Interest Rate chart 8-1-11

It’s hard to believe that rates are as low as they are these days.   If you’re not buying, think about refinancing your home.   I just refinanced my home with a 7 year arm for 3.1%!  It lowered our monthly payments by $300.

An adjustable mortgage may not work for everyone, but with fixed rates in the low 4% range, there’s a huge savings that can be had there, too.

Buying or refinancing a home or condo now is not for everyone.  Unfortunately, some people may not want to or are not in a great position right now to do either.  But if it something you’re considering, then check out what the payback would be based on the number of years you might stay in your home.  If you plan to be in your home for a while, it could very well be worth refinancing.  Talk to a mortgage professional you trust to help you decide if it’s worth taking advantage of these great rates.

Should buyers be required to have a 20% minimum down payment in order to purchase a home?  Is this the answer?   Lawmakers in the other Washington, not here in Seattle, are looking into this issue.   Congress is currently looking at the Quality Residential Mortgage issue:

As federal regulators wrestle with setting the definition of a qualified residential mortgage (QRM)–which under the Dodd-Frank Wall Street Reform Act would be exempt from risk-retention rules–a bi-partisan group of U.S. House and Senate lawmakers urged regulators not to be rigid in setting the rules.

Some people might think a large down payment provides more insurance that a buyer can handle the mortgage.  After all, if the buyer had the discipline to save a significant amount of money, then the buyer should have the discipline to make mortgage payments.  This is true, discipline is required to save a substantial down payment.

But was the lack of a 20% down payment the main source of failed mortgages and the housing meltdown?

From the truth about mortgage blog:

Mortgage default is not related as much to a high monthly payment, but to the depreciation of home values and higher unemployment.

A report released by the Boston Fed last week found that home price depreciation is a leading cause of mortgage default, challenging common arguments that attribute rising delinquencies to unaffordable mortgage payments.

“We find that the DTI ratio at the time of origination is not a strong predictor of future mortgage default,” the report said.   “A simple theoretical model explains this result.”

“While a higher monthly payment makes default more likely, other factors, such as the level of house prices, expectations of future house price growth and inter-temporal variation in household income, matter as well.”

The economists estimated that a 10 percentage-point increase in the debt-to-income ratio increases the probability of 90-day delinquency by just seven to 11 percent.

Conversely, a one percentage-point increase in unemployment rate raises this probability by 10-20 percent, and a 10 percent fall in house prices raises it by more than half.

From Senator Johnny Isaksen:

“We don’t have a down payment problem in this country, but rather an underwriting problem. I strongly urge regulators to rework their overly rigid down payment requirement for QRM. If left as is, it would make recovery in the housing market almost impossible.”

What happens to those who wish to buy a home, but don’t have the down payment?

Federal regulators have proposed a rule that would require most borrowers to come up with a 20% down payment on a home purchase. Buyers with less than 20% to put down would have to choose between higher fees and rates — up to 3 percentage points more — compared with folks who have the 20% or a 16-year delay while they save up the necessary down payment.

That’s how long it would take the typical American family to save enough money for a 20% down payment and closing costs, according to estimates of 2010 median income and home prices from the NATIONAL ASSOCIATION OF REALTORS® and the 2010 national savings rate.

When I read the excerpts from these other blogs, I’m seeing declining house values, unemployment, and bad underwriting as the causes for the financial meltdown.  My vote goes to bad underwriting as the main culprit.    I’m not seeing a low down payment as the culprit.  Everyone knows that changes  are still needed for our financing rules, but is the 20% down payment the answer?  If you think, no, then please alert your congressional representatives in Washington.

Here in Washington State you can contact:

Senator Patty Murray

Senator Maria Cantwell

Rep. Jay Inslee

Rep. Rick Larsen

Rep. Jaime Herrera Beutler

Rep. Doc Hastings

Rep. Cathy McMorris Rodgers

Rep. Norm Dicks

Rep. Jim McDermott

Rep. Dave Reichert

Rep. Adam Smith

Seattle/Eastside Condo Sales, August 2009

(The absorption rate, the percentage of condos selling,  is the number of condos for sale in any given month divided by the actual number of condos sold that month.  So if the absorption rate or chance of selling is 10% that means out of 100 condos for sale, 10 received offers and sold.)

August, 2009                            1429 condos for sale          206 condos sold           14% chance of selling.

July, 2009                                 1441 condos for sale          203 (now 171) condos sold   14% (now 12%) chance of selling

August, 2009                            1495  condos for sale         159 condos sold         10% chance of selling.

*Adjusted from previous month’s original numbers to reflect the actual number of condos sold and closed.  Some of the sales originally reported last month failed and did not close.

More Seattle Eastside condos are selling. Numbers are more than double the figures from January and February of this year.   But still, some sales are falling apart and not closing because of inspection, financing issues and appraisal issues.

