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What the Fed Move Means for Real Estate

December 14, 2017

What the Fed Move Means for Real Estate

As most economists and financial analysts expected, the Federal Reserve voted to raise its key interest rate once again in a sign of confidence in the U.S. economy. The Federal Open Market Committee announced Dec. 13 that it would raise its target for the federal funds rate by a quarter of a percentage point for a new range of between 1.25 and 1.5 percent.

While this is the third interest rate hike in 2017, the Fed continues to keep those rates historically low. Combined with its projections for future economic growth, this meeting has broad implications for the U.S. real estate industry, including for homeowners, buyers, sellers and businesses related to the housing market.

The federal funds rate is the primary tool the Fed uses to accomplish its policy objectives: keeping the economy growing steadily, tamping down inflation and stimulating investment through business spending and hiring. According to expert consensus based on the most recent economic data, the third rate hike of 2017 was no surprise.

More interesting was the information contained in the Fed’s latest projections for economic growth. It now expects gross domestic product to rise 2.5 percent in 2018, faster than its last estimate for next year’s economic growth rate. In a statement from outgoing Fed chair Janet Yellen on the decision, certain factors including the likely passing of a new bill to reduce personal and corporate tax rates figured heavily in the new projection.

The takeaway for real estate
How does all of this impact real estate? Like most topics in finance and economics, the relationship between the Fed’s interest rates and a specific facet of the economy is very complex. At a basic level, we know that the Fed rate is generally correlated to the average interest rate paid on a home loan. Mortgage rates have been inching up over the last few years, but since lenders always keep a close eye on the Fed, rate hikes are often priced into the cost of home loans before they are actually put in place.

If we zoom out and examine how short-term interest rates like the Fed’s target rate are related to long-term projections, things get a little cloudier. As Investopedia explained, the price of a standard fixed-rate mortgage is tied to the yield of the 10-year U.S. Treasury Bond. Those bond yields are in turn tied to various metrics like inflation, which rises and falls as businesses and consumers spend more [or less money. The Fed tries to control inflation through short-term interest rates.

If this sounds like it’s going in a circle, that’s the idea – the state of the real estate market is constantly fluctuating as these factors change. Therefore, it’s not easy to say how anyone should respond to any single event, such as a new Fed rate hike. One thing that is still certain is that homeowners and real estate professionals should continue working to understand how to balance their immediate needs with their best ideas of goals for the future.

The Field Guide to Mortgage Calculators

December 7, 2017

The Field Guide to Mortgage Calculators

Sorting through the math involved in buying a home requires more than a device or app that adds and subtracts. That’s why mortgage calculators have proliferated online. They come in many different forms and offer a surprising variety of functions to help us understand the financial implications of buying and owning a home.

Why use a mortgage calculator?

Understanding the costs of owning a home is a challenging exercise, but not in the same ways that differential calculus is challenging compared to a fifth-grader’s math homework. Getting an accurate idea of home ownership costs involves only the basic operations – addition, subtraction, multiplication and division – but requires getting a handle on dozens of variables, several of which are hard to estimate. After all, the monthly mortgage payment is only one of many costs related to homeownership, which includes:

• Application fees and closing costs.
• Income tax.
• Property tax.
• Real estate agent fees.
• Insurance.
• Changes in market value.
• Maintenance.
• Utilities.

This is still only a partial list. But with that in mind, here’s an overview of the mortgage and homeowner finance calculators you are most likely to come across on the web:

Basic mortgage calculator

The most fundamental mortgage calculator is relatively straightforward, and is one you’ve probably been introduced to in school. The monthly cost of a home loan can be calculated from three variables:

• Principle: Essentially, this is the home’s purchase price, minus any down payment that’s already been made.
• Interest: The fee charged by lender expressed as an annual percentage rate. To arrive at a monthly figure, divide the interest rate by 12.
• Payments over the life of the loan: Usually written in the equation as “n,” this should be the number of months in the loan term.

