FED Lowers Rate for the First Time in 4 Years

For the first time during his tenure and for the first time in 4 years, Fed Chairman Ben Bernanke lowered the actual Federal Funds interest rate. The Fed had previously lowered the the discount rate by a similar 50 basis points, but that was largely viewed as symbolic.

Upon the announcement the stock market soared and finished the day near highs gaining about 3% across the board. More than the actual rate reduction, this most recent cut more importantly represents the Fed's willingness to do what it takes, maybe not to bail out the market, but at the very least to smooth out the current economic environment.

Lenders and Banks have tightened their underwriting guidelines in the face of an increasingly tight interest rate market because they wanted to protect themselves from future mistakes like the sub-prime lending debacle that the industry has been embroiled in these past few months. But in our opinion, it seems as if they might have taken things too far and even now perfectly good homebuyers are having difficulty in securing financing. With this rate cut, though not directly tied to mortgage interest rates, lenders should feel more comfortable about the economy as a whole and hopefully will start to ease their guidelines to bring more activity and clarity to the real estate market.

Our take is that the mortgage rates probably hit six month highs a few weeks ago and that buyers can probably start to take advantage of some of the inventory buildup that's happened over the past few months. Sellers should also breath a sigh of relief as buyers might actually be able to find the financing to buy the homes that they had been wanting to purchase as well.

Rates Draw Down

Borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 6.25 percent, down 0.17 percentage point from the previous week, their lowest since the week ended May 18 when they stood at 6.23 percent. Interest rates were also below year-ago levels at 6.32 percent.

Yields on 10-year U.S. Treasury notes, which are linked to mortgage rates, fell last week for a fourth straight week to a 19-month low as investors grew more confident the Federal Reserve will cut benchmark rates at its policy-making meeting on September 18. Yields move inversely to price.

A fall in interest rates is providing some good news in what has been a rough summer for real estate. Mortgage applications are up from a year ago for the past two weeks since the Labor Day holiday, though some speculate that borrowers are just filing more applications in case one or more don't come through. Also, the recent numbers are only for retail lenders and don't take into account wholesale lenders or mortgage brokers, both of which have represented a significant percentage of loan originations during these past few years.

But good news is good news. A few weeks ago, we were calling for a short term top in mortgage interest rates and it seems like we were right on. Expect rates to be no higher than they are now for the next six months as the real estate and financial markets sort things out.

Just be careful about the loan products you use, of course the market has wiped out a lot of the more dangerous loans but some lenders are still making them. Do what is right for you and your family for the long term, it's not about being able to buy a house, it's about creating a home.

So What Now?

Home prices rose 3.2% this past quarter from a year ago and only .1% from the previous quarter. These rates represent the slowest home price growth in nearly a decade. And the most recent published reports are that the recent months the median home price will fall for the first time in recorded history.

Many economists and analysts are predicting that the housing slow down will continue for at least the next three or four quarters, so well into 2008.

Even well heeled buyers are spooked; these cash or nearly all cash buyers are as anxious as anyone. They may not have the higher interest rates and loan underwriting issues to deal with like the rest of us, but investing a greater sum of money than most of us can even imagine in a potentially level if not slightly depreciating housing market is not how they made their millions.

But all of this doom and gloom aside, people don't just stop buying homes. Of course many now can't and those who can are very careful about what they buy and how much they buy it for, to state the obvious. Evaluate what you need and what you want and what you can do without; this advice goes for both buyers and sellers. Put yourselves in their shoes and most of the time we can find an agreeable arrangement. Be flexible in this market and don't pretend or play games like you know what's going to happen. I know I'm not sure and neither are those highly paid analysts. Know yourself, be patient, and be willing to adapt to this ever changing market.

The Recent Fallout

So a lot's been happening over the past few weeks. We've had a steep sell off and mild rebound in the global equity markets. We've had the Fed try to increase liquidity in the markets by pumping billions into the system and then ultimately decided to reduce the discount interest rate by 50 basis points. We've had Countrywide, the nation's largest mortgage lender tap into an $11 billion credit line and then report pending layoffs. And we've had a financial services company like E*Trade's stock price plummet on fear of their mortgage investment portfolios.

What does this all mean for us? It means that credit is tight as evidenced by several private equity deals turning to borrowing from banks instead of being able to take new debt offerings to market. It means that loan underwriting guidelines are tightening so that only the most secure and credit worthy mortgages are being made. It means that homes pending sale are falling out because borrowers who once were approved have had their loan applications returned. And it's having a domino effect as a seller's inability to sell their home because their buyer loses their loan now has to pull out of the purchase of their new home, thus affecting that seller and so on.

Even the areas that stayed strong following the initial sub-prime lending concerns, are not starting to show signs of concern. The entry level or first time home buyer markets tend to be hurt the most as many of those buyers had been taking advantage of low or no down payment or low introductory interest rate products. Don't get me wrong, homes are still selling. Some buyers are more prepared for the current environment and some sellers are more reasonable in their expectations.

