We see on every listing how the estimated values jump all over the place.
On my Aviara listing, the initial estimate was $2,247,615, but once the home hit the open market, the red team lowered their estimate by $313,637 to $1,933,978. A few days later, they have INCREASED it by $205,143 to $2,139,121…….which are some wild swings in less than a week!
It appears that the automated valuations can be wrong by 10% to 20%, and the guys behind the curtain are manipulating them as needed. A scary thought if people are relying on them.
Do people rely on them?
There are probably buyers who are believers, and use them to decide how much to pay for a home.
But it’s even worse for sellers. It’s been happening more and more that home sellers are putting more faith in their zestimate and Redfin estimate. If those estimates are higher than what their agent tells them, of course they want to list for a higher price and they wave around their computerized values as proof.
In today’s frenzy it may not seem to matter much, but there will come a day when accurate valuations will become more necessary.
Or will it?
Rob talks about the changes being made to the GSE’s underwriting guidelines below.
Fannie Mae and Freddie Mac are issuing more appraisal waivers based on automated property valuations! Usually it’s because the down payment is sufficient enough that they aren’t that worried about a default. But once the guidelines are changed, won’t it just be a matter of time before appraisals as we knew them become extinct?
After the TV show, Derrick and I were discussing the good old days when homes were cheap and everyone moved often. He is a mortgage originator, so I asked him how many adjustable loans he has done this year.
His answer? None.
Back in the day, adjustable-rate mortgages were the preferred product. Look at the difference:
$300,000 loan amount
Monthly payment at 11.875% = $3,057
Monthly payment at 9.0% = $2,414
Difference = $643 per month!
Nobody looked too hard at the terms of the ARM because a) $643 per month was a ton of money back then, and b) no one planned to stay forever. Home buyers could always refinance if they had to, but many solved their ARM concerns by moving again – heck, there were lots of homes for sale!
Then the 2-out-of-5-year tax exemption was passed in 1997 which really juiced the market. Homeowners were rewarded with tax-free money for moving!
It was rare that anyone had the full $500,000 in net profit, mostly due to the lower home prices and because of other recent moves. Yet many moved again just to say they got their tax-free money!
At the same time, the mortgage industry, led by Countrywide, flooded the market with an alternative – the interest-only mortgage with a rate that was fixed for the initial period, and you could choose 3, 5, 7 or 10 years. Once those saturated the market, Countrywide stole the neg-am ARM idea from the S&Ls and spiked them with high margins, and, well, we know how that ended.
As the private mortgage companies exited the market, the government lowered rates, and backed Fannie/Freddie to provide market liquidity. For the last ten years, the only program being offered is the 30-year fixed rate mortgage, and because rates are so much lower than before, buyers didn’t mind.
The end result? Today, you never hear anyone buying a home for the short-term.
The combination of ultra-low rates and difficulty of finding a better home has locked in everyone into their current home. Even if the current home becomes unsuitable, it beats moving again.
The low-inventory era is here to stay, and will likely get worse.
It’s a feel-good idea that inflation and lower rates can ease the pain of higher prices. But recent pricing has been really painful for buyers! Let’s apply the data to our local action (using 80% of MSP):
NSDCC Detached-Home Sales, February
Year
# of Sales
Median SP
Mortgage Rate
Monthly Pmt
2006
137
$833,000
6.25%
$4,103
2015
171
$1,110,000
3.71%
$4,092
2018
166
$1,289,005
4.33%
$5,121
2021
226
$1,736,000
2.81%
$5,714
It’s a nice idea, and higher rates did cool things down a bit in 2018. But today’s market is so explosive that we are blowing through all the usual stop signs – look at the number of sales!
My guess is that there will be additional sellers pulled forward from future years, just like with buyers – it’s too lucrative and tempting to find a way to sell now. Might it mirror the covid-recovery trend line?
There was a mistake in the rate-check I posted on Monday (above).
The jumbo rate quoted should have been 3.37%, not 2.37%.
This article discusses the spread between the conforming and jumbo rates, which has been closer until recently. It mostly comes down to lenders having few options where they can sell the jumbos loans, where the government will buy every conforming mortgage you can send them:
For anyone who might be concerned about mortgage defaults, I wanted to highlight these charts to show the risk level the banks are accepting on jumbo loans. This is the safest-looking data I’ve ever seen – it would take a catastrophic event for us to have a mortgage meltdown like we had last time:
A credit score of 775, equity over 20%, and a debt-to-income ratio under 33% is a dream borrower!
We know that the ultra-low mortgage rates and tight inventory have been driving the market wild.
But here’s an extra boost – the strict mortgage underwriting that began in April is being relaxed:
Credit Loosening: According to the NFCI credit index, a composite measure of credit conditions, credit tightened dramatically in mid-April to its most conservative level since 2009 due to the increased economic uncertainty driven by impacts from the pandemic. Since then, credit availability has loosened, even reaching pre-pandemic levels in August. This credit composite takes into consideration many different credit indicators, giving a comprehensive picture of credit conditions in the U.S. When lending standards are tight, fewer people can qualify for a mortgage to buy a home. Likewise, when standards are loose, more people can qualify for a mortgage and buy a home. Credit loosening in August compared with last month increased housing market potential by 266,640 potential home sales.
The graph above is somewhat misleading because they are only reflecting the month-over-month differences. The improvement of ‘house-buying power’ due to low rates has already been in place for months now, so the increase from July isn’t that dramatic.
I’ve heard that the qualify-using-bank-statements mortgage is back, so that will add a few self-employed buyers who can’t qualify using their tax returns. More competition!
