Mortgage Market Update

MARKET RECAP

Many pundits are talking about pricing these days, with most of the talk centered on an impending drop in national home prices. The odd thing is, most data releases show home-price improvement. Clear Capital’s data being the most recent, showing that home prices nationally gained 4 percent in the second quarter of 2011 compared to the first quarter. What’s more, all four of Clear Capital’s regions posted gains.

Any enthusiasm that readers could infer from Clear Capital’s data was tempered, as is often the case these days. Clear Capital’s lead analyst noted that “with summer coming to a close and the price gains clearly starting to level off, the market is at a critical juncture as to whether it can avoid another significant downturn into the slower buying seasons of fall and winter.”

That’s true. Home prices have leveled off, but we question how critical the juncture is. The fact is the Federal Reserve reported economic growth in all 12 of its districts. Nevertheless, more than a few economists, politicians, and pundits are pressuring the White House to “do something” to keep the economy moving forward. Whether that something comes or not, we think the economy will move forward anyway based on the positive trends we see in retail sales and industrial production.

How fast the economy will move forward is debatable. According to William Emmons, assistant vice president and economist at the Federal Reserve Bank of St. Louis , the “new normal” is economic growth of 2 to 3 percent annually, punctuated with more-frequent recessions.

Emmons caught our attention for comments he made about the economy bottoming, which he doesn’t expect until 2015. Emmons said that the bottom will be recognizable when housing becomes a hated asset class and when home-ownership is denounced by former housing advocates as a lousy investment.

If that’s the case, then it’s very possible the bottom has already occurred: Housing as a pariah is nothing new. We’ve read numerous articles over the past year on how we are turning into a nation of renters instead of buyers and how suburban living is a relic of yesterday. This incessant nay saying suggests to us that the bottom has come, and possibly passed.

But when will mortgage rates bottom? Yields on 10-year Treasury notes, a benchmark for longer-term mortgage loans, are at a record low 2 percent. The 10-year note is scraping bottom because of euro-region debt woes, perceived sluggish domestic growth, and the perception the Fed will start buying more long-term securities to keep long-term mortgage rates low.

The bottom line is we think higher mortgage rates are in our future, but short term, lower rates will prevail. The problem, as we see it, is people have become so accustomed to falling mortgage rates, they are resistant to act today. So we are in a catch-22: lower financing rates are great, but expectations of still lower rates are actually tamping down consumer demand.

Since the great recession of 2008-2009, Americans have been de-leveraging: that is, paying down debt and saving more. One worthwhile strategy for paying down debt and saving more is to switch to a 15-year fixed-rate loan, which is one significant reason we have seen more interest in the 15-year loan in the past year.

If a borrower can swing a few hundred bucks more a month toward paying a 15-year loan, he can save a heck of a lot of money. A 15-year fixed-rate mortgage priced at 3.75 percent would produce a P&I payment of $1,454 on a $200,000 loan. The 30-year fixed-rate loan at 4.5 percent would produce a P&I payment of $1,013 on the same loan amount.

The big difference is interest paid over the life of the loan: The 30-year loan costs $164,800 in interest while the 15-year loan costs only $61,800.

It’s all obvious, to be sure, but sometimes the obvious offers a very good opportunity, especially at today’s interest rates – and especially for someone pursuing a lower-debt lifestyle.