This formula can probably be completed very easily with a standard calculator, but its output is just one piece of the puzzle. Most of us also won’t know the exact number for each of these variables until we actually apply for a mortgage, which is a little too late to be useful. That’s why most online mortgage calculators will let users tweak each of these variables, or even estimate unknowns like the APR based on national averages or an individual credit score.

Many of them can also display the relationship between principle and interest payments over the life of the loan. This is important because for the first several years of most mortgages, borrowers will be paying more in interest than principle, and only the latter actually adds to their total home equity (or the amount of the home they technically own). This explains the benefit of paying more than the minimum amount toward a mortgage each month, if possible, or why larger down payments can result in lower overall mortgage costs.

More complex calculators

To give a more detailed look at homeownership costs, many mortgage calculators include tools that roll in other related expenses. Some, like the rent vs. own calculator at The New York Times, even take opportunity costs into account, helping users understand if or when it makes financial sense to buy a home or continue renting.

The New York Times tool provides a great overview of just how complicated household finances get, particularly for those who are contemplating a switch from renting to owning. In general, renters don’t have nearly as many costs to consider, but they end up paying more than homeowners with similar attributes after a period of time. Unfortunately for owners, as the Times’ tool shows, there are many questions involved in the process of buying, like:

• How much will the value of your home grow before you sell? How does that compare to the anticipated growth of rent?
• What kind of maintenance or renovations will be needed for the home in the near future?
• How will all of these variables change depending on inflation and overall economic activity?

There are even more mortgage calculator tools available for other particular exercises. Here at New Penn Financial, we’ve gathered six of our favorite home purchase calculators. These include calculating the costs of refinancing a loan, estimating how long it could take to save up for a down payment, and using your personal financial data to create an estimate of a mortgage you could be approved for. All in all, mortgage calculators make it easier for prospective homebuyers and sellers to get a good idea of how they might fare under any circumstance. Of course, they still can’t replace the advice of a trusted financial professional.

Good Times Keep a-Rollin’, Here’s Why

December 4, 2017

Good Times Keep a-Rollin’, Here’s Why

Housing has led the economy. Housing leads the economy. The proof is in the data.

The latest data show sales of new homes surged 6.2% to 685,00 units on an annualized rate in October. The surge lifts the sales pace to its highest point in a decade. It also lifts year-over-year sales growth to 8.9%.

We’ve seen a lot of commentary on the October sales numbers. The commentary has been particularly enthusiastic on the entry-level front. Few commentators are more enthused than Granger MacDonald, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Kerrville, Texas. Says Mr. MacDonald: “The October report shows strong sales growth at entry-level price points.”

We were enthused to read Mr. MacDonald’s quote, so we vetted the numbers.

We appreciate Mr. MacDonald’s enthusiasm. Perhaps entry-level home sales growth is strong in Texas. After all, housing markets are local markets. Unfortunately, the data from the Census Bureau at the national level show little uplift. Homes priced $200,000-and-under are still only where they were mid-summer (though sales in this range have trended higher in recent months). We would have liked to see more.

No need to linger on a minor negative, because a lot of positives can be reported. New-home sales overall are a positive. Pending home sales are another positive.

The Pending Home Sales Index spiked 3.5% to 109.3 in October. The index hasn’t been this high since March. The index points to rising existing-home-sales growth, which has been tough to come by for much of the year. Sales growth — at least growth at the national level — could be realize in coming months.

The NAHB tells us that housing accounts for up to 18% of gross domestic product (GDP). The accounting includes the imputed, such as the rent owners would pay if they didn’t own. The NAHB’s contribution parameters might be liberal, but the fact is that housing is a significant contributor to economic growth.

And how is the economy growing?

Third-quarter GDP was more solid than initial estimates. Growth was revised up to 3.3% from 3% on an annualized rate. Housing contributed, to be sure, but other sectors are contributing more. This is good news for all involved.

Despite all the good economic news, interest rates remain home on the range. The yield on the 10-year U.S. Treasury note remains range-bound between 2.3% and 2.4%. Quotes for a prime conventional 30-year mortgage remain range-bound between 3.875% and 4.125%.

We don’t see the range changing. Market participants have already priced in a new Federal Reserve Chair and a Fed interest-rate increase (for December). Expect to see more “range-boundness” through the remainder of the year.

