Keeping it all in perspectiveJoe Amorosointerest rates, home prices
Consider this recent gloomy headline from USA Today: "Home sales
sink; rates, inventory rise; expected Fed hikes lower
expectations."
Reading through the stacks of mortgage trade and national
business papers on my desk, it's easy to see why many potential
homebuyers are confused about what to do and why a few originators
may find this to be a discouraging market.
Interest rates have increased. There's speculation that house
prices in certain markets may be over-inflated. Rising prices on
other goods, especially fuel, have impacted home-buying power.
But on the other hand, consumer confidence is up, jobless claims
are down and our economy is growing. What's the true picture? That
depends on whom you ask.
I know firsthand the challenges that originators are facing in
the market today, and I don't take those challenges lightly. But
with more than a few years in the business, I know one thing is for
certain: It's still a good time to buy a home.
For those of us on the front lines of communication with
borrowers and referral partners, our mission should be to deliver
this statement with confidence and help them put all of this
competing information in perspective.
Let's examine three of the most-discussed topics in the mortgage
business today - interest rates, originations and housing bubble
speculation.
Interest rates
For those of us with a few decades' worth of mortgage banking
experience, we know that despite the modest rate increases we've
seen lately, rates are still at historical lows. Granted, they're
not as low as in 2003 and 2004, but can you remember where we ended
the year 2000, the early 90s, or worse, the 80s, when rates
approached 20 percent?
It may help to look at a snapshot of the past couple decades.
This data is taken from Freddie Mac's Primary Mortgage Market
Survey and represents the annual average for a 30-year fixed-rate
mortgage.
Year Average Rate
1975 9.05
1980 13.74
1985 12.43
1990 10.13
1995 7.93
2000 8.05
2005 5.86
2006* 6.70
*as of June 2006
Where will rates go for the rest of 2006? Here's a recent
statement from the Mortgage Bankers
Association (MBA): "We project that mortgage rates will rise
from the current level of about 6.6 percent to about 6.9 percent by
the end of the year." (Source: Mortgage Finance Commentary #13,
June 7, 2006)
How do we translate this for skittish or hesitant borrowers?
"Now is a better time to buy than in December."
Originations
The MBA also predicts that total originations for this year will
decline by 18 percent from 2005. But in the theme of keeping it in
perspective, 2006 will experience the fifth-highest level of
originations ever. Last year, we saw the second-highest level,
while 2003 ranked as our industry's top-producing year to date.
With rising rates, it's likely that refi originations will also
take a substantial short-term hit. Looking ahead over the next few
years, however, it's probable that refi origination activity will
rebound somewhat, as a portion of adjustable-rate loans will be
refinanced into fixed-rate mortgages when borrowers face their
first payment resets.
About housing bubbles
Recent information released by the National Association of Realtors
suggests that home price gains are moderating or normalizing in
many markets. This is to be expected.
For example, the median price of a single-family home is now
approximately $229,700 - an increase of 6.4 percent from a year
ago.
It's important to keep in mind that price appreciation of 10 to
12 percent per year is neither sustainable nor reasonable.
According to the Office of Federal
Housing Enterprise Oversight, home price appreciation has
slowed to an annualized 8.1 percent rate in the early part of
2006.
And what about the looming speculation that many markets are
poised to collapse?
According to PMI Mortgage
Insurance, only a small handful of major metro areas (13) face
a 50 percent or greater chance of a housing price correction in the
next two years. While that does not diminish the concerns of
residents in those specific markets (eight of the 13 are in
California), it doesn't seem prudent to make sweeping national
housing bubble forecasts based on only 13 markets, especially while
areas in Texas, North Carolina and New Mexico, for example, are
actually reporting double-digit growth.
What lenders are doing
Most lenders understand what products drive this market, and we're
listening to you to determine which new products will effectively
meet your borrowers' needs. We have our ears tuned to leading
economic indicators, and we're working to roll out products that
will deliver strong returns over the long term.
One trend you'll continue to see is a focus on more
affordability products: longer amortization periods, interest-only
loans with fixed rates and newly revised option ARMs with added
borrower safeguards.
We'll also continue to arm you with effective marketing tools to
educate customers on all of the latest product options and help
them understand why it's still a good time, in the grand scheme of
things, to invest in real estate.
It's true that the last few years in our industry have been
exceptional. It's unlikely we'll see a return to the levels of
purchase and refi originations we saw in 2003 and 2004. But put in
its proper perspective, the market we have now is still one of the
best, historically.
Joe Amoroso is senior vice president of Opteum Financial Services. He may
be reached by e-mail at
[email protected].
