New Loan Pitches Demand Old-Fashioned Due Diligence

Low monthly loan payments are one way big banks, mortgage brokers and home builders are trying to drive business, say industry trackers. "Consumers have become more focused on how much they'll pay a month rather than how much they'll pay in interest charges a few years down the line," says Blanche Evans, editor of trade publication Realty Times in Dallas. The subtle shift in the industry from pitching low mortgage rates to low monthly payments has sown confusion among some borrowers like Ms. Hill. "Who ever heard of a mortgage where the amount you owe increases as you pay it?"

U.S. Two-Year Treasury Heads for Fifth Straight Weekly Decline

The difference in yield between two- and 10-year notes narrowed for a third straight day, to 75 basis points, in a sign that investors expect Fed rate increase to limit inflation. The gap was 241 basis points a year ago. Bill Gross, manager of the world's largest bond fund, said the yield on the 10-year U.S. Treasury note will stay above 4 percent. More increases in the Fed's benchmark rate may begin to undermine demand from foreign central banks that has kept the yield lower than it otherwise would be, causing a `mispricing,'' according to Gross, chief investment officer of Pacific Investment Management Co. Gross made the commentary in a report published on Newport Beach, California-based Pimco's Web site yesterday. Demand for two-year securities at yesterday's auction of $24 billion of the notes yesterday matched the lowest since January 2004.

Existing Home Sales -.5Existing Home Sales Fall 0.5% in January.

Against expectations, sales of existing homes dropped in January, the second consecutive decline. Despite the drop in the number of sales, the months of inventory is descending, as fewer homeowners put their homes up for sale. House price appreciation also remains very strong. The level of sales activity remains quite high as well. The National Association of Realtors has rebenchmarked the sales data to the 2000 Census. The revised data shows a lower level of activity, but growth patterns remain the same. NAR is also now reporting condo data on a monthly basis.

Housing Starts Continue to Climb to a 21-Year High

A jump in starts on single-family housing pushed total U.S. housing starts to a nearly 21-year high in January, but other data released Wednesday were not as robust.

Home mortgage applications dipped last week and industrial production was flat in January as warm weather damped demand for heating and dragged down utilities output.

U.S. housing starts climbed 4.7% to a seasonally adjusted annual rate of 2.16 million units in January from an upwardly revised 2.06-million-unit pace a month earlier, the Commerce Department reported.

The January total marked the highest pace of housing starts since February 1984, when they hit a 2.26 million unit pace.

Wall Street had expected housing starts to decrease 4.3% to a 1.1.92-million-unit rate from the 2-million-unit rate initially reported for December.

"Boom would be the most appropriate word for these housing numbers," said Patrick Fearon, economist at A.G. Edwards & Sons Inc. in St. Louis.

Single-family housing starts drove January's gain, climbing 2.7% to a record 1.76-million-unit pace, the government said.

Permits for future groundbreaking, an indicator of builder confidence, rose 1.7% to a 2.11-million-unit pace in January from an upwardly revised 2.07-million-unit pace the previous month. Analysts had expected permits to decrease to a 1.995 million unit pace.

The Mortgage Bankers Assn. said its seasonally adjusted index of mortgage application activity decreased 0.5% to 732.3 in the week ended Friday, after rising 4.2% in the prior week survey.

U.S. industrial production was flat in January, but manufacturing output remained healthy, the Federal Reserve reported. Wall Street had forecast a 0.3% rise in overall output.

Mortgage Rates May Be Down... Or Up ?

Both Freddie Mac and the Mortgage Bankers Association (MBA) have released the results of their most recent weekly surveys on mortgage rates. Freddie Mac reported that rates dropped for the sixth consecutive week this year and MBA found that most rates were up. The actual rates, however, were nearly identical. This could be a correction by one of the organizations of a statistical anomaly the previous week when their reported rates deviated substantially.

For the week ended February 10, Freddie Mac showed the 30-year fixed rate mortgage down to 5.57 percent from 5.63 percent the previous week, and the 15-year fixed down 0.04 to 5.10 percent. The 5-year ARM dropped 0.01 to 4.99 percent and even the 1-year was down for the first time in 2005 to 4.11 percent from 4.23 for the week ended February 3.

