The Impact of the Job Market on the Housing Market

Being unemployed, under-employed, or afraid of losing a job is never easy. One of the first things many people do in these situations is batten down the hatches and minimize their spending. Certainly, the last thing on their minds is making a major purchase like a house. It’s just not a commitment that most people are willing to make when they lack confidence in their financial stability.

Although such decisions are made based on an individual’s job prospects, they have a ripple effect that impacts the broader economy, including the housing industry. Here are three key points that shed light on specific ways that the labor market influences the housing market.

Home Prices: A more secure employment market can help home prices stabilize, as fewer people are at risk of losing their homes to foreclosure. In addition, improvements in the labor market often open the door for more first-time homebuyers to join the ranks of homeowners. This can eventually help home prices improve.

Home Size: If you are running a business and need to hire someone, during a good healthy labor market you may need to entice your top pick. How will you do that? Perhaps by paying them a competitive salary. And when someone is paid a good salary, one of the things they often think about doing is purchasing a larger home.

Home Location: When the labor market is thriving, an employer may even have to lure in people who live outside the local area to take a job. This is one of the reasons housing markets are so localized. One state, city, or community might have a much better job market than a neighboring one. That’s why it’s very important to understand the labor
situation in your own state and city in order to really get a feel for the health of the housing market there.

The bottom line to remember in 2012 is that all real estate markets are local…and that means that there can be enormous variations across the country. In areas where employment is struggling, the housing market may continue to struggle as well. But employment is improving in many parts of the country, which also means the housing market in those areas will follow suit.

If you have any questions about your situation or the housing market in the area where you live, contact me if I can be of any help.

Fairfax, VA – FHA lenders had reason for cheer and mirth at the end of last week. “In an effort to continue stabilizing home values and improve conditions in communities experiencing high foreclosure activity, Acting FHA Commissioner Carol Galante will extend FHA’s temporary waiver of the anti-flipping regulations.” With certain exceptions, FHA regulations prohibit insuring a mortgage on a home owned by the seller for less than 90 days, but this rule is waived through December 31, 2012, unless otherwise extended or withdrawn by FHA.  “All other terms of the existing Waiver will remain the same.  The Waiver contains strict conditions and guidelines to prevent the predatory practice of property flipping, in which properties are quickly resold at inflated prices to unsuspecting borrowers.  The Waiver continues to be limited to sales meeting the following conditions: All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction. In cases in which the sales price of the property is 20 percent or more above the seller’s acquisition cost, the Waiver will only apply if the lender meets specific conditions and documents the justification for the increase in value. The Waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Fairfax, VA

CPI, PPI, PCE…sounds like a nice bowl of alphabet soup. But did you know that what lies behind these letters impacts not only YOU every single day…it also bears a very heavy influence on the direction of home loan rates? So pull up a chair, grab a spoon, and let’s dig in to learn more.

First, let’s break down what these letters mean. CPI stands for the “Consumer Price Index,” and just like it sounds, it is a measure of prices that consumers are paying for goods and services here in the United States. PPI stands for the “Producer Price Index,” which is a measure of the prices that manufacturers and producers are paying to create these goods and services. PCE stands for “Personal Consumption Expenditures,” which is another measure of how much we as consumers are paying for all the items we purchase.

Each of these readings is very different–but they all serve to measure inflation, which is the relative increase in the prices for goods and services…or a decline in the purchasing price of a dollar.

Consumer Price Index
CPI was first initiated during World War I. This was a time when prices were increasing very rapidly, so employers needed to develop a system to adjust wages along with the increasing cost of living associated with higher costs of goods and services. The Bureau of Labor Statistics determined a basic “basket of goods” that an average person might buy on a regular basis, and then began monitoring the prices of items in this basket on a monthly basis, for cities across the US. As spending habits changed over the years, the basket of goods and areas surveyed changed–but the basic philosophy has remained the same.

What does an average CPI “basket” look like? Here’s a sample. How does it compare with your monthly shopping cart?

