Interest Rates Rising, But Still Relatively Low

I have discussed interest rates often as they tend to be a critical element in the real estate market. For younger buyers these higher rates may seem "high" but in reality our rates still remain well below the established 50 year average. A while back I published some charts and graphs showing the plight of rates over the last 50 years.

Today I have returned with more data from Freddie Mac and when we look at the broad picture and compare it to the recent data the rates we have right now are still super low. We had a fairly long period with rates that were at or near all time lows dating all the way back to before WWII. These super low rates were largely produced with subsidies from the federal government. The feds were buying up mortgages to keep the housing market from completely imploding after the severe beating it took in 2009-11.

The real issue is that our economy over the last 15 years has been much more fragile than previous economic cycles. Our national government continues to pile on debt and now it is beginning to become a heavy anchor on the economy. Despite seeing robust growth in the economy, the low rates are a major reason we have the growth. As rates return to "normal" the economy will start to drag again. I am not predicting a recession per se, but interest rates this low are generally not healthy for the financial sector over the long term.

As for housing, we have seen hot real estate markets with 30 year fixed rates in the 7s. The problem right now, especially in high cost markets like the Northeastern US and the West Coast is that many buyers are priced out when rates go up. In more affordable markets rates can continue to rise and buyers will still be able to buy. 

Home ownership is still one of the best ways that a middle income earner can build wealth. With rates low, that wealth builds faster. Equity is gained more quickly with lower rates than with higher rates because mortgages are amortized and the lower rates mean more principle is applied with each payment.

The media does not always present the facts in their entirety and home affordability has many variables. income, interest rates, housing prices are major players and all of them need to be accounted when determining affordability. In 1971 the median household income in the US was $10,383 average Freddie Mac mortgage rate of 7.3%, and median home price of $24,500. In 2016 the numbers looked like this: $83,143 median income, 3.75% mortgage rate, $213,700 median home price. The median home cost 2.36 times annual income in 1971 versus 2016 where it was 2.57 times annual income. Housing prices has outpaced income growth but not by the huge margins many people think. When we apply the interest rates however actual cost of ownership is lower today than it was back in 1971. Assuming zero down, the payment on the median home in 1971 at the average rate was, $168 a month against an monthly income of $865 for a principle and interest housing payment of 19.4% of gross income. 2016 median principle and interest payment of $990 against month gross income of $6,929 yields 14.3%. The median home is cheaper today than it was in 1971 because rates are low. These are national averages and generalizations, of course, but it is important to keep in mind that now is still a great time to buy a house. Someday we may look back at the last few years as the "good 'ole days".

Any rate under 6.5% is still, historically speaking, a low rate. Our government needs to stop overspending and that seems to be something that everyone agrees on yet regardless of which political party is in power, the feds can't seem to stop spending more than they take in.

Since 2010 mortgage rates have been volatile but have never gotten very high. Average Freddie Mac par rates have not been above 5% since 2010. Remember that par rates are based on top tier credit and no cash rebates from lender. Right now, Freddie has the national average rates at 4.86% but this is for a strong borrower with no rebate. Rebate is a term to describe a payment the mortgage investor pays back to the borrower used towards the closing costs. Typically rates paid by a buyer is a little higher than these published figures. So as rates have crept up all year, they are still lower than they were in 2010 and well below the established average since 1971 which is roughly 7%.

That stated, rates are sitting at around 5ish, and that is still pretty darn low. Buyers that are playing the waiting game may find themselves in a worse position next year than they are now even as prices are softening. Higher rates will erode purchasing power faster than rising prices. Higher rates also slow down the speed at which equity is gained.

Lenders Follow the Money, Very Closely!

If you are buying a house and using a mortgage loan it is very important to follow the direction of the Loan Officer even when it seems redundant or even stupid. Ever since the 2008-09 crash the government has been putting banks beneath an ever watchful eye of regulators and under the oppressive thumb of the government. Every significant deposit or withdrawal into any account the borrower uses is carefully analyzed. The bank needs to know where the money came from and where it went.