Points and fees for all but the 15-year, which stayed at 0.7, went up 0.1, resulting in a rate of 0.8, the highest in many months, for the 30-year and 1-year. The 5-year was up as well, from 0.6 to 0.7.

MBA’s survey, which has a much larger respondent base, reported 30-year rates at 5.5 percent, up 0.02 and 15-year up 0.03 to 5.09 percent. MBA and Freddie were in agreement that the 1-year dropped substantially; MBA quotes 4.10 percent from 4.24 the previous week.

The MBA survey continues to show strength in the refinancing sector of the market. Refinances represented nearly 50 percent of all mortgage originations last week. The market share of adjustable rate mortgages, however, dropped again to 30.7 percent.

Mortgage rates take surprising dip

Last summer, as mortgage rates rose to over 6 percent, a sense of inevitability pervaded.

The party was over, it seemed. Historically low interest rates and home prices were vanishing.

Not exactly. On Thursday, Freddie Mac reported that the average rate on a 30-year fixed home mortgage fell for the sixth straight week, to 5.57 percent, the lowest in 10 months.

"I'm surprised that they are at such attractive levels for consumers now," said Frank Nothaft, chief economist with Freddie Mac, a major buyer of U.S. mortgages.

That is good news for home seekers, who are shopping in a market of soaring prices and recent record sales.

Myriad factors have kept rates hovering at historic lows. The stock market still lags, and people continue to invest in bonds, which keeps yields low. Rates were lowered partly in reaction to last week's disappointing employment report, Nothaft said.

Mortgage Study - Americans Will Carry Mortgage Into Golden Years

The Joint Center for Housing Studies at Harvard University recently released an interesting look at trends in housing debt and home equity by age group.

Entitled “Emerging Cohort Trends in Housing Debt and Home Equity, the study by George S. Masnick, Zhu Xiao Di, and Eric S. Belsky was prepared for presentation at the Annual Meeting of the Population Association of America to be held in Philadelphia, March 31 to April 2, 2005.

The study looked at age groupings of the U.S. population in ten year increments: 15-24, 25-34, up to 65-74 and then over 75 years of age, measuring several characteristics: amount of mortgage debt carried by homeowners, home equity, and amount spent on housing-related expenditures as a share of income. Populations were further divided into married and un-married persons and compared data from 1990 and 2000.

The study found some very real changes in debt patterns. It recalled the days where a homeowner labored 20 years or so to pay off the mortgage, a rite of passage that was sometimes even the cause of a celebratory “burning the mortgage” party. The elimination of this debt freed up significant funds which the homeowner could divert to increased consumption or, more likely to funding retirement.

Today, the amount of mortgage debt carried by homeowners as they approach historical retirement age has been increasing and the share of persons who have “burned the mortgage” as they near the end of employment has been declining. Home owners more and more perceive the equity in their homes as a liquid asset and are tapping into that equity by refinancing or taking out home equity loans or second mortgages. These equity-into-cash strategies are being used to fund a variety of household or personal expenses or to shift other debt into tax deductible housing debt.

Whereas, in 1989, 54 percent of homeowners in the 55 to 64 age cohort were mortgage free, by 1998 that number had declined to 39 percent.

In addition to changing attitudes toward debt, the study pointed to later age at marriage, divorce and remarriage, the rise of the two paycheck family, increasing life expectancies and the resulting delay of retirement, increases in education and health care costs, and increased housing consumption as contributing to the emergence of higher mortgage debt late in life.

Homeowners in all age groups have taken on significantly more debt of all kinds. According to the Federal Reserve Board’s Survey of Consumer Finances, total debt for home owning households increased from $2.4 trillion to $4.1 trillion between 1990 and 2000 and the average debt grew from $40,600 to $58,700 (in 2001 dollars.) The percentage of this total debt represented by housing debt also increased. By 2000 roughly 60-80 percent of total debt was due to housing debt across all age groups. This trend is particularly striking in the oldest age groups. In 1990 housing debt represented less than 50% for those over the age of 75 and was declining with advancing age. In 2000 the figure had increased to well over 60% and was increasing with age.