Food and Beverages (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
Housing (rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture)
Apparel (men’s shirts and sweaters, women’s dresses, jewelry)
Transportation (new vehicles, airline fares, gasoline, motor vehicle insurance)
Medical Care (prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services)
Recreation (televisions, toys, pets and pet products, sports equipment, admissions)
Education and Communication (college tuition, postage, telephone services, computer software and accessories)
Other Goods and Services (tobacco and smoking products, haircuts and other personal services, funeral expenses)
So how is this data collected? Every month, researchers from the Bureau of Labor Statistics visit or call thousands of stores and offices to obtain pricing information, ultimately tracking and pricing about 80,000 items per month. The numbers are reported on a monthly basis, using the time period for the years 1982-1984 as a baseline, assigning the basket a level of 100. So if the new pricing levels come in at 189, you could make the connection that something that cost $100 in 1982-1984 might now cost $189. On a monthly basis, however, what is reported is the percentage increase (or decrease) from the prior month, and then also the percentage change from last year.

For an interesting – and somewhat sobering – look at how the buying power of your dollar has changed over the years, try out this inflation calculator from the Bureau of Labor Statistics:

Producer Price Index
The Producer Price Index (PPI) is somewhat different than the Consumer Price Index (CPI), as it measures the costs that a producer or wholesaler pays for the items they need to create goods and services. This can often give a foreshadowing of potential increases to consumer prices…but not always. In some cases, the producer is unable to pass along their increased costs, and simply has to take a lower profit margin on the item in question. Similarly to CPI, the data for PPI is released in a percentage format, indicating the increase or decrease in prices paid by the producer relative to last month and also last year.

It’s fascinating to watch these particular economic reports get released each month, as the Producer Price Index is always released just a few days before the Consumer Price Index, and it’s always a subject of much speculation to see if the increases in producer costs have been passed on to consumers…or not.

Personal Consumption Expenditures
PCE is somewhat similar to CPI, as it measures price changes in consumer goods and services. But there is one primary difference. Remember the “basket of goods” described in the CPI? PCE takes a slightly different look at this basket, as it presumes that consumers are smart enough not to keep buying a particular item that has gone up in price compared to something else similar.

For example, if oranges become expensive due to a crop freeze, a savvy consumer might decide to buy a different kind of fruit or juice in the meantime. Where CPI leaves that expensive item in their fixed basket of goods, PCE takes smart shopping into consideration. This is why many people speculate that the Federal Reserve actually places more weight on PCE, as it may more accurately depict a consumer’s true behavior and spending habits.

The Impact on Home Loan Rates
Imagine for a moment that you are going to lend your very own money to someone to buy a house. So you go through all the paces to determine this person is a good credit risk, you do the loan, and you start receiving $1,500 per month as your regular payment. You then of course take that $1,500 and start loading up your shopping cart with the goods and services you need on a monthly basis…food, clothing, medicine, gas, etc.

But over time, you notice something happening. Every month, you are getting slightly less in your cart than you did the month before, for that same $1,500 you are spending. Why? Because costs are on the rise–that’s inflation.

Now imagine that you are once again going to lend your very own money to another person to buy a house. You go through all the paces once again, and determine that the person is a good credit risk. You want the same shopping cart full of “stuff” that you got last time in return for doing the loan, but this time you realize that you can no longer get that same cart full with $1,500. Due to inflation, you now need $1,700 to buy those same goods and services.

So what does this mean for the interest rate you will charge this second person? It means you will need to charge a higher interest rate to compensate you for the ongoing impact of inflation. And that is why home loan rates change when there is a fear of inflation in the air, as lenders need to offset the impact of inflation over the years, which will erode the value of the dollars they are receiving over time. And that’s also why it makes sense to work with a smart home loan professional who can be watching these types of indicators and keeping you informed and advised.

Please call me if you have any questions, or if you are look to refinance or if you are purchasing a new home.

Bankruptcy – FHA will allow origination of an FHA insured loan after your bankruptcy has been discharged for two years with a Chapter 7 Bankruptcy.

A Chapter 13 bankruptcy must discharged for at least one year before you can apply for an FHA insured loan.

Foreclosure - You need to wait three years to apply for an FHA insured loan after the sale/deed transfer date.

Short Sale / Notice of Default – You need to wait three years to apply for an FHA insured loan after the sale date of your foreclosure. As of right now, FHA treats a short sale and a foreclosure the same.

New Credit must be re-established your score should be in the 640 range, the higher the score the better.

