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Mortgage Blog covering all aspects of home buying and owning
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Well, it seems that creditors must be heating up the competition for people with good credit scores. The rates have fallen again in the last month, and it's not because the Federal Reserve has dropped their rates.
Why is this happening? Here's my theory: it's because we have seen a higher than usual default rate in the past couple of months for mortgage payments. My thought is that we're likely defaulting on payments because we are dealing with Christmas season "hang over" -- credit card debt that we shouldn't be carrying.
The good news is that lenders are seeing defaults on payments, but not complete defaults on the loan itself -- at least not yet.
So, as lenders deal with people who are stretched too thin, they are out looking for people who can afford their debt, and they are making it as attractive as possible. Ergo, lower rates.
Don't be fooled by lower rates. Have you seen Oprah dealing with debt on her show? Debt is a hot topic it appears, and even the daytime talk shows are dealing with it. We do need to get our personal debt levels down. (Perhaps Mr. Bush should be watching Oprah and dealing with that huge federal deficit and debt that our country has collectively.) Low interest rates are only in your favor if you are actually paying down debt. If you are getting into more and more debt, even low interest rates are costing you money.
In my own life, we are actually finding that we're spending less on our credit cards than ever before, since baby Rayna arrived. While that might seem strange, it's because we've started eating at home more (it's hard to eat out with a little nursing baby) and we've stopped taking long drives on the weekend to friends and family (same reason as above -- little nursing babies nurse frequently, and stopping by the side of the road to let my wife breastfeed in the back seat just wasn't much fun for her). Two small things that have reduced our monthly budget by a couple of hundred dollars.
It's amazing what small changes can do. We'll be making a lump sum payment against our mortgage soon.
Michael
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If anything good has come from the epidemic of identity theft we have learned how important it is to monitor our credit reports and our credit scores.
Just a couple of years ago, most Americans didn't even know they had a credit score, even though credit scoring had been used for a number of years to measure the creditworthiness of borrowers. All lenders depended on credit scores as a major part of determining if you could get a loan or not -- and at what interest rate.
FICO scores are widely used by mortgage lenders, but the three credit bureaus, TransUnion, Experian, and Equifax, have utilized and marketed their own credit scores from their proprietary databases although their models were based on FICO's. As a result, you can actually end up with more than one credit score! Each credit bureau could have a different number.
As consumers realized that their scores could differ and that information kept on them could be different from one bureau to the next, pressure was put on the bureaus to develop one consistent approach to credit scoring. On March 14 the three bureaus announced that they have now collaborated on a new credit scoring system "to benefit consumers and credit grantors." The new system is named VantageScore.
You may still have variations from one credit reporting bureau to another, but the differences should now be because of differences in the information that the credit bureau has on file. As a result, we should see credit scores become more uniform than previously.
As we move to this new approach, it's a good time to make sure that each of the major credit reporting bureaus have the right information on you, so that your credit score -- high or low -- will be the same number, no matter which credit bureau is used.
Michael
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I just realized it's been almost a week since I wrote my last entry. When you have a new baby in the house, time just flies. More accurately -- it evaporates! And my sleep-deprived spouse doesn't have much sympathy for the fact that I don't have time to get things done.
Yeesh.
On the news front, there are some interesting new facts out there. Apparently, the fast rising prices of our homes are making us rich -- at least on paper. The rising value of U.S. homes boosted the net worth of American households to a record in the fourth quarter. This is a very nice benefit for those of us who have jumped into the housing market. However, like stocks, you don't really have money in your pocket until you sell, and when you sell your home, you have to buy another -- in the same high-price environment that you just sold in!
In any case, don't bank on your new riches just yet. Higher interest rates could slow home-price appreciation in the months ahead. And there continue to be signs that the market is cooling. However, it appears to be cooling as opposed to crashing, and for this we can all be thankful.
One thing that we have in mind as the market cools: it often makes it easier to take a step up in houses. While the houses at the lower end of the market lose less of their value, the homes at the higher end lose more -- at least on a percentage or proportion basis. Depending on what kind of house you own now, you could be in that range where you don't lose a lot as homes depreciate, but the next step up in house size or status does.
We've decided we might just upgrade to that small farm we've always wanted. Without question, we are going to need some more room now that Baby makes 4.
Michael
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Now here is some particularly interesting news: With the housing market cooling, a number of people are backing out of their agreements to buy new homes. Even though buyers often put down hefty deposits, there still has been an uptick in buyers asking for their money back or even walking away from their deposits entirely.
