What will happen to rates if the economy starts to heat up?

We have been accused of being too optimistic in our projections. For example, last year when economists were calling for a double dip recession, we downplayed this threat. When analysts have pointed towards a housing market that will not recover for years, we pointed out the economic factors which could turn things around quickly. These factors include projected population growth, increased household formulation in a recovery and continued governmental aid for the sector.

We must definitely look at the other side of the coin as it appears the economy is starting to turn the corner for the better. What if the economy starts to heat up from here? Certainly, the stock market is displaying strength which can be seen as the market's belief in the economy's growth potential. The fact that Europe has approved the Greek bailout package is another positive sign.

 

Economic growth is what everyone has been rooting for.  Evidence is mounting that we are on the grasps of a housing recovery as well.  But recovery does not come without risks. What are these risks? We will cite two -- the risk of inflation and the risk of higher interest rates.

The Federal Reserve Board has seemed to discount the risk of inflation, but if there is no risk then why has the price of gold continued to be so strong?  Gas prices are now approaching $4.00 per gallon, a price that will affect consumer purchasing power.

If Oil prices remain lofty, which seems reasonable due to the uncertainty surrounding Iran and a chance that QE3 is coming, it will weigh on economic growth much like it did last year. A look at the chart shows prices seem destined to retest the 2011 price highs of $115 a barrel.  When you hear someone say they "hope for a lower rate", say be careful what you wish for, because it may take some pain at the pump and a weakening economy in order to achieve lower home loan rates.

The Federal Reserve Board (FED) also has told us that rates will stay low for at least two years. We need to point out that the FED does not really "control" rates. The yield of Mortgage Backed Securities are what determine the interest rates on home loans.  If the economy keeps recovering, rates will rise and the FED will have no choice but to change on its forecast. Actually, the FED would love to do that because that means the economy and especially the housing market is on the road to recovery.

The Core Consumer Price Index (CPI) rose .2% in January from December, which was just above expectations.  The Core Consumer Price Index (CPI) is a measure of the average price level paid by urban consumers (80% of population) for a fixed basket of goods and services and removes volatile food and energy categories and is considered a better gauge on inflation trends.  Year-over-year, Core CPI is up to it's largest yearly gain since September 2008. It's important to keep an eye on CPI readings as it's an indication of inflation being passed down from the producer to the consumer meaning higher costs on goods and services.

Everyone has been hoping for a stronger recovery. We just have to realize that if this recovery becomes stronger, there are negative factors we will have to deal with including rising interest rates. If the result is more jobs and a healthy economy, it is a price worth paying. For consumers who have been waiting to purchase a home or a car -- remember that you will get no warning that rates are about to rise and the sales are over.

  

 

Economy causes conflicting emotions for homeowners

According to national color expert Kate Smith, people have conflicting emotions regarding their homes during these economically challenging times.  Homeowners want to embrace their need for change and feel positive about their living space by purchasing new products, while at the same time being financially and environmentally responsible. Smith believes the marketplace is seeing a shift to homeowners looking for items that have high value and a long lifespan.

 

Smith, president of Sensational Color, says there are some distinct trends emerging that will guide homeowners during the next several years. “People naturally seek newness of colors, products and other items for their home,” says Smith. “However, this is now being balanced by our concern with greater issues than ourselves. Many of us are willing to tame our desire for newness and change in order to make decisions that have a positive impact on the greater good of the environment and our global community.”

 

In order to meet these conflicting emotions, homeowners are seeking out better quality products with longer life spans. “People are educating themselves more these days on the impact a single purchase will have on themselves and on the environment,” says Smith. “For example, a homeowner may desire real wood shake shingles on a roof, but they understand the lifespan of those roofing shingles is extremely limited. They’re thinking twice about how many trees would need to be harvested to make those wood shingles.

 

“Instead, that same homeowner is more likely to lean toward selecting a polymer shake roofing tile. These tiles are man-made and require minimal long-term maintenance. This becomes a ‘win-win’ choice for the conscientious homeowner.”

