South Orange County Blog from Bob Phillips

Last Week’s Economic News in Review

Existing home sales outpaced expectations to hit an eight-year high, while new home sales were at a seven-month low. Meanwhile, lay-offs shrank to their smallest rate in more than 40 years.

Existing Home Sales

Sales of existing single-family homes, townhomes, condominiums and co-ops, increased 3.2 percent to an annual rate of 5.49 million in June, according to last week’s report from the National Association of Realtors. This was not only well ahead of the market expectation for a 5.4 million-unit pace, but marked the highest level in more than eight years.

“Buyers have come back in force, leading to the strongest past two months in sales since early 2007,“ NAR Chief Economist Lawrence Yun said. “This wave of demand is being fueled by a year-plus of steady job growth and an improving economy that’s giving more households the financial wherewithal and incentive to buy.“

Looking at price, the median existing-home price for all housing types in June rose to $236,400, which is 6.5 percent higher than June 2014’s and surpassed July 2006’s peak median sales price of $230,400. Looking at inventory, the supply of existing homes at the end of June grew 0.9 percent to 2.3 million units available for sale. This put the inventory of existing homes available for sale at five months.

“Limited inventory amidst strong demand continues to push home prices higher, leading to declining affordability for prospective buyers,“ Yun noted. “Local officials in recent years have rightly authorized permits for new apartment construction, but more needs to be done for condominiums and single-family homes.“

New Home Sales

While existing home sales skyrocketed, sales of new, single-family homes fell to an annual rate of 482,000 in June, according to last week’s report from the Census Bureau and the Department of Housing and Urban Development. This was 6.8 percent below May’s revised rate of 517,000, and marked a seven-month low.

However, compared on an annual basis, June’s sales pace was 18.1 percent higher than June 2014’s estimate of 408,000. If anything, the experts advised against reading too much into new home sales, when other real estate activity — such as existing homes sales — was performing so much better.

“We should not get too worried about the signal from the new home sales data at this point,“ JPMorgan Economist Daniel Silver told the Reuters news service.

In terms of prices, the median sales price of new homes sold in June was $281,800, and the average sales price was $328,700. Looking at inventory, the estimated number of new homes for sale at the end of June was 215,000, which represented a 5.4-month supply at June’s sales rate.

Initial Jobless Claims

First-time claims for unemployment insurance benefits filed by recently unemployed individuals plummeted to a 40-year low. Initial jobless claims filed during the week ending July 18, dropped to 255,000, a tumble of 26,000 claims from the previous week’s total of 281,000, the Employment and Training Administration reported last week.

The news marked the lowest point for lay-offs since November 24, 1973’s total of 233,000 claims. The big driver for the substantial drop was likely lay-offs due to restructuring in the car industry, but there was no denying that lay-offs were in retreat.

“This week’s claims reading may have been exaggerated on the low side but there is certainly no sign of the labor market losing momentum,“ High Frequency Economics’ Jim O’Sullivan told the Wall Street Journal. “The message: Employment growth remains more than strong enough to keep the unemployment rate declining.“

The four-week moving average — considered a more stable measure of lay-off activity — fell to 278,500, a decrease of 4,000 from the previous week’s unrevised average of 282,500. This was still well below the 300,000-claim mark that indicates a healthy job market.

This week we can expect:

  • Monday — Durable goods orders for June from the Census Bureau.
  • Tuesday — Consumer confidence for July from The Conference Board.
  • Thursday — Initial jobless claims for last week from the Employment and Training Administration; advanced second quarter GDP estimate from the Bureau of Economic Analysis.
  • Friday — Consumer sentiment for July from the University of Michigan and Thompson-Reuters Survey of Consumers.

What’s Your Outlook on the Real Estate Market?

An article by Colin Robertson, of TheTruthAboutMortgage.com, 7/23/2015

crystalball-610x250

So here’s a true story. Yesterday, a good friend of mine asked the following question via text message: “What’s your outlook on the real estate market…we are looking to buy a place soon.”

That’s the exact message he sent over last night; there weren’t any emoticons by the way, sadly.

I saw the message but did my best to avoid answering it for about half an hour. Then I finally cracked and responded with the following:

“In a word, overpriced. But if you really want to buy a home that’s your deal. It’s not always about the investment.”

Now in the past I may have just left it at “overpriced,” but I’ve learned that such remarks are often met with resistance. I also don’t want to ruin anyone’s grand plans.

And it’s true, buying a home isn’t just about the investment. It’s not simply about timing the market and making a killer profit, that is, unless you’re a real estate investor.

For most people it’s a home. It’s a place to live. There are reasons to buy other than turning a profit.

So my outlook has changed, or perhaps broadened, to include benefits beyond making money.

But my point was basically that it’s not an ideal time to buy in terms of investment, but it could be a great time to buy a home if there’s one you really like and want to own.

At the end of the day, if he gets the home he wants, he’ll probably be happy, even if it doesn’t double in value in five years. Even if it flat lines or drops, he’ll probably still be happy if he truly loves the home.

And over time, he’ll surely build equity and come out ahead as home prices reach new heights.