It's not just the middle-class buyers who are under pressure. Last month, luxury-home builder Toll Brothers Inc. told analysts that its cancellation rate had increased in the fourth quarter of 2005. Overall, the whole market is being affected. A recent survey by the National Association of Home Builders found that 20% of builders were seeing cancellation rates somewhat or significantly higher than six months earlier. That's an indicator that is based on the buying habits of us Americans, and it seems to be the best indicator I've seen that something is afoot. After all, if someone is willing to walk away from a deposit of several thousand dollars, then they have to have a really good reason.
There are regional variations in this trend. The most impacted areas include many California markets; Washington, D.C.; Phoenix; and Chicago, according to an analysis prepared for The Wall Street Journal by Hanley Wood Market Intelligence. Of course, these markets have also been very hot in the past few years. In Sacramento, Calif., for instance, the number of cancellations quadrupled in last year's fourth quarter from the year-earlier period.
Why are buyers bailing? The typical reasons: Buyers can't sell their current home, or they are having trouble getting a mortgage or fear that they may be buying at the top of the market. It would seem that all the gloom being peddled by analysts is starting to filter into the home-buying public's awareness.
Not a good sign. After all, economics is a purely human function, and it rides largely on the confidence of us humans.
Michael
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Ever fall for that trendy new color and then live to regret it? Did you buy those moss green appliances when they were in style and build them into your kitchen? What about putting down laminate flooring instead of hardwood, and now all you can see is that your floor isn't hardwood... Such is the challenge when deciding on renovations.
This past week, my wife and I renewed our favorite hobby -- looking at houses. We took our 5 week old baby and 5 year old son with us. (That's another story.) We had spotted something in the local real estate pages that was in an area where we'd love to live. We decided to take a look at the house, despite the fact that the price tag put it a bit out of our reach.
It was a lovely home. The neighborhood was perfect. The landscaping was divine. And the decorating was so dated, I could almost have shot a period piece for the 70's inside that home.
If you want your renovations to retain their value, think "timeless". Think "classic". Unfortunately, "cheap and cheerful" rarely falls into either the timeless or classic category. Trendy may or may not be the right way to go. What stood out for us in this particular house was that the owners had sometimes scrimped on the quality of the materials they had used. In some cases, they had picked a trendy color that didn't work -- in a home decorated in neutrals, they had a dark laminate countertop in the kitchen that screamed "low budget". Little things like that can make a really desirable home lose some value, because people really can get hung up on the decorating. My wife and I did and we know better!
A lovely house, but it would take about $20,000 to update it to the point where we would be happy with it. If the house was a better deal, it might make sense, but at it's current price -- we're out of the picture. Interestingly enough, we've already seen a $20,000 drop in the price since we toured the house, so others must be having the same problem we've had. It would seem that there is pressure on the owners to drop the price in order to sell.
Michael
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Hmmm... Seems that not only are new homes on the market longer, with inventory increasing, but this is also happening with resale homes. Resales of U.S. homes fell 2.8% in January to the lowest number in two years, the National Association of Realtors said Tuesday.
Sales are down 5.2% since January 2005. It's the fifth consecutive monthly decline. Is this a trend or a blip?
What do the experts think? "Demand is dropping and supply is rising," said Joel Naroff, president of Naroff Economic Advisers. "It doesn't take a Ph.D. in economics to know what the implication of that is: It's Wal-Mart time - 'Watch out for falling prices!'"
Well, I'm not holding my breath yet. As the spring buying season heats up, I'm still seeing prices staying fairly steady (if not increasing) in my local area. But who knows? It would be nice to see a buyer's market for a change.
Michael
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Alright -- I KNOW I shouldn't be watching Oprah, or I'll have to give up my membership in the “true blue male” club, but have you seen her show this past week? (I promise I'll quit watching it when my wife no longer needs me to walk the baby in the afternoon in order to get a nap... Honest!)
In any case, Oprah's doing a series on how to get out of debt without going bankrupt. I hate to admit it, but it was full of really good advice. Heck, it was advice I might have given myself in this very blog.
Astoundingly, many of the couples who were featured on her show had debt that equalled or exceeded the yearly salary of both partners combined -- and most of these people were making a pretty good living! A case in point: one couple took home over $100,000 (gross) combined, and yet had debt on credit cards totalling more than $170,000! In the calculation of debt, no one included a mortgage. The only debt included was debt that wasn't building anyone equity or doing anyone any good.
