high”). You may see dollar inflation against some currency or in commodities, but you’ll see continued depreciation in assets and industries the government has kept from finding their natural levels like finance and real estate.
This includes property values which are still too high due to government intervention. In fact, if the government weren’t 95% + of the loan market, where do you think loan rates would be? What rate would you make a loan and how much would you charge? Credit Suisse says rates would be 2% higher. (that’s how I know it would be at least 3%!) The government can’t be this pathetic / selective socialists forever!
Agree with you, Grizzly.
Deb:
Those homes exist. We worked with Richard in Jim’s office, and found an ugly duckling which has turned into a swan with a little work and my wife’s ability to look through prior owner’s clutter. With views out to the eastern foothills and a peekaboo to the ocean. Hopefully you are looking, and using Jim’s crew. We ran them ragged for months with nerry a complaint, only their urging us on. Thanks again, Klinge Realty!