National Median Sales Price Reaches All-Time High

Yesterday, the National Association of Realtors reported that the national median sales price reached an all-time high.

The price of a median existing home climbed to $236,400 in June, a 6.5% increase from a year earlier, enough to surpass the previous peak median sales price reached in July 2006 ($230,400).

For the record, the median sales price has increased year-over-year for 40 consecutive months, so yes, home prices have been on a tear.

Home sales have also been white-hot, with existing sales hitting their highest level in over eight years (February 2007).

Properties are also being scooped up faster than ever, with the average time on market only 34 days in June, down from 40 days in May, making it the shortest amount of time since NAR began tracking in 2011.

I also got word from a real estate agent friend that new home sales are picking up again. Recently, builders were offering discounts, but now that inventory is so low, they’re increasing prices and slashing discounts.

This is basically a testament to the supply/demand imbalance that is causing home prices to keep rising, and making bidding wars a common situation.

It’s for these reasons that I don’t love the current market as a buyer. At the same time, selling isn’t ideal either because there’s a good chance home prices will continue to increase.

In fact, if you look at real prices adjusted for inflation, home prices aren’t really at new all-time highs. In today’s dollars, the median would have to be closer to $260,000.

So buying because you love a home still makes sense today, as it always will. And you’ll probably do just fine if you can afford the home and stay in it for several years.

But if I had to take a side, I’d say that home prices are bloated and the competition is fierce. That certainly makes it a lot less attractive to buy today than in the very recent past. I’m taking a wait and see approach. ( End of Colin’s article.)

What’s Ahead For Mortgage Rates This Week – July 20, 2015

Whats Ahead For Mortgage Rates This Week July 13 2015Last week’s economic news included an encouraging report from the National Association of Home Builders, whose housing market index held steady with a reading of 60 in July. This was the 13th consecutive month for readings over 50, which indicate that more builders are confident about housing markets than those who are not. July’s reading was noteworthy as it was the highest since November 2005 prior to the recession.

Housing Starts, Building Permits Increase

The Commerce Department provided further evidence of stronger housing markets with reports on housing starts and building permits issued in June. Housing starts rose from May’s reading of 1.07 million to 1.17 million, which surpassed the expected reading of 1.11 million housing starts.

May’s reading for housing starts was revised from 1.04 million to 1.07 million an annual basis.

Construction of apartments and other multifamily housing complexes attained their highest level since 1987, which supports reported trends that millennials who prefer to live in larger cities are renting rather than buying homes. Housing starts gained nearly 10 percent between May and June. Would-be home buyers are also renting due to tighter mortgage approval standards; others may be “sitting on the fence” as they wait for further indications of stronger labor markets and improvements in overall economic conditions.

Building permits issued in June supported trends in housing starts, with permits for multi-family housing units higher by 16. 10 percent and was the highest reading for multi-family building permits since 1990. Analysts said that the increase in multifamily building permits was in caused by the pending expiration of a tax credit for builders in New York State that was set to expire June 30.

Permits for single family homes rose only 0.90 percent in June, to an annual pace of 689,000 but this was still the highest reading for single family housing permits since 2008.

Mortgage Rates Rise, Jobless Claims Fall

Freddie Mac reported that average mortgage rates rose last week. The rate for a 30-year fixed rate mortgage averaged 4.09 percent and was higher by five basis points. The average rate for a 15-year mortgage was also five basis points higher at 3.25 percent. The average rate for a 5/1 adjustable rate mortgage was up by three basis points to 2.96 percent. Discount points were 0.60 percent for 15 and 30 year mortgages and 0.50 percent for 6/1 adjustable rate mortgages.

New jobless claims fell to 281,000 last week against the prior week’s reading of 296,000 new claims and an expected reading of 285,000 new jobless claims. Analysts said that the current reading indicates that last week’s spike in new unemployment claims was a false alarm. Seasonal anomalies and re-tooling at some auto plants were cited as causes for the prior week’s high reading. New jobless claims have remained under the benchmark reading of 300,000 since February for the longest consecutive period in 15 years.

Last week’s reports ended with the University of Michigan’s Consumer Sentiment Index, which fell from June’s reading of 96.1 to 93.3; analysts expected a reading of 95.0.

What’s Ahead

Scheduled economic reports for next week include new and existing home sales, and FHFA home prices along with weekly reports on mortgage rates and new jobless claims.

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Mortgage Rates and Purchasing Power

Mortgage ratesHow Does Purchasing Power Work? You’ve heard the term before — but really, what does ‘purchasing power’ mean? In its most basic form, purchasing power means what you can buy for a given amount of money. For example, a cup of coffee that cost $1 in 2010 now costs almost $4 (thanks, Starbucks!). You buy less gas with $25 today than you did a few years ago, and a car that costs $35,000 once could be bought for less than $10,000. So the purchasing power of a dollar has dropped over time. Inflation makes items cost more and lessens purchasing power.

Buy Low …
So when costs are low, it’s better to buy, before they rise, right? That may not exactly work with a cup of coffee, but it definitely works with things like cars, airplane tickets, and of course houses. When it comes to buying a home, your purchasing power is directly related to several factors, including the availability of desirable homes, average home prices, and the current mortgage rate.