Tracking the changes for individual cohorts in median levels of housing debt during the ten year period dramatically shows the emerging increases in housing debt for younger and middle age owners. In 1990, median housing debt for 45 to 54 year olds, the first wave of baby boomers, was just over $25,000 in 2001 dollars. By 2000, the cohort that had moved into that age group was carrying median housing debt of about $50,000.

“Extrapolating these cohort trajectories forward 10 years,” the study states, “ while certainly not sophisticated, suggests that the next group of 45-54 year olds in 2010 (the youngest of the baby boomers) may well have a median housing debt of over $70,000 based on debt levels for this group in 2000 when they were 35-44. But what actually occurs will be heavily influenced by the rate of house price appreciation this decade.”

Married couples have been the driving force behind the trends in increasing housing debt for the middle age groups. Unmarried homeowners have certainly experienced increases in housing debt, but they lag far behind their married peers. While median housing debt for the younger cohorts in the study, if married, topped out at $80,000, unmarried homeowners did not exceed $50,000 in median housing debt in any age group.

The debt trends, the study states, are not necessarily cause for alarm if they are matched by increases in the value of housing. But, if housing values were to suddenly drop or interest rates suddenly rise, housing would become a less liquid asset and homeowners would not necessarily be able to do cash-out refinances or sell their homes in the event of a financial reversal.

Federal Reserve data confirms that the value of housing owned by each successive cohort has increased on a higher value trajectory than the group before it. This is reflective of the higher initial price paid by younger buyers along with strong housing appreciation but also because of their ability (fostered by lower interest rates and higher salaries) to move up in the housing market. The steepest increase of all is in the youngest cohort, 25 to 34 years of age. In 1990 the median price of a home owned by a head of household in that age group was around $50,000. In 2000 it was over 100,000. As age increases, the trajectory flattens (in the oldest group it went from around $98,000 to $118,000. This probably reflects the lack of mobility in the older age groups. Census data indicate that only 30 percent of 65-74 year olds and 20 percent of those over 75 changed residence in that ten year period.

The larger increase in housing values among the younger age groups probably reflects trading up in the housing market as income and family size increase. Low mortgage rates and an easing of credit terms have accelerated this trend and it made it easier to carry a larger housing debt

In addition to carrying less debt, unmarried homeowners have not seen the price appreciation of their married peers. Appreciation within unmarried cohorts has been nearly flat (indeed negative in the 35 to 44 age group) except for the youngest and oldest age groups. The upper two groups showed the steepest increases, but the study pointed out that this may be a factor of married homeowners moving into unmarried status following the death of a spouse.

This lack of appreciation in housing owned by the unmarried, the study states, is probably reflective of a tendency of the unmarried to purchase smaller homes, condominiums, mobile homes, or older stock in more urban areas. The older groups of the unmarried may also contain a sizeable percentage of recently divorced who have experienced a downturn in disposable income.

But what about equity? For married owners in all cohorts, growing home values did result in increased equity, even with growing debt. Median home equity increased $20,000 to $30,000 in the ten year period in each cohort except 45 to 54 where the increase was less than $10,000. Unmarried owners, again, did not far as well. While the older unmarried did show substantial increases (perhaps reflecting the retirement of mortgage debt) in most age groups equity growth was flat or negative.

The study concludes by predicting that high housing debt as each successive cohort approaches retirement age could have several repercussions. Debt may force older homeowners to continue in the workforce in order to carry housing expenses or to sell their homes in order to downsize the debt. It may also increasingly drive people of retirement age to locations where housing stock is less expensive. Where deferred retirement, downsizing, or relocation are not realistic, “housing debt in old age could divert money away from spending on other necessities such as food, heat, and utilities or health care.

The entire study, in a PDF file, can be read at www.jchs.harvard.edu. Click on W05-1

Real estate market may come down to earth

The US residential real estate sales market is likely to cool somewhat in 2005, experts say. But given the scorching temperatures of the market in 2004, the relief probably won't be very noticeable to first-time buyers and first time homebuyers who are shopping for a home.

Mortgage interest rates are expected to remain low by historical standards, but buyers are likely to have a little more inventory to choose from as the sizzle begins to moderate following four years of record-breaking home sales.

The residential housing market probably will reflect this year's nationwide trends: less incentive for potential buyers to make the leap into new mortgages, which translates into less demand for builders and sellers to bring property onto the market.

