Home Prices vs. Mortgage Rates

Let’s take a look at the impact of both home prices and mortgage rates on your decision to buy a home.

Obviously, both are very important not only in terms of whether you should buy (from an investment standpoint), but also how much house you can afford.

At the moment, mortgage rates are very close to historic lows, with the popular 30-year fixed-rate mortgage averaging 4.09 percent last week, according to data from Freddie Mac.

But while rates are low, home sales are still pretty flat, thanks in part to high unemployment, a lack of consumer confidence, and perhaps inflated home prices.

home prices are well off their housing bubble peaks, many feel they’re still inflated (but housing prices are different depending on the regional markets around the country).

Home values have lost appreciation from the peak of the market, and are currently coupled with near-record low mortgage rates.

Home prices are predicted to be pretty flat over the next several years, but mortgage rates are expected to rise.

So should you buy now while rates are low and prices have foreseeable downward pressure, thanks to all that distressed/shadow inventory and lack of confidence?
Or should you wait it out and let home prices hit bottom first?

Well, first things first, it’s nearly impossible to buy at the bottom. Anyone will tell you this, whether it’s a home or a stock or anything else. Predicating the absolute bottom, or even close to it, can be a tall order.

Home prices are also regional and local, so it’s not like home prices have fallen by the same amount throughout the country.

And not all home prices in the nation can be designated as cheap, average, or expensive – they vary greatly.

At the same time, it’s hard to argue that mortgage rates nationwide are not very low and only expected to rise.

That said, let’s look at a scenario where mortgage rates rise and home prices slump.

Example on Conventional Purchase with 20% down:

Sales price: $400,000
Loan amount: $320,000 (20% down = $80,000)
Mortgage rate: 4.09%
Mortgage payment P&I: $1,544.38
Total paid: $555,976.46

Now if home prices fall 10 percent over the next year or two, while mortgage rates rise from 4.09 percent to 6.00 percent, which isn’t necessarily unlikely.

Sales price: $360,000
Loan amount: $288,000 (20% down = $72,000)
Mortgage rate: 6.00%
Mortgage payment P&I: $1,726.71
Total paid: $621,615.60

(FHA or VA loans require min. 3-1/2% or 0 down)

Buying the home at the current higher price with the lower mortgage rate results in both a lower monthly mortgage payment and significantly less interest paid throughout the loan.

That could also make qualifying easier with regard to the debt-to-income ratio requirement. However, the down payment is $8,000 higher on the more expensive house, which could prove a barrier to home ownership if assets are low.

But we’re still looking at savings of roughly $57,600 with the larger / lower-rate mortgage.

This illustrates the importance of low mortgage rates. Of course, there are many variables that can come into play.

And who knows, maybe rates will stay relatively low and home prices will fall even more than expected over the next few years.

A Huge Housing Bargain -- but Not for You

NEW YORK (RealMoney) -- The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors -- vulture funds.

These homes, which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value.

You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs(GS_) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

in the process, these investors will instantaneously become the largest improved real estate owners and landlords in the world. The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.

On Wednesday, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD) and the U.S. Treasury Department issued a Request for Information (RFI) concerning the disposition of the inventory of foreclosed homes owned by the federal government.

An RFI is ostensibly a way for the federal government to get input from the private sector on how to accomplish the goals laid out in the request. But that's really just a facade, as the RFI was structured by the investors to begin with.

In reality, the RFI is a way for the members of Congress to find out if they can get away with bulk-selling these homes to private companies without incurring the wrath of their constituents, taxpayers and former owners of the properties.

Assuming taxpayers don't push back, the next step will be to issue a Request for Proposals (RFP). The RFP will be the bid and plan for these homes by investors.

The way to keep taxpayers from pushing back is to structure the RFI so that the real intention, the bulk sales, is masked by feel-good goals, such as stabilizing neighborhoods and increasing the supply of rental properties.

As intended, the mass media are playing their part in classic style. Every major newspaper in the U.S. has run articles discussing the plan as a rental conversion, allowing readers to assume that Fannie, Freddie and HUD will be renting the properties directly to families who need housing. And although there is an allowance for these kinds of rentals, it is a minor political facade to the obvious true goal of bulk-sale privatization of these homes.