Sales don’t close for a variety of reasons: an appraisal that came in lower than the selling price, an inspection that both buyer and seller couldn’t agree upon or a lender who didn’t put the loan package together properly.  Unfortunately, there are other reasons sales fail to close, such as short sales in which a seller is selling a condo for less than is owed on the property and the bank does not agree to sell the property at the price agreed upon between the buyer and seller.

Important news for all condo buyers: FHA spot approvals will be going away.  If a unit in a  condo association could meet designated FHA guidelines and the whole complex is not approved, then an offer and approval for this spot FHA loan must be approved by the lender by October 1st, only two weeks away. FHA financing allows for a borrower to put just 3.5% down.

The absence of FHA spot approvals and the end of the $8000 first time home buyer tax credit could affect the number of condo sales in the future.

As of May 1st, the appraisal industry had to meet new Freddie Mac guidelines called The Home Evaluation Code of Conduct, subtitled “Enhancing The Independence of Appraisers“. The debate about the new home valuation code of conduct has been going on since it was first announced last year and is going on to this day. Before the financial meltdown, there were appraisers who needed to be run out of the appraisal business for appraising properties for exorbitant prices, but the reality is there is now a new set of problems created by these new appraisal guidelines.  The appraisals or home valuation system has not been fixed, it just has new problems.  In today’s real estate world, a request for an appraisal is sent to an independent clearing house and the next appraiser on the list is selected to do the job.  This system has been designed to “enhance the independence of appraisers,” as mentioned above.

Now that this “new and improved system” has been in place for just over 30 days, I’ve had the good fortune to see  how it works in reality. Take the latest appraisals I’ve had on two  of my recent sales.  For those of you in the Seattle area, you’ll understand how far flung the different areas are that each appraiser had to drive to in order to complete assigned appraisals.  Appraiser #1 scheduled his appraisal late in the day for a home I’d sold in Redmond, Washington.  He had to come late in the day, because he was coming from an appraisal on Vashon Island.  Vashon Island, the last time I looked, is southwest of Seattle proper in Puget Sound, while Redmond is located east of Seattle across Lake Washington from downtown.  Between ferries, bridges, and highway travel, the appraiser may have to travel 1 1/2 hours (on a good day) between these two appraisal appointments. Appraiser #2 called to appraise a listing of mine in Kirkland, Washington, again on the eastside of Seattle.  This appraiser was coming from an appointment in Maple Valley, which is a city much further south and east of Seattle.

This map shows the location of the places the two appraisers had to go to do their job.  If you click on “view larger map”, you’ll be able to see the location of these cities.  Oh, I forgot, Vashon Island, which is in a different county, doesn’t show up on the map  because it’s so much farther south of the Seattle!  If you look for Maple Valley that, too, does not show up on this map.  Maple Valley happens to be south of Issaquah.

View Larger Map

Silly me, when I have a client who wants to look for a home on Vashon Island, I refer the client to a Realtor who knows the island.  The same goes for Maple Valley.  I could show homes in all of the far flung regions of Seattle/KIng County, but I don’t, because it’s a disservice to my clients.  I don’t know about the different school systems and how they affect the value of the homes in each of the cities, counties or islands in the area. I don’t know about the different builders in the area, the different neighborhoods, the shops, parks, etc, etc. Don’t appraisers need that same knowledge to evaluate properties?  How can appraisers know all of these areas well and give an accurate appraisal for a home? It’s a problem happening all over the country right now.

The second problem I’ve seen come up with appraisals is a little box checked by the appraiser.  As part of the appraisal report, the bank wants to know if the real estate market is appreciating, remaining stable or declining. Recently, two appraisers have checked the box labeling the Seattle/Eastside market as “declining.”  What a shock, this is a market where home prices have gone down!  I wonder who or where appraisers are checking anything but “declining” in that box.  In each case, because of this checked box,  the underwriter required a second appraisal.

The lending/appraisal industry was far from perfect before, but these “improvements have and are wreaking havoc with home prices and the entire loan process. If appraisers are not really familiar with a city or neighborhood, there is no way that the majority of appraisals will be accurate.  This could hurt consumers, both home buyers and home sellers, if properties are not accurately evaluated. The appraisal process needs an industry watch dog and stricter guidelines, but having the appraiser who’s next in line complete an appraisal in an area he/she knows nothing about dilutes the whole appraisal process. It’s a sad state of events for real estate.  I’m hoping the government will see the light and make reasonable changes to this system in the near future.

What problems have you seen since the change in real estate appraisals? My guess is the examples above are only the tip of the iceberg.

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a down payment.

Mr. Donovan spoke at the Realtor’s Mid-Year legislative Meetings and Trade Expo Live

According to Donovan, the FHA’s approved lenders will be permitted to “monetize” the tax credit through short-term bridge loans. This will allow eligible home buyers to access the funds immediately at the closing table.