The first piece of good advice was to live on the amount you take home -- NOT on the gross amount you make. After all, if you make $100,000 then there is a goodly portion of that which is going to Uncle Sam right off the top. So, live on the real amount you take home -- which is much less.
That was one of the best tips. Here's another one: pay your retirement savings and “emergency” savings account before you count what you have to live on. Many experts call it “paying yourself first”. If you do this, and live within your net income after savings, you'll be so far ahead of the crowd, you won't know the crowd is even there.
Michael
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While we're talking about houses on the market and the housing market in general, we should remember that many people in the areas ravaged by Hurricane Katrina still don't have homes. There is no “housing market“ for many of them, because they have lost everything. It's hard to believe that in a “first world” country like ours, we still have so many people homeless and struggling, without sufficient aid from either the state or federal government. Can you believe that FEMA is cutting off the money for people who are currently without homes and living in hotel rooms? It's not lavish: most of these rooms are being shared by families, and they are sleeping many people to a bed. And yet, our government thinks that we can push these people out of hotels when there aren't any apartments or other housing for them. Frankly, many of the parishes outside of Louisiana are full of derelict homes, without even the benefit of being declared unfit for habitation so that they can be bulldozed.
It's up to us to do something. In any other country, the mass relocation of people and the lack of aid would qualify those suffering as “refugees”. We can call them something else, but if these people are not being helped to return to the place they came from, they are refugees in their own country.
Yesterday, while walking my 3 week old daughter to give my wife a break, I was watching Oprah. (I know -- a sorry state of affairs for the male of the family.) Having said that, Oprah was hosting a show where a whole new neighborhood was being opened up, and families who have been displaced by Katrina were being moved in. Each family was getting a fully furnished and outfitted home. FEMA hasn't been able to do what Oprah has -- FEMA is having problems just getting trailers to affected families. So, if you want to help to get homes to people who need them, consider visiting Oprah's website. There you can make a donation to her work creating homes for the homeless of Louisiana.
While we enjoy our own homes, we should give thanks by helping others to enjoy a home of their own too.
Michael
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I love reading the news. There's always something to keep you on your toes -- especially with the housing market. Consider this: with the key spring selling season about to get under way, the inventory of homes on the market is climbing sharply in a number of major cities, and this seems to have gotten the attention of the infamous market analysts.
Now personally, I'd consider that a harbinger of spring. After all, the warmer months are usually the best selling months on the housing market. (If you live in the northeast like I do, you'd rather move when there's no snow...) So, of course there are more houses on the market.
Do the analysts recognize this? Of course not. Check out the following quote from the Wall Street Journal Online: "[The increase in housing inventory] is the latest sign that the balance of power between buyers and sellers is shifting as the once red-hot housing market continues to cool. The slowdown is affecting both existing homes and new homes. Yesterday, the nation's largest builder of luxury homes, Toll Brothers Inc., reported a 29% decline in new orders in its first quarter, which ended Jan. 31." Now, any chance the Toll Brothers saw a decline in the past quarter because it's winter time, and perhaps Thanksgiving and Christmas takes our attention away from home buying?
Of course not. That would just be common sense, and we all know that analysts are MUCH smarter than that.
Michael
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Refinancing in the fourth quarter of last year represented 45 percent of total loan applications. According to Frank Nothaft, Freddie Mac's chief economist, "The overwhelming majority of (these) borrowers were extracting home equity rather than trying to reduce their monthly payments.
Unfortunately, many economists think that this extraction of one-time capital from our homes is what is propping up consumer spending. The end result could be that the economy takes a bigger punch from the rise in interest rates than would be otherwise expected. This is one reason that I'm glad to see that the Federal Reserve is considering a slow and stop to the rise in interest. If the economy is going to slow down, we'd all like a soft landing, as opposed to a hard one!
In my mind, I think we'd all do better financially if we remember the parable of the ant and the grasshopper. The grasshopper "plays" all summer, while the ant works. In the fall, the grasshopper dies and the ant retires to the ant colony with reserves to take him through the winter. In other words, make sure that you have something put away for "bad" times. The whole economy doesn't have to collapse for you to have an unexpected circumstance that impacts you financially.