 

Smith has identified several key trends related to exterior home products and colors. These include:

1. Living Simply in a Complex World – This trend relates to people moving away from the old question of “what more do we want?” to the question of “would life be better with less?” The desire for a more streamlined life motivates people to select modern technology, products and materials that make our complex lives easier.
2. Give Me More “Me Time” – Younger buyers, who once would not be bothered by a home that was anything but brand new, are now changing their home buying strategies. These individuals are embracing older homes that they can personalize by adding newer products that require minimal maintenance. These Internet savvy people are relying on researching the best product options online for their homes. They’re looking for products that help blend the older bones of a home with their modern sensibilities in order to provide a sense of connection to history and their community.
3. Rules are Made to be Broken – Today’s homeowners are making their own rules. In the coming years, look for unusual mixing of materials and colors in ways communities haven’t previously seen. Homeowners want their homes to reflect their personalities, but they also want to express themselves on the exterior of the home. Look for attention-getting colors on front doors, a not-so-expected color on window frames and unique blends of color on the roof in the coming years as homeowners put their personal stamp on their homes.
4. Naturally Inspired and Improved – Colors and materials that harmonize with the natural surroundings of a home are increasingly important to homeowners. This goal becomes easier for people to achieve as manufacturers continue to introduce products that mimic nature (such as polymer slate roofing tiles). Homeowners are basing their purchasing decisions on their increased understanding that the manufactured products they select will have a longer life span, thus reducing the need for replacement. And, in many situations, these man-made products that look, feel and have natural colors incorporated, require less maintenance and reduce the negative impact on the environment.
5. Inside Out Harmony – Regional colors and materials on a home exterior help anchor people to their community, providing a unity within a neighborhood or subdivision. In many cases, homeowners are also bringing the outside indoors by adding plant walls, gardens and water features into the home. On the exterior, they’re adding fire pit areas, and outdoor living and dining room spaces that blur the boundaries of living both inside and outside the home.

 Courtesy of RISMedia

Homeowner insurance policies beginning to vary greatly

Homeowner insurance policies can vary greatly, and if home owners aren’t careful, they may find their claims denied when disaster strikes, according to a study to be published early next year by the University of Chicago Law Review. While home insurers once used standard policy forms by the Insurance Services Office, now some are coming up with their own policies and a few tweaks in the wording can mean trouble for some home owners, according to the study.

Home owners should read the fine-print and carefully review their policies to examine what’s covered and what’s not, the study notes. For example, some policies include mold and lead coverage; other policies do not. According to United Policyholders, here are a few questions home owners can ask insurance agents when shopping around for a home owner’s insurance policy:

• What is the coverage for water damage from sewer or pipe problems?
• What is the coverage for any damage to the foundation — is it completely covered, limited, or excluded completely?
• Will items be paid at “replacement value” or “actual cash value”?
• Ask about exclusions and wording differences across policies.

Study author Daniel Schwarcz, a University of Minnesota Law School associate professor, told The Wall Street Journal that he is urging state insurance departments to post their insurance policies online so they can be reviewed closer by consumer groups and home owners.

The unfortunate part of homeownership can be greatly minmized...

It's an unfortunate part of homeownership — things break down. Heating and cooling systems have limited lifespans and can cost thousands to replace. Home appliances go on the fritz or the plumbing system shuts down, and before you know it, you've had hundreds of dollars worth of unexpected repairs.

One thing that can help with unexpected costly repairs is preventive maintenance. In fact, think of it as giving new meaning to the phrase "home health."  For those purchasing a home, it is strongly suggested to get a Home Inspection before finalizing the purchase of the property.  A professional home inspector can assess the property, and alert you of what possible issues to expect in both the short and long term.