2011 VA Waiting Guidelines

Bankruptcy - You need to wait two years from your bankruptcy discharge to apply for a VA guaranteed loan. 
Foreclosure - You need to wait two years from your foreclosure before you may apply for a VA guaranteed loan. 

Short Sale - If the short sale loan was a conventional loan you may apply for a VA guaranteed loan two years. If the short sale loan was a VA loan then restrictions apply. If the VA lost money on the short sale, this loss will most likely have to be cured before a new VA loan will be guaranteed.

New Credit must be re-established your score should be in the 620 range, the higher the score the better.2011 Conventional Waiting Guidelines (Fannie Mae)

Bankruptcy – For a Conventional Fannie Mae / Freddie Mac loan, you currently must wait four years from your bankruptcy discharge date.

Foreclosure - Conventional loans, Fannie Mae / Freddie Mac loans require seven years after the sale date of your foreclosure.  Additional qualifying requirements may apply,

Short Sale / Notice of Default – Currently treated the same as a foreclosure with a waiting time of seven years before you can buy again using a Fannie Mae conventional home loan.

New Credit must be re-established your score should be in the 660 range, the higher the score the better. Fannie Mae and Freddie Mac currently like scores over 740 for all of their loan products.Fannie Mae has reduced waiting periods in cases of extenuating circumstances – The death of a primary wage earner seems to be the only one I have been able to identify up to this point.

Fairfax, Virginia: Last month, the world watched in horror as another tsunami brought immense devastation, this time to Japan. In light of the tragic earthquake and subsequent tsunami, I wanted to discuss a topic that’s important to all homeowners: homeowners insurance.

Let’s start with some important questions:

• Do you know what a typical homeowner’s insurance policy covers?
• If you’re currently a homeowner, do you know what your policy does, or more importantly, does not cover?
• Can you afford a higher deductible?

A study released by the National Association of Insurance Commissioners pointed out that typical  Fairfax Virginia property and liability policies do not cover home damage from floods, earthquakes, water line breaks, termites, mold, and several other perils, large and small.

Hurricane Katrina taught us hard lessons about home insurance. One unbelievable story was the loss of home equity experienced by Senator Trent Lott. The Senator’s long time insurance company did not cover his home after it was completely destroyed by Katrina.

The reason?

With hurricane insurance you typically have coverage from high winds, but not water damage. The water surge brought onshore by Katrina is what destroyed his home.

Homeowners need to be properly protected. Plan for the worst, hope for the best is prudent advice here. Mortgages and home equity are a big part of every homeowner’s financial plan and proactive planning is essential!

Going with a higher deductible on your Fairfax, Virginia home increases your out of pocket expense, but it can save you money in the long run through lower yearly permiums.  Insurance companies track claims against a home AND the home owner. Some companies might not renew a policy if too many claims are filed over a certain period of time. Check your budget and if possible increase your deductible and lower your yearly premium.

If you want to discuss your personal situation, please contact me. Don’t wait until after a tragedy happens to learn exactly what type of coverage you have. Then, it may be too late to protect yourself, your home, and your financial future.

Globalization’s Impact on Home Loan Rates

Fairfax, VA – Today we live in a global economy, an interconnected world where goods and capital move freely at lightning speed across countries. The widely accepted view is that globalization not only benefits all countries across the world but lends itself towards the betterment of the economy as a whole.

As we have seen, globalization can also have a negative impact with a domino effect in times of turmoil and unrest. This impact affects the financial markets both in the U.S. and abroad.

Flight to Safety
When there is political unrest, which was sparked recently in Egypt and has spread like wildfire throughout the Middle East, global investors get nervous. Often they shed their risky assets like Stocks and flee to the safe haven of the U.S. Dollar and U.S. Bond market.

This geopolitical unrest can create a buying binge, which helps Bond prices improve. And when Bond prices improve, so do home loan rates. However, there are growing concerns that trump the disturbing news coming from the Middle East, which will be the guiding force of home loan rates in the times ahead. What might that be?

Inflation, Inflation, Inflation
Inflation is the arch enemy of Bonds and home loan rates, even if inflation is across the pond. The increase in global unrest, not just in Egypt but in other parts of the world as well, is mostly attributed to economic factors – primarily runaway inflation in commodities and food.

The People’s Bank of China has raised interest rates a couple of times, most recently by 0.25% in an effort to head off a continued rise in consumer prices in China. The culprits? Soaring food prices and higher raw material costs lead the pack.

