Fed Interest Rate Hikes and Your Mortgage

By now you’ve probably heard that interest rates will soon be rising. The media reports simple sound bites such as, “Interest Rates Rise” which is of little help in understanding to which interest rates they are referring—credit card debt, student loan, small business loans or home loans?

Why are the Feds Raising Rates and What will it Mean?

The Federal Reserve rate making the news is set by the Federal Open Market Committee, which is part of the Federal Reserve. It is used as part of a monetary policy to attempt to help smooth the inevitable business cycles that the economy experiences. 

When we hear “The Feds are going to raise rates”, it’s important to note that specific change to the Federal Reserve overnight rate affects adjustable-rate mortgages. One must also watch Treasury Notes and Bonds for volatility in fixed rate mortgages.

The Federal Reserve keeping interest rates low helped us all through the 2007-2009 recession and again was employed during the Pandemic to help keep the economy from wild market force swings.

After the housing bubble burst in 2007, conforming loans actually had higher interest rates due to their greater propensity for default, while Jumbo loans enjoyed smaller rates of default as they were often tired to a properties with more equity.

But the Fed needs room to maneuver and raising the rate to more normal levels gives them some ammo in their arsenal in the event they need to employ their interest rate weapon again.

Since the attack on Ukraine, the feds have already signaled that they will slow any rate hikes this year for fear of stalling the economy. Once they begin raising rates it will serve to slow down the current high inflation by dampening spending.

This is a good illustration of how the Feds use this tool during recessions to stimulate or suppress the economy.

What Effect Interest Rate Hikes will have on Home Loans?

As we discussed in an earlier blog,  the Federal Reserve rate—does not necessarily mean home loans will follow suit—though some often do. 

  • The 10 year Note (typically affects 15 year fixed rate mortgages)
  • The 30 year Bond (typically affects 30 year fixed rates)
  • The Federal Funds Rate (affects Adjustable Mortgage rates)

As interest rates on Treasury notes rise, banks can raise the interest rates on new fixed rate mortgages. That means home buyers will have to pay more each month for a loan which in turn takes away purchasing power. Typically, when interest rates rise, home prices fall. When housing prices fall, the economy slows.

One of the rates most often discussed is the 10-year note. This frequently serves as a benchmark for setting long-term rates like commercial and residential mortgages. This rate is not directly set by the government. It is determined by market forces, often as simple as supply and demand.

Although today’s rates aren’t crazy by historical standards, they are higher than they have been in years, and that’s likely to have a small effect in the housing market — though we don’t see housing prices to declining significantly.

“More than a decade of chronic underbuilding and millions of millennials moving into the homebuying stage of life has created a significant imbalance between housing supply and demand,” McBride from Bank Rate said.“While rapidly rising mortgage rates may temper the demand somewhat, don’t expect home price appreciation to come to a halt. A more modest pace of appreciation is the likelier outcome.

More About Mortgages

Conventional mortgages fall into two main categories: “conforming” and “nonconforming” loans.

Conforming loans are home loans that are purchased by government entities such as Fanny Mae and Freddie Mac and must meet their guidelines such as the amount of down payment. These organizations make the access to more mortgage loans available. These tend to be smaller loans.

The Federal Housing Finance Agency (FHFA) raised the 2022 Conforming loan limits in California. This allows some mortgage loans that were previously labeled “Jumbo” to now be placed in the Conforming loan limit category. Conforming loans in California generally come with better mortgage rates and easier underwriting requirements.

A ”Jumbo” loan is considered a non-conforming loan, when it is in excess of the loan limits allowed for a conforming loan. 

What Are The 2022 Conforming Loan Limits in the Bay Area?

San Francisco, San Mateo & Santa Clara all have the highest limits available—$970,800 for a conforming loan.

What Does this Mean for You?

If you’re a homeowner thinking of selling, higher rates could impact the amount buyers can overbid for your home, as higher rates impact purchasing power.

If you’re a buyer, it means money will cost you more going forward so finding a home sooner rather than later could save you thousands of dollars. Every time there’s a tick up in interest rates buyers get more anxious about completing a purchase—so expect more short-term competition.

Our belief is that a modest rise in the fed rate will have a nominal effect on interest rates, but since lenders can react in any way they choose, all bets are off to definitively say how the upcoming rate hikes will impact our local housing market.