So for buyers, take care of your credit, start saving and tighten those purse strings, you have to plan ahead for your home purchase. But that's the way things had always been before, to take a term from the internet bubble, the irrational exuberance of the past five years. And for sellers, temper those expectations, homes are taking a bit longer to sell and for slightly less then they were last year. Work closely with your Realtors and be open and honest with them about your needs. And as we've been saying all year, make all decisions deliberately, consider all things carefully, and look out at least to the medium term as any short term decisions could result in regret.

A Different Week, The Same Story

Reports yesterday stated that existing home sales in June fell for the fourth consecutive month while the median home price increased slightly with all sections of the country showing weakness. Haven't we heard this before?

The rate dropped almost 4% to a seasonally adjusted rate of 5.75 million homes annually. The big point that is being made is that it's the lowest in 4 and a half years; but may I remind us all of where we were four and a half years ago and what's transpired in those years? We were in year two or three of the strongest run up in real estate value we've ever witnessed and we set subsequent historic highs for home sales year after year. While we will likely end the year down from last year, we should keep in perspective that we'll still have one of the best years ever historically in terms of number of homes sold and median home price.

Of course I'm not naive enough to believe everything is hunky dory in my industry, but I do know enough to advise to not panic. Leave that to the journalists who are great at reporting the news, but not always so great at understanding or explaning what the news actually means for the rest of us.

Keep in mind that national numbers are just that, they try to explain the entire industry by putting a few numbers that are supposed to span the entire nation. But the reality is that some areas are getting hit much harder than others and I'm not just talking about regionally. Look locally and even if you don't follow this everyday like I do, I'm almost positive you can all identify some cities in your area or even neighborhoods within cities that are doing much better and of course some much worse than others.

Take the reports with a grain of salt and don't rush into anything. Know what your area is doing and make your decisions from there. You've got time, some economists say that the housing industry won't rebound until late 2008, so according to them you've got plenty of time. But you know better than them don't you? They don't live in your area, you do. You know what makes sense and what doesn't. Decide for yourself, don't let them decide for you. Find a local Realtor you feel like you can trust, interview a bunch, once you've established who of those have the necessary skill, go with the one you feel most comfortable with. Trust goes a long way and it will help ease your apprehensions about the entire process, especially in the face of the same story we're being fed every week.

So What's Changed in the Past Month?

Really not much. Homes that are in good condition priced responsibly are still selling. Those not quite up to par in either or sometimes both areas are sitting. But if it was that simple I wouldn't be writing this blog nor have a job.

What needs to be done and what exactly does good condition mean? And what is the right price anyhow. That's what we're here to help you out with.

In addition, we're here to help you figure out the economy as a whole. Today Fed Chairman Ben Bernanke gave his midyear report to Congress. He stated the the economy has rebounded from a recent slowdown, however, annual growth rates will be below original forecasts. Inflation is still a worry, yet it seems as if core inflation, the measure that strips out food and energy will be lower than expected leading most to believe that there will be little to no movement in the federal funds rates for the remainder of the year.

Though the Chairman still believes that there will be a downward drag from the housing market, flat short term rates will help to stabilize the market overall and limit the downward pressure.

It's difficult to time a home purchase or sale to catch the best conditions, however, at least with more clarity, it seems as if we shouldn't be caught by surprise for the rest of this year which is good for buyers and sellers alike. It's much better knowing what you're going to get then the uncertainty of interest rate fluctuations.

Real Estate Shake Out

Although foreclosures and the fall of the subprime loan market were bumps in the road of Bay Area real estate, what has happened in the past few weeks in the financial markets look to perhaps have a longer lasting impact.

The economy's too good. At least that's one explanation for the downward pressure on the stock market. Investors were betting that the economy was going to stay strong but also cool off in terms of growth giving the Fed reason to lower rates later this year. Good for the stock market and seemingly good for the real estate market (though mortgage rates aren't so much tied to the short term Federal Funds rate). But a funny thing is happening, okay so maybe not so funny, but the slowing economy is now facing increasing inflation worries. Okay so gas costs more and food seems to be catching up, I get it, so what does that have to do with houses? Shouldn't my home price increase as well then?

The problem that we are facing is that the market is getting ahead of the Fed on this one. The 10 year bond yields have gone up about 70 basis points or .7% in the past few weeks. As one investor put it, it's like the Fed making three quarter point rate hikes in a month. The idea is the higher rates will curb borrowing which will reduce investing and limit inflation. So what does this have to do with real estate? As I've written in the past, mortgage investment dollars competes for the same dollars as the 10 year treasury bonds so as those yields increase, so do the standard 30 yr mortgage rates, which have gone from the low 6% range to the high 6% range in less than a month.

A more expensive loan means buying less house, or getting a cheaper price on the original house a buyer wanted. And there you have it, money is getting more expensive so home prices might have to get less expensive. I think this is going to effect the lower quality properties more, not the less expensive ones, but the properties that aren't as well taken care of. Sellers can't just dump their homes on the market without taking some care in preparing it to be sold anymore and expect to get full market value.

A little leg work and elbow grease will get you a long way. Take the advice of your Realtor or get a home stager. Spend the few hundred dollars and a weekend of work to make your home more appealing. And don't forget, you only get one chance to make a first impression.