Mortgage Rates Report

I know, I know... I'm shooting myself in the foot.  I'll start this essay with the conclusion; if you think prices are going to drop even farther, don't buy a home in San Diego...unless...

Let me explain.  Dean Calbraith wrote an article, in the Union Trib, about mortgage rates' affect on the affordability index in San Diego.  It was the standard industry hype from some local economists and mortgage professionals:

"The day of low interest rates is over," said Dan Seiver, an economist at San Diego State University. "Because of inflation, we'll be having interest-rate rises across the board. But having rising mortgage rates in the current real estate environment is like pouring water on a drowning man."

Eh...maybe, Dan.  You'd be surprised at the resilency of a real estate market to higher rates.  Higher inflation could also lead to higher wages, which throws the affordabilty index out the window.  Purchase prices are permanent while loans are temporary; they can always be refinanced to a lower rate during the next economic cycle.

Oh, yeah.  I almost forgot.  I've been yelling about the affordability index since last Thanksgiving and higher rates since May 2, 2008.  Panic, if you're buying a home in July- lock your rate at application.  Don't fret too much about an economic cycle, though.

Gary London, who heads The London Group Realty Advisors in San Diego, said, "It's inevitable that interest rates will rise, which will only slow what's increasingly becoming a festering situation with real estate."

Many local real estate experts say prices will decline at least through the end of this year and probably through much of 2009. The main reason for that drop is that we're only halfway through the wave of foreclosures emanating from the bursting of the housing bubble.

Maybe, Gary.  If prices plummet more than they have, as you predict, a 4% 30 year fixed rate won't get people off the fence.

Would-be home buyers face a challenge: Do you wait to buy your home until the market hits absolute rock bottom by which time interest rates may be zooming skyward? Or do you buy a home now at interest rates that are relatively cheap, and then watch the selling price of your home erode over the next year or year and a half?

That really is impossible to say.  Timing the bottom is never a good strategy for a long-term investor.  Buying a property you can afford is.  In some areas of San Diego County, prices are at their 2002 levels; a bargain indeed.  In some of the worst affected areas, prices may ALREADY have bottomed as investors step up and buy.

"The rising rates make things a lot more complicated," said T.J. Knowles, a mortgage broker with CalBrokers in Del Mar. "If you wait too long for the price to drop before buying a house while the interest rate is rising, over the long term you could cost yourself a ton of money."

Or not, TJ.    Again, prices are permanent, mortgage loans are temporary.

Call me to run the numbers.  You may very well buy a home for $400,000 today  that drops in price to $368,000, in 2009.  It may also rise to $410,000 at the end of next year.  They key component is your expected hold time.  If it's 7-10 years, you're probably going to make money, regardless of how close you come to the bottom.

Oh, now back to my conclusion:  Don't buy a home today if you think prices are going to continue to drop...unless...

they've dropped as far as they will already.

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Yesterday, I wrote about the possibility of a Canadian mortgage crisis akin to the American mortgage crisis.  It would have been less controversial to side with the CBC decision to cancel its renewal of "Hockey Night In Canada" theme song.  To my brothers and sisters in The Great North:  It was a warning, not a criticism.

I'm not alone in my warning.  Here are some articles offering caution:

The Canada Mortgage and Housing Corporation (CMHC) warns of slowed housing starts:

"Strong economic fundamentals such as continuing high employment levels, rising incomes and low mortgage rates will provide a solid foundation for healthy housing markets this year," said Bob Dugan, Chief Economist for CMHC. "Most of the pent-up demand that built up during the 1990s has now been fulfilled and residential construction activity will gradually move in line with Canadian demographic fundamentals. These factors will continue to exert downward pressure on housing starts, which will decline to 199,900 units in 2009."

Michael Shapcott at the Wellesley Institute notes the housing affordability problem in Canada:

The housing affordability gap the difference between actual incomes and the incomes required to afford a private rental unit is growing. And, as the affordability gap grows, renter households have less money to pay for other necessities such as energy, food, medicine, transportation and clothing.

Mark Argentino from the Mississauga Real Estate Blog, reported that the CMHC expects demand for housing to put downward pressure on prices.

Garth Turner documents the decreased housing resale volume and excessive leverage carried by Canadian homeowners on Greater Fool.

HouseHuntVictoria pleads with the CMHC to boost reserves for impending foreclosures:

One fact remains undeniable: never before has the Canadian taxpayer been more exposed to private lending practices than it is today. And as the real estate market winds down and inevitably contracts from its unprecedented expansion, Canadian taxpayers may well end up "insuring" the bad lending practices of banks, private mortgage lenders, the speculative buying activities of would-be real estate investors and the poor insurance decisions of CMHC who agreed to back them.

Does any of this sound like America in 2005?  This is a warning Canadian investors not a prophecy.  If you're heavily invested in Canadian real estate, it may make sense to diversify and take advantage of the currency disparity by investing in an already decreased asset.

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I was in Phoenix, for the better part of the last two weeks so I'm catching up on my e-mails.  I've been exchanging messages with the Brendoor family (not their real name) about a home purchase in San Diego.  The Brendoors have a lease expiring at the end of the summer and want to see if they can buy a home by Labor Day.

Here are some of the questions I'm addressing:

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The National Association for Realtors convinced FNMA to lift its "declining market" down payment policy:

Fannie Mae is scrapping a "declining markets" policy that required loan underwriters to boost minimum down-payment requirements by 5 percent in areas where home prices are falling or difficult to determine.

Beginning in June, Fannie Mae will instead require 3 percent down payments for conventional, conforming mortgages processed through its Desktop Underwriter automated underwriting system, and 5 percent minimum down payments for loans processed manually. Larger down payments may be required depending on occupancy, property and transaction types.

The new single national down-payment policy will retire a controversial declining-market policy announced in December. The policy, implemented Jan. 15, boosted the minimum down payment required by 5 percent when Desktop Underwriter flagged a property as being located in an area of declining home prices or where it was difficult to assess home values. The policy also applied if an appraiser determined a property was in a declining market.

Californians rejoice, right?  Not so fast.  There are a few more moving parts in the mortgage industry and the NAR lobby can't provide enough lubricant to remove the rust.  Mortgages with a down payment of less than 20% can't be funded without:

a) a corresponding second mortgage for the amount over an 80% loan; NOBODY is making second mortgages at the 95-97% level.

b)  private mortgage insurance; the PMI insurers just aren't playing ball.

MGIC, the big private mortgage insurer, has their own "restricted markets list".  If the property falls in a restricted market,  down payment and credit requirements are more onerous than the FNMA policy.

FNMA threw a party but nobody showed up.

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