Drew & Christine Morgan are REALTORS/NOTARY PUBLIC in Belmont, CA. with more than 25 years of experience in helping sellers and buyers in their community. As Diamond recipients, Drew and Christine are ranked in the top 50 RE/MAX agents nationwide and the top 3 in Northern California.  They may be reached at (650) 508.1441 or emailed at info@morganhomes.com.

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The information contained in this article is educational and intended for informational purposes only. It does not constitute real estate, tax, insurance or legal advice, nor does it substitute for advice specific to your situation. Always consult an appropriate professional familiar with your scenario.

Why Are Interest Rates So Low and What Does it Mean to Me?

Unasked2 copy Whether you are thinking of buying or already own a home the current historically low interest rates may help you save thousands of dollars.

Rates in the last week have averaged the lowest point since records were first kept over 30 years ago. Refinancing today may help you save hundreds of dollars in monthly interest payments but even more important are the long term savings.

Rates are low right now because the financial crisis in Europe is driving the appetite for U.S. bonds which in turn raises the price and lowers the yield (interest) payment. And since mortgage rates roughly track the 10 Year Treasury Bond you can see where rates are headed and why. Rates are the lowest they’ve been–period.

If you think about the past 30 year trend of interest rates, which have averaged around 9%, it’s easy to guesstimate that the odds are good rates will be higher in the future rather than lower. What does that mean to you? If you are considering a purchase it means that there are two ways to look at it: if you buy a home at today’s rates either your monthly payment will be substantially lower or you can buy a considerably larger home for the same amount of money. In fact a payment on a $1,000,000 home ($800,000 loan) would be around $4,234 per month as opposed to $6,437 at the average historic 9% rate. But that doesn’t even begin to tell the whole story.

Not everyone stays in their home for Fhfb_contract_rate30 years but this offers up a substantial savings in interest payments. Most people aren’t aware of the long term costs of home ownership so you’ll be interested to note that at today’s rate your total interest payments over 30 years would total $725,000 and at the historical 9% rate it would be as high as $1,517,000–over double the interest payment for the same home. What could you do with an extra $793,000?

Perhaps rates will never be as high as they were back in the late 70’s and early 80’s but rates have still averaged 6.7% over the last 15 years during a time of historically low rates.

Case-shiller MSANow combine this with the recent decrease in home values and it’s hard to argue that waiting to buy a home will significantly benefit you.

$8,000 Tax Credit Extension to September 30, 2010

What’s the big brouhaha about yet another extension of the $8,000 tax credit for first time homebuyers?  
Bird house Senator Harry Reid wants home buyers to have until September 30, 2010 to close escrow and receive the $8,000 tax credit. But before you go out and celebrate, understand that the only buyers this extension will help are people who already were in contract to buy a home by the April 30th deadline. The proposed extension would allow only those buyers to have until September 30th to close escrow rather than the looming deadline of June 30th. Senators Johnny Isakson, R-GA, and Christopher Dodd, D-CT, are joining Senator Reid in support of the amendment. And why not? It’s a good political move and even Senators who said they would never vote for another extension will feel pressured in an election year to get behind this move.

Will it help? Sure, in a few cases where there are delays in the closing of escrow where banks may be overwhelmed or dragging their feet on short sales or where buyers are simply not able to close soon enough.

But don’t look to the government to shore up the housing industry anymore for awhile. The housing market is like a bird flying the nest…at some point you have to find your own wings.

Real Estate re-cap–2008

Before we wrote this year’s forecast, we went back and re-read our assessment of where the market might be headed in 2008. Graphs

 

Of course very few people could have predicted that the dire real estate woes would drag the entire economy to the brink of collapse and we were no better than most.

 

However, for your enjoyment we’ve clipped a segment out of our 2008 market forecast made on January 4th 2008—and highlighted some of our more interesting comments:

 

“This is precisely why the Peninsula should fare better than other areas [in 2008]”.

 â€œHowever, it’s entirely possible we are on a precipice which could collapse at any time. What is [currently] impacting the Peninsula is the rising cost of energy—especially gasoline.”

“What could have an incalculable impact would be a prolonged recession and loss of local jobs; either of these would undoubtedly bring a decrease in home values to the Peninsula”.