Stay tuned.  As soon as I learn more, I’ll let you know in this blog.  Happy house hunting!

Will Washington State be the first state in the nation to offer a program to first time buyers to use the $8000 home buyer credit towards a down payment for a home?

Here’s a memo from Barbara Lally of the Washington State Realtors Association explaining the program that is in the works:

OLYMPIA, Wash. – The Senate Ways and Means Committee last night (Thursday) unanimously approved a measure designed to help first-time home buyers come up with a down-payment.  The committee adopted the measure as an amendment to the proposed Senate biennial operating budget.

The proposal would make the $8000 federal tax credit for first-time home buyers available at the closing of a home sale instead of when a buyer files a tax return. Home buyers would repay the $8000 after filing for and receiving a tax refund. The amendment creates a Tax Credit Advance Loan Program and authorizes the State Treasurer to deposit $25 million in a financial institution giving it the ability to open a line of credit to the State Housing Finance Commission to provide the down payment loans. The deposit would not deplete state funds, but would provide liquidity for the financial Institution to lend its own funds.

The program is the first of its kind in the nation and would work as follows:

• The State Treasurer’s Office would make an off-setting deposit in an FDIC-insured short-term
  account with a selected financial institution. The investment would earn a low interest rate to
  stay fully insured under federal guidelines.
• Realtors and other stakeholders back the loans with funds to provide security against losses.
• The financial institution provides the Washington State Housing Finance Commission a line of
  credit to advance up to $8000 to qualified first-time home buyers for a down-payment.
• Buyers repay the advance loan after filing for and receiving the tax credit.

The amendment is the result of the efforts of the Washington REALTORS®, Washington State Treasurer’s office, and Washington State Housing Finance Commission. State Treasurer James McIntire wrote the budget proviso and is helping to advance the measure through the state legislature.

State Sen. Steve Hobbs (D-Lake Stevens), who offered the amendment, said that using the $8,000 tax credit to help first-time home buyer make down payments could help jump-start the economy. Hobbs noted that home purchases have a significant impact on the retail and banking sectors of the economy and on state and local coffers. “In this recession we need to find new and innovative ways to stimulate the economy. This proviso will slow the decline of our housing market and stimulate the economy,” Hobbs told the Senate Ways and Means Committee.

“Down-payment assistance to our first-time home buyers is the key we need to unlock economic activity throughout the state,” said Greg Wright, President of the Washington Realtors. “This tax credit is new money that we can put to work now to help the housing market and ignite economic action statewide.” According to a study by the Washington Research Council, each home sale by a first-time buyer generates $11,100 in state and local tax revenue. Every 1,000 home sales generate $126 million in general economic activity, supporting 711 jobs.

Home buyer tax credit fact sheet

The goal of the program is to get the money to buyers efficiently and return the federal refund quickly so that the HFC can turn it around to provide more assistance.  The funds may revolve as many as three times before the tax credit expires, reaching up to 9000 first-time homebuyers.  These “bridge loans” would expire at the same time as the federal tax credit, on November 30, 2009.  All of the bridge loan funds return to the state system by early 2010 to use for capital projects in 2010-11.

“With homes at affordable prices and interest rates at historic lows the $8,000 tax credit opens a window of opportunity that may never be seen again,” said Wright, a Chelan Realtor. “The Senate’s budget helps bring that opportunity to families throughout our state.”

Lack of a down-payment is the only barrier to home ownership for up to 50 percent of first-time home buyers, according to J. Lennox Scott, Chairman and CEO of John L. Scott Real Estate.  A recent study by the Federal Reserve Board showed that home ownership for people 35 years and younger increased by as much as 43 percent when a primary mortgage was combined with a down-payment assistance loan.

“First-time home buyers are the most critical to the recovery of the housing market and our overall economy, because their purchases set off a chain reaction of buying and selling,” Scott explained.  ”The first step toward stimulating the state housing market is making the federal tax credit available at the closing table and increasing down-payment assistance.”

(REALTOR® is a federally registered collective membership mark which identifies a real estate professional who is a member of the NATIONAL ASSOCIATION OF REALTORS® and subscribes to its strict Code of Ethics.)

Interestingly, a private company in a suburb of Atlanta is proposing the same thing.  The article from NuWire Investor did not have positive things to say about the program

What do you think about the possibility of using the tax credit as part of the down payment for a first time buyer?

Click to enlarge

• The price of crude oil has declined 71 percent from July 2008 to February 2009 (from $133/bbl to $33/bbl), and retail gas prices have dropped 53 percent.  To fulfill annual driving needs in July 2008, consumers were spending an average of $3,045 at $4.06 a gallon; In February 2009, that figure declined to $1,440 at $1.92 a gallon – a savings of $1,605 per year.  And with the average American household owning two cars, the potential savings are even higher.