What is Mortgage Preapproval and Why is it Important?

November 29, 2017


Mortgage preapproval is often one of the first steps you will take in the complex process of buying a home. Like many other aspects of homebuying, it’s one that’s shrouded in mystery and its fair share of misconceptions. Particularly if you’re a first-time buyer, it’s essential to understand what mortgage preapproval is, why it’s important and how to complete the process.

A mortgage preapproval serves two important purposes:

  1. It allows a mortgage lender to check an applicant’s basic financial background to determine how much it is are willing to lend the would-be buyer for a home loan.
  2. It gives homebuyers a good estimate of how much they can expect to spend on the purchase.

After the rigorous vetting process required for most preapprovals, successful applicants will receive a preapproval letter that can serve like a bargaining chip during negotiations with a home seller. In fact, most sellers today have come to expect preapproval letters from any serious buyers before considering an offer.

While preapproval letters are taken seriously by sellers and their agents, it’s important to know that they don’t constitute a total guarantee from a lender. There are often contingencies and conditions written into the contract that give the lender the right to revise some terms of the loan before giving the final seal of approval. While rare, it’s possible that a lender could back out of preapproval altogether if any of these contractual obligations are not met. If it happens at all, this will usually occur during the closing process.

It’s also good to know that mortgage prequalification is not the same as preapproval, despite the similar terminology. Essentially, prequalification is the light version of preapproval, since it usually means a lender will perform only a cursory credit check and return with a very general estimate of the kind of home loan it could offer you. Prequalification can help buyers survey their options before committing to one lender, but it won’t count for anything once they start entering serious negotiations with a seller.

In short, preapproval will give lenders a vote of confidence in you as a homebuyer, which provides you with the confidence to make a serious, competitive offer on a home you love. Of course, there is a good deal of work that needs to go into the process first.

What you need for preapproval

Mortgage preapproval is just a few steps away from the real deal, so getting ready for one requires work from you and your lender. First, you’ll need to fill out a lengthy application containing as much information as possible about your personal and financial background. Then you need to provide your lender with documents that prove everything you’ve stated in that application is correct.

Start by collecting all the necessary records and copies you will need, which typically include:

  • Identification like your driver’s license, Social Security number, proof of residence and records of your marital status.
  • Recent statements from any bank accounts in your name.
  • Income tax returns and recent pay stubs to confirm employment and income.
  • If you own a business or are self-employed, provide a recent profit and loss statement along with relevant business tax forms.
  • A comprehensive list of all financial assets you own (including property and investments) as well as all liabilities you owe (like a previous mortgage, credit card debt or outstanding student loans).
  • For first-time buyers who were renting, provide recent canceled rent checks or include records of rent payment in your bank statements.
  • If you are using gift money from family or a charitable donation to pay for the down payment, you need to provide written proof from the source of that payment that it is a gift and not a loan.

In the process of reviewing your application, a lender will also pull your credit report to verify the information you provided, as well as to glean additional insight into your financial history. It may be helpful to check your credit report in advance of submitting your application to make sure everything is accurate. If you have any derogatory marks on your report, like bankruptcy or late payments, you may need to provide the lender with proof that those issues are officially resolved.

Mortgage preapproval is a great way to gain a clear view of how much home you can expect to afford, but it’s not something that should be rushed into. Perform as much research on your own as possible into where exactly you want to live and the housing prices in that area to come prepared to the mortgage lender’s office.

Housing Going Strong, Will Keep Going Strong

November 27, 2017


Housing led the economy out of the 2009 recession. It leads the economy to this day.

New housing activity is a big deal to economic growth. When all the inputs to a new home — material, financing, sales, accouterments (furnishings and such) — are factored in, it’s easy to appreciate new housings’ contribution to the economy. 

New housing activity remains a big deal, and it remains a big deal where it matters most. The single-family-home segment is where it matters most. 

Single-family-home starts were up a stout 5.3% in October. Starts rose to 877,000 on an annualized rate for the month. More single-family starts are in store. Permits rose to 839,000 on an annualized rate in October.