In 2008, Investors eventually began to snap up undervalued properties in the central valley and a few of the nine bay area counties which were hard hit by foreclosures. This had the desired effect of liquidating the tidal wave of inventory but the undesirable effect of sinking the reported median price by skewing the sales mix to smaller homes (since smaller homes and distressed properties sell for less). The media meanwhile continued its relentless reporting of the falling median home price without appreciable application of responsible journalism. Bombarded by the media’s lack of analysis, invariably many buyers were frightened by the reports of falling home values and quite reasonably and expectedly took a “wait and see” attitude. That’s not to say the media’s information was wrong, but they do choose what to report and what to leave out and in many cases they reported numbers without the necessary perspective leading many to believe the housing situation to be far worse than it was in some areas, and far better than it was in others.

Although clearly there were several other factors which inhibited the ability of people to purchase homes—not the least of which was tighter lending standards and higher interest rates—our intrinsic evidence suggests that most credit worthy buyers on the Peninsula withheld from purchasing a home based on the fear of values spiraling down, not because they wanted to wait and “time the absolute market bottom” or couldn't get a loan.

 

Belmont-Month in Review December 2008

We’ve got a lot to cover at the beginning of a new year as we go back and examine all of 2008 as well as the month of December.

This is our month-end report of home sales in Belmont for the month of December 2008. Note that while the median price dropped significantly from November, so did the size home which sold in December. The difference in size of homes in the two months was 190 square feet. At the price per square foot of $514 that could account for $97,660 of the difference in the median home price—meaning that home prices were actually higher in December if you factor in for the size of home which sold.

Sales were up too. There were eight sales in November and eleven in December. That’s an anomaly as typically sales in November are greater than December. We’ll chalk that one up to the dire economic news in October (October sales are November’s closings).

Click on the chart for a readable picture.

December 2008 Belmont Sales

Market Update-11.24.2008

Drew & Christine Morgan



 


Housing Update–November 2008

(650) 508-1441


dmorgan@morganhomes.com


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We’re very excited to bring you a new animated version of our graphs depicting the various housing market trends in San Mateo County and the cities which lie within.


Each month we download data from our Multiple Listing Service and analyze the market indicators. We provide this in-depth analysis for several of the many cities we serve on the Peninsula.


We’ve also added short audio tags to describe what we are depicting and help put the information in perspective.


Another feature will be our “Weekly Graph”. We’re not saying it will change each week but when an interesting trend develops you’ll find it under that tab.


We hope you’ll take a moment to check out our new graphical interface on our “How’s the Market?” link and give us some feedback.













Unveiling our NEW Fusion charts!

Graphs We’re very excited to bring you a new animated version of our graphs depicting the various housing market trends in San Mateo County and the cities which lie within.


Each month we download data from our Multiple Listing Service and analyze the market indicators. We provide this in-depth analysis for several of the many cities we serve on the Peninsula.


We’ve also added short audio tags to describe what we are depicting and help put the information in perspective (Click on the play button to hear a brief introduction).




Another feature will be our “Weekly Graph”. We’re not saying it will change each week but when an interesting trend develops you’ll find it under that tab.


We hope you’ll take a moment to check out our new graphical interface on our “How’s the Market?” link and give us some feedback.

When A Little Common Sense Goes A Long Way

I found the picture that accompanied the article in the San Francisco Chronicle, Saturday November 15th 2008 title “Increase in Deaths, injuries on dangerous San Francisco Streets”  a bit symptomatic of the problem.

The article is reciting the statistics on just how dangerous the streets are for pedestrian and bicyclists and the picture shows a pedestrian walking right out in front of a car without even looking at the driver of the vehicle which is poised to potentially run him over.

(click on the picture for a full-sized view)

SF Chron 11

Don’t get me wrong, in most accidents drivers are in fact at fault and hitting pedestrian accounts for more than half of the fatalities each year in San Francisco. That doesn’t mean we should subjugate personal responsibility or common sense for laws. Traffic lights are there to tell drivers they need to stop, and laws are there to help enforce that they do so, but if they fail to stop who really wants to be dead right?

