Michael Cordle
Equity & Debt Advisor
The Real Estate ReportSeptember 30, 2008
• Economic Commentary
• Weekly Interest Rate Overview• Real Estate News
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The Great 700 Billion Dollar Debate & Lower Interest Rates
Well, we're back to the drawing table and hopefully back to a vote in the House this Thursday in trying to get a re-worked version of the Emergency Economic Stabilization Act of 2008 passed to help with the economy and real estate financing. Today's failure to pass the bill as currently drafted resulted in the Dow falling 777 points toward the end of trading today. As a result, interest rates are continuing their downward trend. Now is the time to be prepared to look at refinancing or purchasing as the cost of mortgage monies just got less expensive.
It is very interesting that on Friday night Obama and McCain were debating while Congress debated the Administration’s $700 billion mortgage bailout proposal. All week, the President, The Chairman of the Federal Reserve and Congressional leaders tried to assure the public and the markets that the deal would get done and they worked through the weekend to make sure that happened. Of course, the devil is in the details. Proposals being debated included limiting executive compensation for companies that benefit from the plan, increased foreclosure assistance and the ability for bankruptcy judges to modify mortgage notes.
While most are absolutely blown away by the size of the proposal, most understand that the package is not only justified but essential to restore the ability of lenders to loosen their credit strings. One major point should be made. The government is not necessarily spending $700 billion. They will be obtaining an asset that could increase in value, especially if the proposal contributes to a recovery in the housing and financial markets. As a matter of fact, the government could wind up in a profit situation. That would be very good with the annual deficit soaring. The more important question is–will it work? This is a crisis of confidence. If loans of any kind could be sold more easily, then financial institutions are theoretically more apt to increase their lending capacity. There is no doubt that tightening by lenders is a major factor in the crisis and that they will not loosen up until they can be assured that there are takers for the loans they have on the books that are not performing.
One negative response to the proposal has been an increase in oil prices and interest rates. Why would that happen? Well if the markets feel the proposal will work and that the economy will recover, then a stronger economy would produce higher oil prices and rates. Of course, if there is no increase in economic activity, there is also no reason why rates and oil prices will not just adjust back to where they were. Speculation may be interesting–but there is no way to understand what will happen even in the near future in this case.
Weekly Interest Rate Overview
The Markets: Rates reversed their downward trend this last week. Freddie Mac announced that for the week ending September 25, 30-year fixed rates averaged 6.09%, up sharply from 5.78% the week before. The average for 15-year fixed rose to 5.77%. Adjustables were also up significantly with the average for one-year adjustables increasing to 5.16% and five-year adjustables rising to 6.02%. A year ago 30-year fixed rates were at 6.42%. "Mortgages followed Treasury bond yields higher this week amid market uncertainty over the current state of the economy," said Frank Nothaft, Freddie Mac vice president and chief economist. "Compared with last Thursday, 10-year Treasury yields are up about 0.3 percentage points, and 30-year fixed-rate loans moved up about the same amount. And while up, interest rates for 30-year FRMs are still more than 0.5 percentage points below this year’s peak of 6.63 percent set the week of July 24th. The latest housing information for the third quarter continues to show some softness in prices and sales activity. House prices fell 5.3 percent over the twelve months ending in July – weaker than the market consensus – according to the Federal Housing Finance Agency’s purchase-only house price index. During August, the median sales price of existing single-family homes (excluding condominiums and co-ops) fell 9.7 percent in August over August 2007 according to the National Association of Realtors (NAR). Overall resales dipped by 2.2 percent between July and August, on a seasonally-adjusted basis."
Current Indices For Adjustable Rate Mortgages
Daily Value
Monthly Value
Sept 25th
August6-month Treasury Security
1.57%
1.97%1-year Treasury Security
1.97%
2.18%3-year Treasury Security
2.42%
2.70%5-year Treasury Security
3.09%
3.14%10-year Treasury Security
3.88%
3.89%12-month LIBOR–WSJ
3.237% (Aug)12-month MTA
2.664% (Aug)11th District Cost of Funds
2.698% (July)Prime Rate
5.00%
Real Estate News
The U.S. Department of Veterans Affairs, whose loans remain one of the few no-down-payment options in this tight market, have made more than 162,000 home loan guaranties this year, an increase of more than 31 percent over the same period last year. The VA has tried to streamline the loan process by allowing veterans to apply for a loan before they obtain a VA Certificate of Eligibility. Once the borrowers have demonstrated that they are otherwise eligible, lenders can access the program’s Web portal to use VA’s online Automated Certificate of Eligibility (ACE) system and obtain the certificate for the veteran. Many times, lenders can receive the certificate within seconds. The VA can process the application in less than 24 hours. VA-guaranteed home loans are made to eligible veterans, service members, and surviving spouses through private mortgage lenders throughout the United States. Source: U.S. Department of Veterans Affairs
Beginning on Jan. 1, 2011, fire sprinklers will be required in new one- and two-family homes and townhouses under a rule approved recently by the International Code Council that will be published in the 2009 International Residential Code. The mandate’s supporters say it will give residents more time to exit during a fire, but the National Association of Home Builders is concerned about the higher home prices and maintenance costs that will result. Though costs vary by community, the Fire Protection Research Foundation says sprinkler systems run an average of $1.61 per square foot of space covered. Source: Wall Street Journal