Buyers are rushing back into the housing market, enticed by record low mortgage rates and a pandemic-induced need to nest like never before.
Mortgage applications to purchase a home rose 4% last week from the previous week and were a remarkable 21% higher than one year ago, according to the Mortgage Bankers Association’s seasonally adjusted index. That was the ninth consecutive week of gains and the highest volume in more than 11 years.
“The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.
Plus the loan-qualifying by bank statements (instead of tax returns) is coming back – though with 15% down payments, instead of 10%:
Just like the price of gasoline, mortgage rates are very slow to come down, but they tend go up like a rocket – and with the surprising employment news today, we’ll probably get back into the mid-3s by Monday. We’ll see if the lowest rates in history were the sole reason why showings rebounded so quickly. From cnbc:
What’s good news for the U.S. economy is suddenly bad news for mortgage rates. A far-better-than-expected May employment report only added to a growing sell-off in the bond market, pushing yields to the highest level since March. Mortgage rates loosely follow the yield on the 10-year Treasury.
Rates have been rising this week, after sitting around a record low for the last two weeks. Friday, the average mortgage shopper may see rates on the 30-year fixed as much as a quarter point higher, according to Matthew Graham, COO of Mortgage News Daily, which runs daily averages from lenders.
For those with top-tier credit and financials, they may only see an eighth of a point increase, but for those with lower scores and down payments, the jump could be as much as 0.375%.
“It’s going to be ugly,” said Graham. “Today is the first time since the Covid-19 market reaction settled down in March that interest rates truly have a reason to panic. Until further notice, this looks like liftoff.”
This is not, of course, the last word in a mortgage market that has been on a rate roller-coaster ride fueled by a massive spike in mortgage delinquencies, an initially confusing and risk-ridden government bailout, and an overstressed loan servicing system. The mortgage bailout has been clarified, with parts rewritten to help servicers, the number of borrowers in forbearance plans is shrinking and mortgage companies are on a massive hiring spree.
The coronavirus caused banks to pull back on lending, and one niche that was severely impacted was jumbo loans with less than 20% down payment. In early March, you could have borrowed $2,500,000 with 10% down, and by the end of March the max was down to $850,000.
We got lucky and found Dustin at Mission Fed, who is still funding the jumbos at 90%LTV up to $1.5M! My buyers thought he made the process simple and easy, and we closed escrow on the day Dustin predicted in the beginning. We couldn’t be more pleased with the service.
Here is a quick snapshot of some of the out of the box programs and jumbo programs at Mission Fed. This assumes a score of 720+ on an owner occupied purchase of a single family home:
0% down loans to $690,000 (*Not a VA loan. Anyone can qualify for this)
7/1 ARM at 3.125% with a 1% lender credit back for closing costs
10/1 ARM at 3.25% with a 1% lender credit back for closing costs
30 yr Fixed Jumbos with only 5% down
5% down up to a loan amount of $850,000 – Rate as low as 3.25%
All on one loan. No need for a high rate HELOC
10% down payment up to loans of 1.5M
7/1 ARM at 3.125% with a 1% lender credit back for closing costs
10/1 ARM at 3.25% with a 1% lender credit back for closing costs
5/5 ARM @ 2.625% with a 1% lender credit back for closing costs
30 yr fixed jumbo at 3.25%
I like to help people, so I thought I’d mention him and his contact info for anyone reading who might be in the same fix. I don’t know any other lender offering these programs at these low rates – if you know someone, pass them along.
Dustin Gildersleeve · Mortgage Loan Originator at Mission FCU
The thoughts of Fannie/Freddie were on my list of indicators, and it’s good to see them touting lower rates in the future. But 3% rates are either here now (if you pay points) or should be here shortly at no points.
Let’s get caveats out of the way upfront. No conversation about mortgage rates would be complete without a reminder that some lenders are very far removed from the averages. Moreover, even a lender is offering rates that are in line with today’s average, that may have been a completely different story at various points in the past. With that out of the way, yes, the average lender is now offering the lowest rates in several weeks for top tier, conventional 30yr fixed scenarios.
Speaking of top tier, how about some more caveats? As soon as we start adding risk factors to the mix, rates (or upfront loan costs) rise abruptly. In many cases, lenders aren’t even offering certain combinations of factors anymore. For instance, if you were hoping to get a cash-out loan, that’s quickly become much more expensive and in some cases impossible (at certain lenders). Similar story with lower FICO scores and investment properties.
The increased costs and decreased credit availability will continue to be an issue for the mortgage market. It will likely get worse before it gets better and we’ll need to see the breadth of the forbearance issue before having any hints of a shift in those trends.
But for the average “top tier” borrower, things aren’t too bad. You’d have to go back to at least April 9th to see lower rates. Most lenders are now in the low 3% range. FHA/VA rates are still frustratingly high for many lenders. ARMs aren’t even a consideration. 15yr fixed rates (which had been much higher than normal relative to 30yr rates) are finally starting to come back down for many lenders, but remain inexplicably elevated for others.
All of the above is a byproduct of the magical process of the world coming to terms with coronavirus. As far as the mortgage market is concerned, massive joblessness creates massive amounts of missed payments. Mortgage investors have quickly adjusted what they’re willing to buy and how much they’re willing to pay until they see the extent to which the missed payments cripple the industry. While tightening credit is frustrating for many consumers, it’s a natural law of the lending environment when joblessness ramps up, and joblessness has never ramped up so quickly. Lenders are doing what they need to do to avoid a collapse of the industry. People with jobs, but who also don’t have perfect credit files are unfortunately paying the price.