I applaud Belmont for installing the flashing crosswalk signals to alert drivers that a pedestrian is about to cross. This extra “heads-up” could save many lives if it were employed in San Francisco. And while their proposal to install cameras to award citations for failure to stop will generate much needed traffic fine revenues, it will do little prevent accidents; remember the citations are given after the fact—once there has already been a violation. That said, if the fines generate enough revenue to be self-sustaining or better yet offer extra revenue to fund lighted crosswalks I’m all in favor.

Not being privy to the statistics, intuitively, I’ll bet that the person who purposely runs a red light does so by just missing a yellow one. If the lights were timed with a little more delay, a pedestrian would not receive a green light until well after the opposing light had turned red. The real danger is in drivers who plow on through a red light oblivious to its warning, well after the driver should have stopped—giving pedestrians ample time to wander out in front of an oncoming car.

When I was a child my mother taught me to stop, look and listen before crossing a street. Somehow those simply life saving lessons have been lost as people become more reliant on traffic lights and less reliant on common sense—traffic signals do not substitute for common sense and personal preservation. Sure people are supposed to stop, but pedestrians fail to remember that sometimes they don’t, or can’t always do so.

I’ve driven around Belmont for many years and I’m always amazed as I approach an intersection to see for example, a mother with a stroller fixated on the WALK signal in front of her and not on whether I am poised to heed my signals. They’ll blindly push their stroller right out in front of my vehicle on the assumption that in a perfect world I will see the red light, heed the laws, that I will physically be able to stop and my car will mechanically be able to do so—should you really have that much faith in the average driver or the maintenance of their vehicles?

Look, listen, be aware of your surroundings and a lot of these accidents could be avoided.

BELMONT–Week in Review for November 11, 2008

With no new listings for two weeks in a row, it’s nice to see a little activity before the winter market slows to a snail’s pace.

There was no agent "Tuesday tour" this week due the Veteran’s Day holiday so most of these homes we’ll not view in person until next Tuesday; and I won't be updating the week's activity until a week from Saturday–the normal day for my Belmont Update post.

Belmont has 53 homes currently for sale which is higher than normal for this time of year but with no new listings for two weeks in a row and four sales last week inventory should start to wind down.

Five new listings popped up recently and here they are:

Naughton 3817 Naughton-4 Beds 3.5 bath 2,103 Sq. Ft. home LISTED for $1,550,000

Naughton is a nice street and this home shows beautifully. This is a great home for people who do not need a large level yard but want nice views–though it does have a level yard area out back. Also, if you are adverse to climbing stairs this home is not for you. OPEN SAT 11/15 1:00-4:00 & SUN 11/16 1:00-4:00 Listed By Bob Bredel, RE/MAX Today

 

 

San juan 2856 San Juan—3 Beds 2 Bath 1,540 Sq. Ft. home LISTED for $1,088,000

Situated on a relatively busy section of San Juan, but on a very large 16,670 Sq. Ft. lot. Though a lot of that is sloped up in the rear so it’s not really usable. The home has been upgraded very nicely. Still, it seems priced a tad bit on the high side. Listed By Richard Beale, Beale Properties NO OPEN HOUSE LISTED.

 

Read 2614 Read.—4 Beds 4+ Bath 2,800 Sq. Ft. home LISTED for $1,000,000. The sad story is this is a short sale. It was purchased back in July of 2006 for $1,233,000 and they put a lot of work into it since. This is one of those Belmont homes with a bungee line to the rear yard. Listed By Bryan H. Yoshida, Provida Mortgage & Realty, Inc NO OPEN HOUSES LISTED.

 

 

DSC_6870 1308 Academy—3 Beds 2.5 Bath 3,400 Sq. Ft. home LISTED for 998,000

I did a little reconnaissance on this home since they haven't posted any pictures or tours on-line. Frankly the home is not ready to be shown just yet but I've included a sneak peak that I took with my own camera.

Listed by Eda Diridon in our office at 3,400 Sq. Ft. on a 9,150 Sq. Ft. lot in the heart of Belmont’s Country Club area this home has a small creek which runs through the rear yard. There’s a nice deck at ground level and some flat yard area. The home has a dramatic setting with soaring windows that look out upon your own miniature park. It needs updating, but this is a good deal for the size home. NO OPEN HOUSES LISTED YET.

