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Adjustable-Rate Mortgages Starting To Adjust Higher

ARM adjustments creeping higher

For the first time in a year, homeowners with adjusting mortgages are facing rising mortgage rates. The interest rate by which many adjustable-rate mortgages adjust has climbed to its highest level since September 2010, and looks poised to reach higher.

This is because of the formula by which adjustable-rate mortgage adjust.

Each year, when due for a reset, an adjustable-rate mortgage’s rate changes to the sum of fixed number known as a “margin”, and a variable figure known as an “index”. For conforming mortgages, the margin is typically set to 2.250 percent; the index is often equal to the 12-month LIBOR.

LIBOR stands for the London Interbank Offered Rate. It’s a rate at which banks lend to each other overnight.

Expressed as a math formula, the adjusting ARM formula reads : (more…)

Home Values Rose In June 2011

Case-Shiller Changes May to June 2011

Has housing turned the corner for good?

The June 2011 Case-Shiller Index reading posted strong numbers across the board, with each of the index’s 20 tracked markets showing home price improvement from May.

Some markets — Chicago and Minneapolis — rose as much as 3.2 percent.

The rise in values is nothing about which to get overly excited, however. The Case-Shiller Index is just re-reporting what multiple data sets have already shown about the summer housing market; that it was stronger than the spring market, and that a recovery is underway, but occurring locally, at different rates.

For example, the June 2011 Case-Shiller Index shows the following :

  • Denver, Dallas, Washington D.C., and the “California Cities” bottomed in 2009. Each has shown steady improvement since.
  • None of the Case-Shiller cities showed negative growth between May and June 2011.
  • 12 of Case-Shiller’s tracked cities have improved over 3 consecutive months.

 

In isolation, these statistics appear promising, but it’s important to remember that the Case-Shiller Index is a backward-looking data set, focusing on just a portion of the national housing economy. (more…)

Mortgage Rates Don't Move With The Fed Funds Rate

Fed Funds rate vs Mortgage Rates 2000-2011Last week, at its 5th scheduled meeting of the year, the Federal Open Market Committee voted to leave the Fed Funds Rate in its target range near zero percent.

The Fed Funds Rate has been near zero percent since December 2008 and, in its official statement, the FOMC pledged to leave the Fed Funds Rate untouched for at least another 2 years.

This doesn’t mean mortgage rates will be untouched for 2 years, though. 

Mortgage rates and the Fed Funds Rate are two different interest rates; completely disconnected. If mortgage rates and the Fed Funds Rate moved in tandem, the chart at right would be a straight line.

Instead, it’s jagged.

To make the point more strongly, let’s use real-life examples from the past decade.

  • June 2004, 529 basis points separated the Fed Funds Rate and the 30-year fixed mortgage rate
  • June 2006, 168 basis points separated the Fed Funds Rate and the 30-year fixed mortgage rate

Today, the separation between the two benchmark rates is 407 basis points.

1 basis point is equal to 0.01%. (more…)

Mortgage Rates Drop After U.S. Credit Downgrade

Mortgage rates are runningMortgage rates continue drifting downward, despite — or because of — a ratings downgrade on long-term U.S. government debt. Standard & Poors issued a single-notch downgrade after Friday’s market close, from AAA to AA+.

Of the roughly $9.4 billion in publicly-held U.S. debt, 72 percent is long-term (i.e. with duration of 2 years or longer).

U.S. short-term debt was not downgraded.

When an entity — government, business, or other — is cited for a credit downgrade, it means that the risk of lending money to that entity has increased. In theory, higher risk should lead to higher borrowing costs and higher consumer rates.

Except in today’s U.S. Treasury and mortgage bond markets, the opposite is occurring. U.S.-backed bonds are in demand, leading rates lower. It’s an unexpected response to the S&P downgrade. (more…)

New Home Supplies Keep Shrinking; Prices Pressured Higher

New Home Supply 2010-2011Home builders are slowly reducing inventory.

According to Census Bureau data, the number of new homes slid 1 percent from May. On a seasonally-adjusted, annualized basis, home buyers bought 312,000 newly-built homes last month.

It’s the third straight month of falling sales and the headline data casts the Fitchburg housing market in a negative light.

Upon closer inspection, however, the numbers appear quite strong. 

First, sales are down marginally. Total units sold have dropped just 2 percent from the highs of the year. And, second, the number of newly-built homes for sale is down markedly from last year

There are 22% fewer new homes for sale today as compared to June 2010

At today’s sales pace, the complete new home inventory would be sold in 6.3 months — the quickest sell-out window since the expiration of the 2010 federal home buyer tax credit.

Builders are feeling better about their business, too. (more…)

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