China has also tightened lending standards by requiring banks to raise their capital reserve requirements. In their latest reporting, China’s inflation rose by 4.9% year over year. This was lower than their expectations, however it still marked their highest reading in a couple of years. China may have to tighten their belt some more.

Brazil is appearing on the scene with the hottest rates of inflation in six years. They are attributing this to a rise in food costs and increased bus fares. It is anticipated the Central Bank will raise the benchmark interest rate in March for a second straight time in an effort to contain the spike in inflation.

The British are grappling with inflation as well. Their year over year reading struck a hot 4%, which is twice the rate of the Central Bank’s target. The UK has yet to address this with rate hikes because their economy is in such bad shape that any hike would make matters worse.

Inflation is beginning to become a problem in Europe where it has risen to 2.4%. This is super hot and well above the European Central Bank’s (ECB) comfort zone of beneath 2%.

With an inflation problem in Europe, the ECB will eventually have to raise rates to fight it. When they do, the Euro will strengthen against the dollar, making European Bonds relatively more attractive than U.S. Bonds. This attraction will likely put a damper on U.S. Bond purchases, and could also cause home loan rates to rise.

Many of these countries within Europe have a high number of union workers. They could very well demand pay increases to offset the higher cost of living resulting from inflation. This would exacerbate matters.

As we see signs of inflation around the world, the U.S. isn’t immune. With the second round of Quantitative Easing, known as QE2, the Federal Reserve’s stated goal is to boost Stock prices, create inflation, and lower the unemployment rate. These are all unfriendly to Bonds and could also cause home loan rates to move higher. As the old trading saying goes, “Don’t Fight the Fed.” It’s a bit like the Golden Rule, “He with the gold, rules.” If the Fed wants to accomplish these goals at the expense of Bonds, they probably will.

Some Good News
Despite inflation rising around the world, the global economy will continue to recover and growth will continue to expand. Consumer confidence has picked up, hitting the highest level since February 2008. With continued confidence as the economy picks up speed, housing may begin to show signs of improvement as well.

These are very interesting times. Historically speaking, rates are still extremely attractive and remain close to the historic lows…but for how long? Overall, as a percentage of total income, the cost of owning a home is less expensive that it’s been at any time since 1963. So if you or someone you know has been thinking about purchasing or refinancing a home, now is the time to get started!

FHA Refinance Changes

Fairfax, Virginia: With Mortgagee Letter 11-11, FHA announces changes to refinance transactions. This ML provides guidance on the changes as well as clarification on existing refinance guides and it will be worthwhile to read this ML in its entirety as a refresher.

Here are the 8 things you need to know about these clarifications and changes:

1. Borrower must be current on their mortgage for the month of closing AND the month prior to closing (The payment due the month of closing CAN be included in the payoff).

2. Second liens must be subordinated to the new FHA first in their entirety.

3. For all case numbers on investment property refinances assigned on or after April 15^th, 2011, the borrower must have occupied the subject property for the last 12 months to qualify for maximum streamline financing; if less than 12 months, a full credit-qualifying qualifying regular refinance is required with a maximum LTV of 85%.

4. Effective no later than April 15^th, 2011, the following net tangible benefit scenarios must exist on all streamline refinances in Fairfax, Virginia, Vienna, Virginia and the surrounding northern Virginia area.  A. The total of the new P&I and MI portion of the payment must decrease by at least 5% OR B. Refinancing from an ARM to a fixed product (See chart in ML).

5. Effective no later than April 15^th, 2011, lenders may now use the short Uniform Residential Loan Application (URLA) (standard loan application) for non-credit qualifying streamline refinances ONLY.

6. Effective no later than April 15^th, 2011, lenders no longer have to certify (verify) employment and income on streamline refinances.

7. TOTAL Scorecard (FHA underwriting system) must not be used for streamline refinances

8. Borrowers or Lenders CANNOT add closing costs, discount points, prepaids or other costs to the loan balance on non-credit-qualifying streamline refinances.  Lenders CAN add closing costs and prepaids (not discount points) ONLY through a full-credit-qualifying streamline WITH an appraisal. In other words, if you want to roll in closing costs, you must provide all income and credit documents to your loan officer.