 

 

1905 Lyon—3 Beds 2 Bath 1,350 Sq. Ft. home LISTED for $739,000.

What’s up with Lyon this year? There have been about five homes for sale this year alone. Too new to tour also but it looks to be a home that needs some updating. Listed By Kristin F. Leishman, Patriot Properties OPEN SUN 11/16 1:00-4:000

 

 

RE-LISTS

Kittie 15 Kitte Lane—4 Beds 3 Bath 1,900 Sq. Ft. home on a 9,000 Sq. Ft. lot for $900,000. If this home seems familiar it should. It was listed back in April of 2006 for $1,355,000. It’s now a short sale approved at $900,000. So what’s the catch? It has a small landslide problem in the rear yard where it needs a retaining wall to prevent the creek from eroding the lot. Sounds horrible but it’s a simple engineering feat to the tune of $150,000 probably (my estimate). Other than that, it’s a great location and nice home. Listed By Marcin Pendzialek, House of Homes Realty & Mortgage

NO OPEN HOUSES LISTED

1218 North Road—3 Beds 2 Bath 1,543 Sq. Ft. home LISTED for $825,000. This too should sound familiar but are you ready for this…back in August of 2007 it was listed for $1,250,000. No prices have not dropped that far they just overpriced it by a long shot. It’s a real cliff clinger home and a driveway that would give any normal driver cause for alarm. Nice views though and the price is in-line now for this completely rebuilt home. Listed By Michael Robles, Coldwell Banker-Burlingame OPEN SUN 11/16 2:00-4:00

SALES

Casa Bona ↑2308 Casa Bona (pictured)-3 Beds 2 bath 1,570 Sq. Ft. home LISTED for $899,000 SOLD for $925,000 in 4 days. This was a nicely remodeled home and priced to sell as you can see by the multiple offers.

↓3215 Upper Lock—3 Beds 2 bath 1,500 Sq. Ft. home LISTED for $849,988 SOLD for $792,000 in 42 days. Why did this home sell for so much less than Casa Bona (above) being that they are virtually the same size? A) Casa Bona was totally remodeled and this home was all original—and it lacked the views.

↓809 North Road—3 Beds 1.5 Bath 1,160 Sq. Ft. home LISTED for $629,900 and SOLD for $607,402 in 9 days. Nice clean starter home in a trailer park atmosphere neighborhood—hence the good price.

This information is for entertainment purposes only and includes no legal, accounting or real estate advice nor is this intended to be specific to your situation-always consult a specialist who is familiar with the details of your situation.

Information deemed reliable but not guaranteed. This is not intended to be a representation of homes listed or sold exclusively by Drew or Christine Morgan or Carlmont Associates.

BELMONT-October 2008 Home Sale Report

The housing market is in a state of flux so we spent added time this month helping you understand the numbers and our local Belmont market:

(Click on the report for a size you can read)

Belmont-October 2008 

Understanding the Belmont’s October 2008 housing market takes a lot more than listening to the numbers being bantered about without insight or analysis.

Read on, as we’ll tell you what these indicators mean and how to put them into perspective.

October 2008 Analysis First the overall picture:

We rate each indicator with an arrow depending on its effect relative to increasing home values from a homeowner's perspective. From a buyer's perspective these indicators would all be reversed. In other words, if inventory levels are growing we would rate that with a down arrow since it would put pressure on lower prices—bad for sellers but good for buyers.

Here we explain each indicator:

MEDIAN SIZE HOME SOLD:

This gets a down arrow because the median size home INCREASED in 2008 yet the median home price dropped. If this is taken into consideration the true median home price in October would be $807,639—a 27% year-over-year drop.

AVERAGE LOT SIZE:

                This gets a plus arrow since it accounts for SOME of the discrepancy in the median price from 2007-2008. That’s because while the median home sold in 2008 was larger, the lots were smaller and while the lot size does not have as great an impact on the median price as the home size itself, one must account for this to help explain some of the change in median prices. It’s interesting to note for example that in 2008 none of the high priced homes which sold were in the more sought after area after referred to as “Hallmark”, or more accurately Belmont Woods, while in 2007 four of the 15 sales were in this area—no doubt accounting for some of higher home sale prices.