• Food inflation has moderated since July 2008 to current levels of 2 percent.

• While a great deal of attention has been focused on those people who had subprime mortgages and are now experiencing foreclosures on their homes, 30-year fixed mortgage rates have declined 1.30 pts during the same period, also resulting in potential savings.

• Tax credits in the stimulus legislation passed by Congress will put an additional $672 in the average worker’s pocket.

• There are some wonderful choices.   In King County alone, there are over 13,000 properties available to pick from.  On the eastside, there are 3500+ homes and 1200+ condos available to purchase.  ( I have some great homes listed to buy among those 3500+!)
• There are more homes available to buy for under $500,000 (and even under $300,000) than there have been in years.
• 61% of the Seattle/Eastside  homes are now selling for under $500,000.
• There are ready, willing, and able sellers who want to sell their homes.  Many sellers understand the current real estate market and are pricing their homes to get them sold.

Interest rates are just plain fabulous.  Bloomberg News recently compared the current interest rates to the rates available during WWII!

• Some lenders are offering 30 year fixed mortgages with a 4.625% interest rate.

The Federal Tax Credit for First Time Home Buyers or Those Who Have Not Owned a Home over the last three years is a terrific bonus.

• Until the end of November 2009, first time home buyers may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit.  Remember a tax credit is very different than a tax deduction – a tax credit is equivalent to money in your hand, as opposed to a tax deduction, which only reduces your taxable income.
• The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.  Buyers will have to repay the credit if they sell their homes within three years.

The above is all great news during times in which there hasn’t been a lot of good news to report.  Making the decision to buy is a very personal one and doesn’t work for everyone.  Some people have layoff concerns, as an example, and are hesitant to make a purchase.  For some, waiting it out on the sidelines is the best thing to do.

Are Seattle/Eastside home prices at the bottom yet? We probably won’t know until after we get there, but prices are back to 2005 levels. The areas of the country with deeper home price cuts than Seattle’s Eastside are areas in which the economy is struggling even more than we see here.  But for those who have secure jobs, good income,  great credit scores, and plan to stay in a home for 3-5 years, this is a terrific time to buy a home.

What do you think?

• Everyone now knows the tax credit will be $8000 with no payback required.  It’s only available to first time buyers or those who haven’t been home owners for the past three years.  The credit is available for homes purchased before December 1, 2009.  I’m wondering if a buyer has to close on the home purchase before December 1st or have an accepted offer by that date.  If the home sale must be closed by the first of December, then buyers need to be buying no later than the end of October to make sure they close on time.  Does anyone have the answer and know whether it is an accepted purchase agreement or does the home sale need to be closed?
• Did you know if you use tax credit, you must stay in your home for three years or you would have to repay the credit?  I like this idea because it helps to keep home ownership more like it used to be:  buying a home to live in, rather than as a quick investment.
• Government backed loan limits will be $729,950 in areas with expensive homes. This should mean the Seattle/Eastside, but have not heard.  Does anyone else know if this means us?
• There’s more than $50 billion designated for foreclosure mitigation, some of which will come from last year’s TARP money. It’s about time more is done to stem the tide of foreclosures.

In reading the summary of the stimulus plan I found this section, which I think is important for all homeowners.   The quote below is taken from a summary of the plan released by lawmakers.  You can find the  summary of the plan’s key points in this Inman News article.

Tax Credits for Energy-Efficient Improvements to Existing Homes. The bill would extend the tax credits for improvements to energy-efficient existing homes through 2010. Under current law, individuals are allowed a tax credit equal to ten percent (10%) of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during the taxable year. This tax credit is capped at $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane, oil furnace or hot water boiler, and $300 for any item of energy-efficient building property. For 2009 and 2010, the bill would increase the amount of the tax credit to thirty percent (30%) of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements during the taxable year. The bill would also eliminate the property-by-property dollar caps on this tax credit and provide an aggregate $1,500 cap on all property qualifying for the credit. The bill would update the energy-efficiency standards of the property qualifying for the credit.

The tax credits for energy efficient home improvements ties into this week’s NPR’s Sunday edition interview with The New York Time’s economic reporter, David Leonhardt. He had some great ideas to rethink how we spend our money.   He thinks spending should be considered in tandem with future savings, not just with consumption.  Investing in a more energy efficient furnace, as an example, would create future savings in your energy bill.  Most of his suggestions centered on the cost of acquiring an item vs. the  future savings benefit.  A better furnace could cost more money in the beginning, but give a larger payback on monthly heating bills.

It’s unfortunate the home buyer tax credit was reduced.  Fewer homes may sell as a result.  However, cuts did need to be made in different parts of the plan to get it passed.  I like the incentive for making energy efficient changes to a home.  I’m hoping it will get  more people to think to make a change as a long term payback.

What are your thoughts about the stimulus plan?