The numbers in total, which include the multi-family segment (also up in October), show starts at 1.29 million on an annualized rate. Starts have trended higher in recent months. They’ve trended higher for the past five years, but they remain below the historical 1.5 million (annualized) average. Room for growth exists. 

As for tenured homes, buyer interest creeps higher.

Existing home sales rose 2% in October to lift overall sales to 5.48 million on an annualized rate. Single-family homes led the charge. They rose 2.1% for the month.

Buyer interest is there. Seller supply continues to dampen enthusiasm, though. 

Total housing inventory decreased 3.2% in October. It’s now lower than it was this time last year. No one should be surprised when prices are considered. The median price for an existing home rose 5.5% to $247,000 in October. The October price increase marks the 68th consecutive month of year-over-year price gains.

We offer the usual caveat — housing markets are local markets: Colorado, Connecticut; New York, New Mexico, they’re hardly the same. Overall, though, things look good. They look good despite a high degree of skepticism.  Read enough of the popular financial media outlets and you’re sure to encounter an article with at least one sentence that contains both “bubble” and “housing.”

A high degree of skepticism is a positive. The fact that many market participants are worried about a bubble suggests there is no bubble. The housing market remains a healthy market due in large part to healthy skepticism. 

Is it a perfect market? No market ever is. That said, we see little proof the housing market floats on air.  


All Quiet on the Interest-Rate Front

The range remains the same, as we expected it would. 

We’ve been portending the recent tend for at least the past month. With little new information on taxes, consumer-price inflation, and economic growth, we thought that interest rates would continue to hold within a tight range. That has been the case, at least on the long-end of the yield curve. 

The 10-year U.S. Treasury note has been anchored at 2.35% for most of November. Deviations have been no more than five basis points up or down. 

As the 10-year Treasury note goes, so go long-term mortgage rates. To no one’s surprise, the 30-year fixed-rate mortgage continues to hold a narrow range. The range has held within 12.5 basis points up or down for most of the year, with 4% serving as the pivot point. Mortgage News Daily tells that 4% has been the most prevalent quote across the country for a prime 30-year conventional loan for the past week. Again, we’re not surprised.

With the holiday shopping season heading to full force, we’ll stick to our mortgage-rate thesis: We see nothing but range-bound quotes from now until the new year. A quote below 4% on a prime conventional 30-year loan is likely worth locking. A quote above 4%? That might be worth floating. Of course, it all distills to individual risk preferences.

The Yield Curve Flattens. Should We Care?

November 21, 2017


The yield curve has flattened in recent months: Short-term yields have risen; long-term yields have drifted lower. 

The yield on the 2-year U.S. Treasury note was 1.22% to start the year. The yield on the 10-year Treasury note was 2.45%. Today, the 2-year note yields 1.68%, the 10-year note yields 2.33%.  The yield on the 2-year note is up 66 basis points, the yield on the 10-year is down 12 basis points. (Yields on 20-year and 30-years bonds are also down.) 

Should we care?

We should. When the yield curve flattens, or inverts, a recession has usually loomed. The yield curve has predicted all U.S. recessions except one since 1950. The yield curve, though still normal (upward sloping), is the flattest in a decade. The last time the yield curve was this flat, an 18-month recession ensued.  

A flattening yield curve can indicate that market participants are worried about the macroeconomic outlook. They anticipate a slowing economy, which would prompt the Federal Reserve to lower interest rates and provide more liquidity. Market participants sell short-term maturities and go to long-term maturities because long-term debt prices will rise more on a lower-rate trend. 

That’s one reason.

The Fed simply raising the federal funds rate is another. This reason we know. The Fed has been raising the fed funds rate. It’s likely to raise it again next month. 

The Fed raising the fed funds rate, a short-term rate, could constrict credit growth. Rising short-term rates coupled with falling (or even steady) long-term rates could strangle credit growth. Lenders prefer a steeper yield curve because they earn a greater spread on the price paid for funds and the interest earned lending those funds long term. 

So, does this mean the good times will soon end? 

Not, necessarily. This time is different. Then again, this time is always different. 