Make no mistake about it, the bank will kill your deal and leave you standing at the proverbial altar with out so much as a Dear John letter if they can't "follow" the money trail to a happy place. by all means do not hide money under the mattress! Cash that magically appears from fairy dust will kill your deal faster than Superman saves Lois Lane.

Any funds used in the transaction should be well seasoned, in the account for several months or deposited from reliable traceable sources such as a payroll check, government agency, insurance company, pension fund, etc. Any larger deposits or withdrawals totaling more than a couple hundred dollars should be logged by the borrower so they can explain to the bank if needed. Also any funds used for the purchase of the home should be taken from the same account the borrower has reported to the lender. No funds should ever be sourced from an account the lender has not vetted.

So in short, your moving and decide to have a garage sale. You do well selling off your unwanted junk. You net a cool and crisp $600. So you deposit the cash into your account. Keep a log of where that $600 came from. A loan underwriter is trained to assume that anything unknown is corrupt. Did ISIS give you that $600? Did your uncle give it to you because you can't really afford to buy this house? Do you moonlight as cat-burglar and this was the loot money? I am not kidding. They are very concerned about the comings and goings of your finances. Remember they are about to loan you hundreds of thousands of dollars based on your promise to pay them back. You are going to have complete control over the very asset that is collateralizing the loan. It is serious business and it is not difficult to comply, but you must comply if you want to play in their vault.

Unfortunately we had some loose regulations prior to 2008 that lead some people and companies to be dishonest and deceitful in their business practices. This helped create a very bad financial collapse that cost the American taxpayers dearly. As is typical with government, there was a gross overreaction that has lead to somewhat oppressive regulations that now create a new series of headaches for the American people.

It is very important to understand the age old adage "Those that have the money, make the rules". Banks have the money and if you want their cash, you play by their rules. The banks have to play by the government rules for a similar reason.

So be mindful and get your dream house.

Blast from the Past...

I am out of town today but this post from a year ago still holds true...

originally posted on 9/9/2013

Many banks are starting to use online auctions for the sales of REO (Real Estate Owned) This is the term commonly used to describe real estate that is owned by a bank, obtained in foreclosure. HUD has been doing auctions for years on its FHA inventory but their auctions are not run live. HUD auctions use sealed bids. REO managers have a different idea. They want to market the house in a classic Ebay style environment. They want to drive the price up as high as possible with a bidding frenzy. This can be a great way for REO sellers to sell, but can have pitfalls for buyers which I will discuss a bit later.

One of the real areas of concern I have is short sales. I see this movement towards online auctions with short sales. Many banks are having their debtors sign an auction agreement along with the other short sale documents. The house is then placed up for auction terms and often the auctioneer does not even notify the listing agent. It seems that banks are going to continue to push ethical boundaries on short sales and in some cases take advantage of the American people while cashing in on federal programs like HAFA (Home Affordable Foreclosure Alternatives).

I have had some positive experiences with one loan short sales under auction terms. It seems the first lien holder often pre-negotiates the deal with the auction house and the short sale can move ahead with efficiency. The problem is that there is sometimes a second lien and the auction house either fails to disclose to the buyer or discloses in a fashion that is difficult to find. This can cause allot of grief for the buyer and the home owner.

People that are bidding on these auction homes should have a real estate professional aid them in the process. Typically the homes are listed on the local MLS and your real estate agent will get paid by the listing broker under the terms of the listing agreement. By all means a buyer should always have representation in a transaction involving large amounts of money.

In general the auction houses appear to be decent business operators. The problem is that another party to the transaction is now involved. The more parties in a real estate transaction the more likely it is to fail. Buyers and sellers can be taken for a long and uncomfortable ride when there is two banks and auction house involved in the deal.

If a buyer decides to bid on an online real estate auction, they should consult their trusted local real estate professional. That agent can do some quick research to help the buyer decide whether or not the home is viable. The agent can also help determine a good bidding range. It is paramount to remember that auction terms are designed to get an emotional response by the bidders. The emotion that screams, "I want to win" so as to drive up the price. Some auctions even have disclosures that suggest overbidding will result in mandated payment even if the property does not appraise. This could be a problem for a buyer using a loan to purchase.