Just like your annual physical, preventative maintenance can play a critical role in keeping your home's systems and appliances running smoothly and efficiently. Most homeowners are aware of the basics, like regularly changing the air filters on their heating and cooling systems, checking for leaky faucets, and so on. However, the to-do list of preventative maintenance tasks can get long, and not everyone has the time or experience to do it all themselves.

Unfortunately, without a professional preventative maintenance program, most home systems and appliances never get a thorough check-up, leaving them vulnerable to costly—and often avoidable—problems. 
 
A professional preventative maintenance program can be a homeowner's most important ally when it comes to the upkeep of their heating and cooling system, plumbing, electrical system, and most major appliances. Quality service providers take a comprehensive approach to preventative maintenance, and are trained to look for early signs of wear and tear, perform recommended maintenance, and record the condition of your appliances and home systems so any repairs and/or replacements can be made before they lead to an unexpected breakdown.

Along with the convenience and confidence of regularly scheduled check-ups, homeowners can also realize other benefits such as reduced energy costs, improved system reliability and lower repair costs over the life of their covered items.

"Preventative maintenance is an investment in the health and well-being of your home's systems and appliances," says Matt Wendl, director of American Home Shield's new preventative maintenance service, which the company recently launched in 45 markets across the nation. "Early detection of problems can help eliminate the need for more costly repairs."

Wendl offered the following tips for homeowners considering a preventative maintenance plan:

• Get a detailed, written list of all items to be inspected, and how frequently they will be inspected.
• Be sure they are doing a visual inspection, as well as testing how key components of your systems or appliances operate.
• Confirm costs up front for any needed repairs. Some providers offer discounts off their regular rates for repairs.
• Contractors should be licensed, bonded and pass a criminal background check.

Courtesy of RISMedia

Rental market leads to hope for real estate market

The apartment vacancy rate is at its lowest level since late 2001 as the rental market continues to soar, according to the latest fourth-quarter data by Reis Inc. As demand increases, the vacancy rate for apartments dropped in the fourth quarter to 5.2 percent compared to 6.6 percent a year prior. “Multifamily property has been the star of the real-estate sector for more than a year, generating profits for landlords but headaches for renters struggling with the economic downturn,” an article in The Wall Street Journal notes.

“Demand has swelled from people being foreclosed out of their houses as well as those unable or unwilling to buy.” Landlords are also raising their rents.  Asking rents moved up 0.4 percent in the fourth quarter, averaging $1,064 a month nationwide — compared to $1,026 in 2009. New York City continued to have the highest rent in the country at $2,876 a month.

"Rents are rising, vacancies are falling, household formations are growing and rental supply is limited," according to “2012: The Year of the Landlord,” a report issued by Morgan Stanley. "We believe the demand for rental properties will continue to grow."

Some people would like to own homes and take advantage of unprecedented affordability, but they can't qualify for financing. Others who were homeowners can no longer afford their properties and have become renters. And plenty of people are too leery of the economy to take the homeownership plunge now.

Meanwhile, as the rental market takes off, builders are rushing to play catch up in building new units to meet the demand. In 2011, Zelman & Associates estimates that more than 173,000 units were started, and about 225,000 and 280,000 starts are expected in 2012 and 2013.   Led by strong gains in multifamily housing, groundbreaking for new-housing market is soaring.
Builders increased their spending in December for the fifth consecutive month, ending a weak construction year on a hopeful note. Starts for structures with five or more units have increased more than 30 percent from and is nearly double year-over-year levels, Reuters reports. Rental costs are also on their way up, increasing 2.4 percent over last year compared with an increase of 0.6 percent in 2010, Reuters reports.

Good start for economy in 2012 bad for mortgage rates?

So much has been happening in the mortgage markets the last few days - it begs the question, "What was all the fuss about?"  At the end of January we saw the release of the first measure of economic growth for the last quarter 2011. The number was solid at 2.8%, but disappointing because many analysts were expecting growth greater than 3.0% and fear a slow down beginning in the first quarter of this year.