For that matter, an unexpected circumstance can be something good! For instance, we now have a new baby in the house. While the cost of groceries hasn't gone up per se, we are spending suddenly on things like diapers and extra laundry soap and various baby toiletries. If we'd been living at the edge of our resources, even small things like this could be an unnecessary burden. But we've always tried to live well within our means and even put a bit away.
I hope the kids appreciate it when we've got some money for their tuition saved up.
Michael
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Are you tired of hearing about a housing "bubble"? Seems that market analysts are a bit like babies; babies have only one way to respond when things aren't quite right. Babies cry. Analysts, on the other hand, create catastrophe.
So now I saw on the news that housing starts in January are the highest they've been in 33 years. After all the doom and gloom, it would appear that the fore-shadowed housing bubble refuses to show up.
I'm feeling a bit like the villagers in the story of Peter and the Wolf. How many times can we hear the cry of "Wolf!" and not eventually just tune it out? I suspect many are tuning it out already.
Could the analysts eventually be right? Of course they could. But we'll all be so exhausted by the time it happens, it may not even make a ripple in the news.
Michael
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I saw an interesting comment in a newsletter I get. The editorial was called "Why I love real estate". The author then went on to compare real estate to stocks. His point? Google shares, less than one month ago, were trading at $475. They are now trading at $368. No house purchased for $475K would be suddenly worth $368 in three weeks.
So, keep that in mind when thinking about a real estate purchase. Even when markets in real estate go through "corrections", they rarely lose the kind of money or percentages that you can lose in the stock market. It's not that it can't happen, but it certainly is rare.
Michael
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Well, after much anticipation, the newest member of the family has officially "arrived". Our daughter, Rayna, was born on Sunday, January 29 at 12:54 am. Mom and baby are doing fine... and Dad will be helping out for the next couple of weeks as the manager of all things domestic. (My wife is thanking her lucky stars that at least I can cook...)
I'll be back to rant about mortgage rates and other topics in Mid February!
Michael
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For the next couple of weeks, before and after Baby (finally) arrives, I'll be watching my wife more than the financial news... So, I thought it was time to take a short vacation.
If you think that the analysts are having a hard time figuring out what is happening in the housing market, you should talk to an OB-Gyn about "due dates" and when your wife will actually have a baby once she is pregnant. They'll give you a date. They'll appear to be quite convinced it is the "right" date. And things will be planned based on that date.
In the work world, timelines can be "firm". In the world of babies, however, you'll find that timelines are only best predictions. In our experience, you'll get as good a date for the stork's arrival from a fortune teller.
Here's a little peek into my life of the past 2 weeks: my wife has had more than 3 rounds of "false labor". (Whoever came up with that name doesn't seem to understand the meaning of "false". Based on what my wife tells me, her "false" labor was an awful lot like "real" labor.) So, three times we've been ready to go, excited that baby was coming, and everything has stopped. Now, I'm finding this stressful -- I can only imagine how stressful my wife is finding this. However, it has convinced me to have a talk with the OB about "due dates" and the obsession with them. Everything in this process has revolved around "due dates", and frankly -- the science is sadly lacking.
I digress.
I'll be back with good news when the littlest member of our household finally decides to officially arrive.
Michael
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Even people who are not real estate "analysts" are getting into the game of predicting what's happening in the market. Last week New York City Mayor Michael Bloomberg warned that the real estate market in his city was slowing "dramatically" and only a "miracle" could stop soaring mortgage rates from eating into housing prices.
Apparently, the Mayor does a regular radio show. In last week's broadcast, he stated that higher mortgages rates were beginning to impact consumers who are not nearly as eager as they had been to invest in a new home at the record high prices being asked in his city. I say, who can blame them? Further, if analysts are right (which is a statistical probability at some point although not certain), prices are going to fall and fall substantially if the market is "overheated". If prices are going to fall, I'd wait too before I bought!
Well, of course, waiting can mean that you spend a lot of time and effort focusing on something with little return. Not to be a "broken record" (which will soon be a completely misunderstood expression) but we're still on the baby watch here, and we're finding that watching can wear you out.
How long before people are "exhausted" by the talk of a housing crash? Like the boy who cried wolf, I suspect that many have stopped listening to the analysts, and that might be to everyone's detriment.
In the same way that you need to pay attention every time you drive, you need to pay attention every time you contemplate getting into the market. And whether I like it or not, I'll be paying attention every time my wife says, "I think it might be time" even if we have still more "dress rehearsals" coming.
That doesn't mean that you can't ignor the analysts at the moment. I am.
Michael
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