And after the recent frenzy, there may simply be a dearth of financially qualified people still looking for homes to buy.

Mortgage interest rates - which were still hovering just above 5.6 percent this month on 30-year fixed-rate loans - are forecast to rise by anywhere from a half percentage point to a full percentage point-plus by the end of this year.

Frank Nothaft, chief economist for Freddie Mac, said last month during a conference call with analysts that he expects a 0.5 percent increase in the 30-year rate this year.

Mortgage interest rates usually follow interest rate trends set by the Federal Reserve Board, which is expected to raise its rates in quarter-point increments at least through the first half of 2005.

But mortgage rates are actually determined by corporations such as Freddie Mac and Fannie Mae, which sell bonds to pay for the mortgages they purchase from brokers. Interest rates on the bonds - known as mortgage-backed securities - are affected by inflation concerns such as interest-rate hikes by the Fed, plus national and global demand for money.

"We expect another very strong year for housing in 2005, with above-trend economic growth and still-low mortgage rates," David Berson, the chief economist for Fannie Mae, said during a conference call with analysts last month.

"A combination of `buying ahead' behavior in the past couple of years and a slowdown in the rapid pace of investor demand should reduce home sales by roughly 7.5 percent this year," he added.

Interest on home equity loans not always deductible

Low mortgage interest rates made 2004 another big year for refinancing. And home-equity borrowing in the United States reached a record-high level last year, according to a recent study.

Americans took out $431.3 billion of home equity loans and lines of credit, according to SMR Research, a market research firm in New Jersey. That's up 35 percent from 2003.

Yet many borrowers don't realize they might not be able to deduct all of the interest they pay on home equity loans. That would depend on how much they borrowed and what they used the money for. Taxpayers subject to the Alternative Minimum Tax face stricter limitations on what they can deduct.

First, it's important to know that in ``tax-speak,'' there are two kinds of mortgage debt: home acquisition debt and home equity debt.

Acquisition debt is a mortgage or mortgages you take out ``to buy, build or substantially improve'' your main or second home. In general, you may deduct the interest you pay on up to $1 million in home acquisition debt. The limit applies even if you own a second home.

So let's say you took out a home equity loan and you used it to remodel your kitchen for $40,000. For tax purposes, that amount is considered part of your ``acquisition'' debt because it was used to improve the home. You can deduct the interest on that new debt, as long as your total acquisition debt is $1 million or less.

From the IRS's standpoint, home equity debt is different. It is money you borrowed from your equity and used for purposes other than buying, building or improving your home. Only interest paid on $100,000 of equity debt is deductible as mortgage interest. Again, the limit applies even if you own a second home.

If you used a home equity loan to pay your child's college tuition, for example, you can deduct only the interest you paid on the first $100,000. (Unless you are subject to the Alternative Minimum Tax; more on that in a moment.)

If you borrowed more than $100,000 and used it for purposes other than improving your home, you may still be able to deduct the interest if you used the money to invest in stocks or start a business, though it won't count as mortgage interest paid. But if you spent the money on a vacation or a car, the interest is probably not deductible.

Things are trickier still for those who must pay the Alternative Minimum Tax, the tax that mainly targets higher-income taxpayers, including more Silicon Valley households each year. Those subject to AMT don't get many of the write-offs that other taxpayers do. Only interest on mortgage debt that is used to buy, build or improve a home can be deducted by those subject to AMT. That means that if someone who pays the AMT spends $20,000 of her home equity loan on a car, the interest on that debt is not deductible, even if she has not exceeded the $100,000 equity debt ceiling.

For example, let's say you had a mortgage for $300,000 and you've paid it down to a balance of $280,000. You refinance that amount of acquisition debt, and also take out a $100,000 equity line of credit. You use $60,000 to remodel a kitchen and bathroom. Now you have $340,000 worth of acquisition debt ($280,000 + $60,000), the interest on which is deductible for both regular and AMT purposes. If the remaining $40,000 of the loan is used for something other than substantial improvement to the home, it is deductible for regular taxpayers, but not for AMT payers.

For more information, refer to IRS Publication 936, ``Home Mortgage Interest Deduction,'' or consult a tax adviser.