The Housing-Bottom “Finder”: Mortgage Rates
Amid all the hand-wringing over whether spring will see home prices rise, fall, or plateau, market analysts have increased their focus on the prospect of mortgage-rate increases and their possible effect on sales activity. A significant rate climb – given the expectation that rates are much more likely to go up rather than down over the next 12 months – would be a powerful motivator for qualified prospective buyers who have been waiting (and waiting) for the market to hit bottom.
Some observers see upward pressure on rates mounting because, ironically, the very homebuyers who are waiting for home prices to bottom out are sustaining demand for rentals, whose ongoing price increases are seen as an indications of rising core inflation.
Hard to say exactly how much rental rates are coming into play. A recent Wall Street Journal post points out that there is disagreement over how to properly weigh rental and other housing expenses when calculating overall consumer costs and measuring inflation. Some analysts look to the consumer-price index, where housing accounts for 32% of expenditures, or 40% of the core CPI (which excludes food and energy costs).
Pressure points for buyers
But however the index is blended – the Federal Reserve measures personal consumption expenditures, which gives less weight to housing than the CPI – rental housing costs won’t be ignored by the Fed when it sets overnight rates.
“You got to think that the traditional buyer is more concerned with rates,” Steve Grasso, director of institutional sales at Stuart Frankel, told CNBC on Monday. “Once the spring/summer kicks in, I would think many would be motivated to buy something while rates are low. Gambling that they stay low for another year is risky.”
Another looming, rates-related concern is tied to the proposed mortgage-lending regulations announced last week by the Federal Reserve and the Federal Deposit Insurance Corporation. The basic aim of the rules is to motivate lenders to maintain solid underwriting standards by requiring them to retain 5% of the loans on their books, or by requiring borrowers to post a minimum 20% down payment. Loans conforming to either of those requirements would be eligible for securitization.
The rules package, which is up for public comment through June 10, would make conforming loans more challenging to obtain because they impose relatively high credit standards (and more demand for cash, in the case of the 20% rule). But in the short term, at least, the rules would be of little concern to the vast majority of borrowers, who, as they have in the past, would continue to work with lenders who guarantee loans through Fannie Mae and Freddie Mac. For those loans, the 5% risk-retention rule and the 20% down rule wouldn’t apply, although Fannie and Freddie likely will require borrowers to pay a bit more in overall loan fees to help cover mortgage insurance costs and default risks.
So yes, prospective homebuyers who wait risk higher rates or associated borrowing costs.
A call for less-stringent financial terms
The National Association of Home Builders, among other housing-industry groups, is resolutely against the 20% down-payment proposal, which would confer “qualified residential mortgage,” or QRM, status and risk-retention exemption on each loan that meets that and a couple other QRM criteria.
“By mandating a 20% down payment on qualified residential mortgages, the Administration and federal regulators are excluding those without huge cash reserves — which constitutes most first-time home buyers and many middle-class households — from a chance to buy a home,” NAHB Chairman Bob Nielsen said in a recent press release.
True, QRM will be a tough hurdle for most. But that’s the point, and it’s unlikely to be major issue for most borrowers or much of a hindrance to a market recovery. Most of the borrowers who propel the recovery will be after loans guaranteed by Fannie and Freddie, which, even though their operations are targeted for eventual privatization, will nonetheless be in business for years to come.