MEDIAN PRICE

                This is of course the mother of all data point often reported by media organizations. Not to beat a dead horse, but without more explanation this number alone could really throw you for a loop.

Yes the median home price is down significantly for 2007 but one needs to remember that back in 2007 this number was an anomaly and we discounted it back then as such.

The problem is that the median size home that sold this October is dramatically larger than back in 2007 which flies in the face of what the numbers are telling us unless there’s been a substantial decrease in median home values—which undoubtedly there has been—just not to the degree the numbers may be hinting at.

One reason has already been mentioned—the fact that no homes in the tony Hallmark are were included in October’s 2008 sales data. These homes have larger lots—many level—sidewalks, underground utilities and a highly rated elementary school. All factors that are hard to quantify in terms of real dollars, but certainly could explain why the price per square foot in 2007 was $563–$50 more than in 2008.

SALES

                Sales were virtually unchanged—one more this year than last. However, given consumer confidence, which is at its lowest point in its 23 year history at 38.0, this is a great sign since despite consumer worries the pace of homes sales as remained steady. In fact Belmont’s inventory of homes for sale has dropped in recent weeks; though some of the lower inventory is attributable to the fact that in the last two weeks NO NEW LISTINGS have come on the market—a first as far back as we can remember!

 

From the Consumer Confidence web site:

“The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September. The Present Situation Index decreased to 41.9 from 61.1 last month. The Expectations Index declined to 35.5 from 61.5 in September.

“The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for October's preliminary results was October 21st.”

DAYS ON THE MARKET

                This stat tells us how long it takes to sell a home. At first glance it appears to have dropped by a few days this year which would be a sign that homes are selling faster. Further analysis reveals that the Total Days on Market (also referred to as the continuous days on the market) has actually increased. What can account for this? Simply put, more agents are playing the game of re-listing a home that has been sitting on the market too long. That resets the Days on Market stat which consumers see but not the CDOM stat that agents are privy too. Don’t worry, your agent must disclose the real CDOM if you are making an offer.

HOMES SOLD OVER/UNDER ASKING

                More homes sold over asking this year than last October but that isn’t important if prices are lower. This could just mean that more agents are pricing homes lower intentionally in order to bring more attention and get homes sold in multiple offers (yes multiple offers are still happening on well priced properties). What’s important to note here is that homes which sold over the asking price sold for half of the amount over in 2008 as they did in 2007; and homes that sold under the asking price sold for twice as much less in 2008 as compared to 2007. That’s definitely a sign a weaker market.

NUMBER/AVERAGE REDUCTIONS

                This number provides us with little insight this month as these two periods are virtually unchanged. It’s nevertheless a good sign that they haven’t increased significantly at all.

PERCENT RECEIVED OF ASKING

                This number can also be misleading if homes are selling for significantly less, but closer to the asking price—this number could actually be higher in a down market. All it would take is for sellers to list their homes decidedly lower than market value, get multiple offers and create an environment where the homes sell over the asking price, yet lower in real dollars.

If you’ve gotten this far good for you. These are just some of the variables we take into consideration when analyzing our local market. So what does all this mean for home values in Belmont?

We expect prices to decrease year over year into 2009. On what magnitude? Probably not much since Belmont is insulated rather nicely on the Peninsula with no room for real growth and a relatively short supply of homes. Of course the impact of the current recession (yes we believe we are in a recession) and its affect on jobs will be a determining factor for inventory levels—if homeowners are forced to sell due to job relocation or losses and the market is flooded with homes for sale, with few new home buyer prospects prices could drop precipitously—in the neighborhood of 15%. Absent those dire conditions we expect a tamer drop of 6-8% through the third quarter of 2009. The next several years may remain flat in terms of appreciation has trepidatious buyers reluctantly return to the home buying market.

Other extraneous factors such as the cost of money could have a huge bearing on prices as well. Homeowner affordability is a key factor in bringing buyers into the market and while lower prices mean more buyers can afford homes, any increase in interest rates could easily wipe out the savings of lower home prices and forestall any market rebound.

This information is for entertainment purposes only and includes no legal, accounting or real estate advice nor is this intended to be specific to your situation-always consult a specialist who is familiar with the details of your situation. Data retreived from the multiple listing service–ProLIstings, San Mateo County