A flatter yield could be the new normal. Few market participants before 2008 would have expected the Fed to hold the fed funds rate at close to zero, which it did for six years. That was an unprecedented new normal. Asset prices re-inflated while consumer-price inflation remained remarkably muted. 

The flattening yield curve also could be nothing more than a supply-demand reaction. The U.S. Treasury Department has said it wants to shift the focus to short-term debt. It wants to issue more bills and 2-year and 5-year notes and fewer long-term notes and bonds. More supply on the short-end requires higher yields to draw more demand. 

Our take is that things don’t feel “recessiony,” as unscientific as that explanation is. We still have low inflation, solid corporate earnings growth, persistent employment growth (with low wage inflation), and a lot of folks worried about the flattening yield (a good thing).

We see business as usual. Business as usual includes mortgage rates holding a tight range through the remainder of the year, with the range possibly holding into 2018. The range has held 3.875% to 4.125% on a prime 30-year loan.  We expect more of the same.

Taxes Revisited

More details have been released on President Trump’s tax reform plans presented to Congress. A few could impact our business directly. 

We have the good: The mortgage-interest rate deduction remains, though it has been capped at $500,000. People will still be allowed to deduct state taxes and local property taxes, though it has been capped at $10,000. An incentive to itemize remains. 

We also have the bad, at least from the NAR’s and NAHB’s perspective: The standard deduction is nearly doubled for individual and married couples. Relatively speaking, the mortgage-interest rate deduction loses value. The NAHB also failed to get the home-buyer tax credit it sought. 

We remain sanguine. No one knows what tax reform will emerge once Trump’s plan is run through the sausage grinder. Congress could accept some, none, or all of the plan (though “all” is unlikely).  Let’s keep in mind, too, that housing is an influential constituency with considerable lobbying muscle. 

And if everything goes the other way?

We’ll survive. Yes, people act on tax benefits. They’re more likely to act on psychic and economic benefits. An owner-occupied home provides both psychic and economic benefits that are independent of tax benefits.

November 15, 2017


Going into the mortgage process, it is common for many first-time or even seasoned homebuyers to have a few misconceptions. With reasonable and clear expectations, the entire process of obtaining home financing can be simple and painless. Here are few myths about the homebuying process, combined with the truths behind them.

Lenders only look at your best credit scores

When you apply for a loan, all three reports from the major credit agencies — Experian, Transunion and Equifax — are pulled. Your lender will look at all of them then use the middle of the three. If you are applying as a couple, each borrower’s middle score will be looked at and the lowest middle will be used for approval. This means that if you have a score of 780 and your spouse has a score of 700, your loan is likely to qualify at 700. 

One exception is jumbo loans: typically in a situation where one borrower has a higher score and is a higher earner, some lenders will allow the higher credit score on the file to be used.

The rate you are quoted at the start will be the rate you get

Rate quotes, unless locked in immediately, are akin to an estimate based on the market and your personal eligibility. The rate quotes can change over the course of the process. 

For those seeking a mortgage refinance, locking in a rate when its quoted to you is possible as long as you’ve provided your lender with sufficient information. For homebuyers, through, this is more tricky: you are typically given a rate quote at the start of your pre-approval process, but you cannot lock in that rate until you’ve actually found a property you aim to buy. 

Fixed rate loans are better than adjustable rate loans

The loan you choose is going to be the one that works best for you and your unique finances. While rates are historically low, it may be tempting to play it safe and opt for a 30-year fixed rate mortgage. But if you are not sure how long you’ll own the home, a adjustable rate mortgage (ARM) may be a better option. ARMs have lower rates and shorter durations before the rate resets, so if after 5 years you are looking to move on and sell the house, you’ll have saved serious money in that time. 

Mortgage insurance is always required for down payments less than 20 percent

While lenders typically require you purchase mortgage insurance on all loans where the borrower is putting down less than 20 percent of the principle as a down payment, certain loan programs like a “piggyback” loan or VA loans allow for no mortgage insurance premiums for those who qualify.

New Penn Financial is here to educate homebuyers and connect them with the loan that is right for them.