In addition, the trepidation regarding Greece, the Federal Reserve Board's statement about the future of rates and reports of tepid growth in Holiday spending caused rates to ease back down.  It appeared economic recovery was happening very slowly.  However, through all this trepidation, the stock market had a very strong month in January.




According to the ADP National Employment Report, private-sector employment increased 170,000 from December to January. This marks the 24th consecutive month of increases. The average for the last three months of gains has been 223,000 versus an average of 163,000 per month for all of 2011.

 If the economy is to slow down from here, why was the stock market rising?  Well, the most important data so far this year has been providing a boost in the form of recent employment reports. The employment reports are not only very significant, but also the first real economic data released which measures performance in 2012.



According to the Bureau of Labor and Statistics, nonfarm payrolls increased in January by 243,000. This marked the largest gain in nonfarm employment since April 2011. The average 2011 gain per month came in at 152,000. Since a decline in nonfarm payrolls in early 2010, 36% of the jobs lost between January 2008 and February 2010 have been recovered. Nonfarm payrolls measure the number of people on the payrolls of all non-agricultural businesses.

There was some optimism before the release of the reports because of the drop in first time employment claims during the past month. The Labor Department report late last week did not disappoint, coming in at 243,000 jobs. This was much higher than expectations.

These reports combined with other strong economic news have had a positive result on stocks. Which has had a negative impact on bonds as money flows out of bonds and into stocks.  Mortgage rates are determined by the value of mortgage bonds (a.k.a. mortgage backed securities).  The value of mortgage bonds typically travel in the opposite direction as the stock market.  So conversely when the stock maket performs well, mortgage rates typically tick upward. 

Coupled with a successful conclusion of the meeting of European leaders we now optimism and perhaps a renewed understanding that rates may not stay at these record levels for long.

Just because you have a 20% downpayment, doesn't mean you should use it...

Despite the “doom and gloom” in today’s headlines, in the current economic climate, homeownership is more affordable than ever, thanks to low interest rates and lower home values. For those buyers who manage to have a 20% (or more) downpayment, they believe this will get them the lowest monthly mortgage payment. However, simply because buyers can afford to put down this amount does not necessarily mean they should.

Those buyers who have saved enough to put 20%—or more—down on the purchase of a home may want to consider another approach—preserving some of their cash for savings, investing or other purposes. It may sound counterintuitive, but with today’s interest rates and the competitive pricing of private mortgage insurance (MI), borrowers can retain some of their money by putting less money down on a home—say only 10%—and still get a low monthly payment.

Home buyers should use a qualified mortgage or real estate professional to evaluate purchasing power based on existing assets as well as future need. The right counsel can help home buyers leverage their current assets while keeping sufficient reserve for any immediate or future financial needs, not to mention all the trips to the local big box hardware store that seem to come standard for any new homeowner.  At the very beginning, it is imperative to look at the borrower’s overall financial picture—taking into consideration current cash flow, debt and all future financial obligations.

Think beyond just the interest rate and downpayment, as these are not the only keys to securing the lowest possible mortgage payment. By having a general understanding of the current financing options, you can better understand what you can responsibly afford, which, in some instances may be more than you think. 

While in the past the adage was, “The more you borrow, the more you leverage,” in today’s financial times, the scenario is much different. Today, borrowers can leverage private MI to put as little as 5% down on a home and still have a competitive payment. And for those potential buyers who have stayed out of the market over worries of declining property values, they can still purchase a home without funneling all of their available cash into the downpayment. By utilizing this strategy, home buyers are able to leverage their current assets, while still keeping sufficient cash reserve.

So, while putting 20% down on a home doesn’t always make sense (or dollars), buying at a time of high affordability does. And by understanding the current financing options available to buyers, and discussing what those options mean for downpayment needs or monthly payments, you can overcome investment fears and achieve your goals.



Courtesy of: Brien McMahon, Chief Franchise Officer of Radian Guaranty Inc.