Fairfax, Virginia: Mortgage Rates Return To April 2010 Levels Mortgage rates are surging.

Over the last week or two, interest rates on 30-year fixed mortgages have increased roughly a .25 percent. This is according to Freddie Mac’s weekly Primary Mortgage Market Survey.  It is the largest one week jump in recent history.  The national rate for a 30-year fixed rate mortgage now averages 5.05%.  Compare this to last November when the average rate was in the low 4 percent range.    Rates are headed upward, over the last tw weeks rates have steadily increased.

Fairfax, VA – Forecasts for Inflation, the Housing Market, and Home Loan Rates

What’s ahead for inflation, the housing market, and home loan rates this year? Read on to find out.

Inflation
One of the major topics that we need to watch in the coming months is inflation. The Fed and the markets keep a close eye on inflation because it impacts so many aspects of the economy, including home loan rates. In fact, inflation is considered the archenemy of home loan rates!

Why is this the case? It’s because home loan rates are tied to Mortgage Backed Securities, which are a type of Bond – which means home loan rates improve when Bond prices do. But when inflation – or even just fear of inflation – grows, Bond prices fall, meaning home loan rates rise. That’s because lower Bond prices are needed to give Bond investors juicier yields that will help outpace inflation.

Here’s an analogy to help illustrate this point further. Think of inflation as the ocean and interest rates as a boat. As inflation (or the ocean’s tide) rises, interest rates (or the boat floating atop the ocean) have to rise as well. In other words, interest rates (or boats) must always be higher than inflation (or the ocean) in order to compensate investors.

With that in mind, let’s take a look at what’s going on with inflation and what you should keep an eye on in the coming months.

At the end of 2010, the Fed initiated its second round of Quantitative Easing (QE2), which is the concept of the Fed becoming a buyer of Treasuries and Bonds. They took this step in a bid to stimulate the economy by: creating inflation, lowering the unemployment rate, and raising Stock prices. While those goals may be good for the overall economy, remember that inflation is very unfriendly to Mortgage Bonds and home loan rates.

In the end, as a result of the Fed’s QE2 and other stimulative actions, we predict a 1.5% increase in consumer inflation by the end of 2011. That should still be within the Fed’s comfort zone of 1 – 2%, so inflation should not be too much of a threat this year. However, the unprecedented amount of debt accumulation on the part of the U.S. could spark significant inflation down the road.

Housing Industry
Home prices began to stabilize during 2010, and homes sales showed some signs of encouragement. We expect more of the same in 2011, although there will be some additional headwinds.

After a modestly good start to the year, home prices could actually decline slightly in some areas, particularly depending on the health of the local job market. Another headwind that could weigh on home prices is the overhang of several million distressed properties. The moratorium on foreclosures has ended and all of the major lenders have resumed foreclosure procedures.

At the end of last year, three million homes were in foreclosure activity, with over one million repossessions. Overall, we expect to see accelerated rates of foreclosures in the first quarter until things settle to normal during the second quarter and rest of the year. This could extend the housing downturn a couple of months longer.

That being said, we still expect to see home prices move higher in the year ahead, especially in the latter half of the year.

Home Loan Rate Outlook
Now for the big questions: Where will home loan rates go in 2011? And why?

Let’s start by looking at where we are right now. Although rates are still near historic lows, they have trended higher since early November, and indications are that those unbelievably low home loan rates seen during 2010 may be behind us. In fact, there are only a couple things that would bring back the lows that we saw in early November 2010:

If the Fed’s recent round of Quantitative Easing falls on its face and doesn’t meet its mission of creating inflation, boosting Stock prices, lowering unemployment and creating consumer demand. If that happens, Bond prices could make some gains as the threat of deflation reemerges. But this is a long shot. As the saying goes: “Don’t fight the Fed.” This means that if the Fed wants to raise inflation, it most likely will.

If the financial problems and uncertainties in Europe that we saw in 2010 worsen significantly in 2011. This would drive investors into the safe haven of the U.S. Bond market, which would help Bond prices and therefore home loan rates, but probably only modestly.   Realistically, the economy is improving, and as it does home loan rates will gradually increase over time. We expect rates to stay relatively low during the beginning of the year, but gradually rise higher.

Google doesn’t give up on much. But it did with this product.

http://www.inman.com/news/2011/01/26/google-drops-real-estate-listings