The investors in this program have been waiting for this opportunity since the portfolio of homes owned by HUD began to spike in 2007, when foreclosures surged first in the "Rust Belt," principally Ohio and Michigan.

Since then, of course, the systemic collapse of housing has engulfed all of the major urban coastal regions of the U.S., as well as Phoenix and Las Vegas, and caused the homes owned by Fannie Mae and Freddie Mac, which are now under the direct control of the U.S. Treasury Department, to spike as well.

Even before this crisis occurred, HUD, i.e. the U.S. government, was the largest improved real estate owner in the world, because of its portfolio of foreclosed homes, which is classified as "real estate owned" (REO). The entire massive HUD REO Portfolio is quietly managed by a handful of private firms already, a group listed as Management and Marketing Contractors.

These M&M companies are principally owned by and employ former high-ranking government officials from the various germane agencies -- the Treasury, HUD, FHA and others. And they will provide the necessary access to the current government employees who are tasked with bringing this program to fruition. Once the privatization is complete, those government employees will move from their positions, and many will take up new employment at one of the M&Ms or the new vulture funds.

I am not currently aware of any way for retail investors to participate in this process.

It is probable, however, that once the privatization has occurred and the properties are generating rental income for the investors, the initial investors will cash out by forming real estate investment trusts (REITs), real estate operating companies (REOCs) or limited partnerships (LPs) that will be made available to retail investors.

This column by Roger Arnold originally appeared on RealMoney on Aug. 11.

Residential Real Estate Industry Cringes As Dodd-Frank Era Begins "as a consumer why should I care"

The financial regulatory bill known as Dodd-Frank, named for it’s two main congressional proponents, Chris Dodd and Barney Frank, has begun to kick in. The bill is more than 1,000 pages in length, and will address virtually every corner of the residential real estate industry.

Virtually no one in the industry will avoid the impact of this new and sweeping attempt at financial regulation and “consumer protection”. While it’s intent was to address the housing crisis, and protect consumers from unscrupulous lenders, the real estate industry is cringing as the bill begins to become active.

Nobody is quite sure which way the Dodd-Frank bill will go for real estate © RTimages - Fotolia.com

But there are so many pieces to this bill, that actual implementation of all of the sections will take several months, if not years. No one knows what the ultimate effect will be, but the real estate industry is cringing as it waits to see how this bill will impact the residential real estate markets in the U.S.

First, this bill gives new powers to the Federal Reserve to regulate the housing industry. This is new territory, and already some of the new rules proposed by the Fed have been the target of major concern amongst housing industry professionals. Most prominent among these is a rule that defines a “Qualified Residential Mortgage”. If implemented as written, this rule would require 20% down payments, and strict underwriting guidelines that even private home sellers who want to finance the sale of their home would have to follow. Obviously a rule that even affects private home sellers in addition to licensed professionals means that these rules will have an impact on every single home sold in the U.S.

The National Association Of Realtors has come out strongly against the rule as written, saying that the proposal will threaten the housing market by making it harder for buyers to meet the stringent requirements for qualifying. Any reduction in potential home buyers could deal another blow to an already weak housing market.

Mortgage Bankers, Home Builders and virtually any other group associated with the housing industry is concerned that these new rules will have a negative impact on the housing market.

Even private real estate investors and note buyers are concerned that the new rules will eliminate seller financing as an option for those buyers who have damaged credit or other financial problems. Under the new rules, private real estate investors who sell more than three properties per year would have to meet the same guidelines as any bank or lender, and would even have to become a licensed Mortgage Loan Originator just to sell their own properties with seller financing.

Sellers would still have to qualify the buyer under the “Qualified Residential Mortgage” rules, which do not allow for credit issues such as payments being 60 days late on a credit report. Since seller financing is commonly used to help a buyer who cannot presently qualify for a traditional mortgage, these new requirements would effectively keep sellers from helping buyers with credit problems.

The whole idea makes no sense. Restricting buyer qualifying at a time when home sales are at record lows does not seem like a good way to get the housing market and the over all economy back on track. Some even imply that this is not an attempt to protect consumers as much as it is an attempt to take over more control of the entire U.S. housing industry. So the industry watches and waits as these new regulations begin to take effect. Only time will tell how much they will help or how much they will hurt the housing industry.

Written by Donna Robinson - 04 September 2011