In my experience dealing with the short sale departments at most banks is akin to getting a root canal without Novocaine. So adding the auction element on these sales is surfing in dangerous seas. Caution is heavily advised.

Finally, there are some banks now taking their REO inventory directly to auction without listing on the local MLS. They hire a local licensed agent to make the sale legal under state law, but offer no representation for the buyer. I believe that American banks are already about as ethical as your average mugger, now they are trying to engage the direct home buying public in a "dark alley deal" that will almost certainly take advantage of the buyer. If the auction house is listing a property that is not listed on the local MLS, I would tell most buyers to run away. Seasoned investors may feel compelled to bid, but inexperienced buyers really should not take the risk of engaging in a transaction without a buyers agent involved.

Banks can be a little rotten at times

I generally like to keep my posts as positive as possible. Sometimes however it is difficult to avoid a subject that has some negative tendencies. This is one of those time and needs to be addressed. Many of America's banks are handling real estate transactions in an appalling way. Buyers should be aware and cautious when entering into a transaction with a bank.

As many of you may know, the banks managed to tap into a large chunk of federal dollars in the form of what we commonly call "the bailout". These banks through various government programs are able to offset losses in foreclosures and short sales. The government wanted to be certain that our financial system did not collapse under the weight of the market crash in late 2008. Regardless of how we feel about the so called, "bailout", it happened and it's all water under the proverbial bridge now.

The problem is that many banks are working the system and taking advantage of the taxpayers and buyers. Banks often stall and dig in their heels on short sale transactions until they finally foreclose. Often it is the case that the bank fails to close on a short sale transaction that would have netted them say $200,000 only to foreclose and get a net of $150,000. Then they slither over to the feds and get more "bailout" money from one of those federal programs. I have seen this transpire many times over the last five years.

The latest trend among banks involve all this REO (Real State Owned) they now hold. Much of this inventory they are holding could have been off loaded in the short sale process that they seemingly sabotaged themselves. Milking the feds is apparently not enough. Now these institutions are preying on innocent home buyers. Banks are posting REO assets on auction sites with a real estate firm that will work for a tiny fee to "list" the property on a local MLS with no cooperating broker arrangement. Then they try to get buyers to engage in the transaction without the traditional representation of a real estate agent.

The modern system of the MLS cooperating brokerage arrangement transformed real estate for buyers from a shady proposition to a safe and properly represented transaction over 40 years ago. Now these banks are trying to circumvent all of the positive progress we have made in consumer protection. They want to lure buyers to an auction website without representation. It seems that some local MLS systems are a willing accomplice to this rather dastardly deed. They do not seem to object to listings being posted with no cooperating brokerage arrangement. Thus we see this reversion to the slimy 1960s used car style of home sales by greedy banks that just want to squeeze a little more profit out of the house the feds already bailed them out on.

Buyers should be aware that the listing agent has an obligation to the seller to negotiate the best possible terms for the SELLER. Banks are exempt from state mandated legal disclosures and often use their own in-house addendum forms that may have serious negative consequences to buyers. Most real estate agents work for a brokerage that won't be too pleased at taking on the state regulated responsibility of agency with out a cooperating brokerage arrangement. This puts the buyer in a position of either being unrepresented or having to hire an attorney or real estate agent for an additional fee.The more likely scenario is that the buyer will enter into a binding contract with the bank without representation. Who do you think will get shafted in that arrangement?

Buyers should be very cautious before entering into these agreements. Buyers that use an agent to purchase the majority of homes listed on the local MLS will enjoy the security of being legally represented under the state regulated agency laws without having to pay that agent a fee. The cooperating broker arrangement on the MLS assures that the listing fee paid by the seller is shared among brokers. This gives buyers the confidence that they will be well cared for and properly represented in the transaction. Some of our seedy banks are working hard to destroy that arrangement just to line their pockets with a little more gold.

There are sharks in the pond so be careful my friends, be very careful.