Today’s interest rates are still astonishingly low. The average rate for 30-year fixed-rate loans over the last 40 years has been around 8.9 percent. But over the last several months, mortgage rates have been in the 3-4% range. This is significantly lower than the historic average — but higher than it was a year ago. Experts are predicting mortgage rates to steadily go up, possibly to as high as 5% by the end of the year.

Little Numbers, Big Difference Five percent might not seem like a lot, but when you do the math, you’ll see that even a quarter of a percent rise in mortgage rates will significantly lessen your purchasing power and make a big difference to how much you end up paying for your home. Just check the following chart, which assumes you put 20% down (although loans are available with only a 3% down requirement — call me to learn more!).

Your Monthly Payment Rate Loan Amount Purchase Power
$1,500 3.75% $323,893 $404,867
$1,500 4.25% $304,915 $381,144
$1,500 5.00% $287,551 $279,422

Don’t be like the family who delayed and delayed buying, and ended up shopping in the $270,000 price range rather than the $380,000 range and had to settle for two bedrooms rather than three. With rates this low, the smart buyer makes a move. The market can’t sustain these numbers for long, and won’t need to as it improves. If you’re considering a home purchase, contact me today to see the strength of your purchasing power — before it drops!

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What’s Ahead For Mortgage Rates This Week – July 13, 2015

Whats-Ahead-Mortgage-Rates-6Last week’s scheduled economic events were few due to the Independence Day holiday. Freddie Mac’s weekly survey of mortgage rates brought good news as mortgage rates fell across the board. The Federal Reserve released the minutes of its most recent Federal Open Market Committee (FOMC) meeting and weekly jobless claims rose.

Job Openings Rise to Highest Level Since 2000

The Labor Department reported that U.S. job openings rose from April’s reading of 5.33 million to 5.36 million job openings in May. This was the highest reading for job openings since the report’s inception in 2000. Private sector job openings rose  to 4.85 million, an increase of 16 percent. Government jobs rose increased by 511,000 open jobs from April’s reading of 430,000 job openings. Based on the Labor Department’s report of 8.67 million unemployed workers, there were 1.60 job seekers for each job opening in May as compared to 2.10 job seekers for each job available in May 2014. There were approximately 1.80 job seekers for each job available when the recession started in December 2007.

FOMC Minutes: Fed Issues No Firm Date for Raising Rates

On Wednesday, the Federal Reserve released the minutes of June’s FOMC meeting, during which nine of ten committee members indicated that they were not ready to raise the federal funds rate. One FOMC member indicated that they were willing to wait for another meeting or two to raise rates. While FOMC has hinted at the likelihood of raising rates this fall, committee members are wary of moving too quickly and cited developments in China and Greece as concerns that contributed to the committee’s current wait and see position. When the Fed does raise its target rates from 0.00 percent, consumers can expect higher mortgage and loan rates.

Freddie Mac: Mortgage Rates Fall, Jobless Claims Rise

Mortgage rates fizzled last week with Freddie Mac reporting average rates lower for all types of mortgages. The average rate for a 30-year fixed rate mortgage was four basis points lower at 4.04 percent and discount points unchanged at 0.60 percent; the average rate for a 15-year fixed rate mortgage was also four basis points lower at 3.20 percent. Average discount points for a 15-year mortgage fell from 0.60 to 0.50 percent. The average rate for a 5/1 adjustable rate mortgage fell by six basis points to 2.93 percent with discount points unchanged at 0.40 percent.

According to the Labor Department, weekly jobless claims rose to 297,000 new claims filed as compared to 282,000 new claims filed the previous week. There were no estimates for last week’s jobless claims due to the holiday.

What’s Ahead

This week’s scheduled economic reports include Retail Prices, Retail Prices Except Automotive and the NAHB Housing Market Index. The Commerce Department is set to release monthly readings for Housing Starts and Building Permits. In addition to Freddie Mac’s report on mortgage rates and the Labor Department’s report on new jobless claims, the University of Michigan will wrap up the week with its Consumer Sentiment report.

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The Connected Home

Posted in Around The Home, Around The House, Home How To, Home improvement, Home Security, Real Estate Tips by southorangecounty on July 10, 2015

smart-homeTechnology is infiltrating every aspect of our lives. Twenty years ago, who could have predicted we’d have the Internet in our pockets? Or a refrigerator that tracks our purchases? There are so many choices when it comes to connecting your home and finding fun ways to let technology make your life easier. But which new tech tools are really worth the cost?

Smart ovens.
GE has come out with a range of connected appliances. Smart ovens can be turned on to preheat while you’re still driving home from the grocery store, and you can also change the temperature or get a notification that dinner is done right from your phone, too.

Smart fridges.
According to thewirecutter.com, they’re just not worth it — yet. GE’s Wi-Fi enabled fridges, due out in fall 2015, will let you know when the water filter needs changing or if the door has been left open. One day your fridge will be able to order more milk when you’re running low and check you’ve got all the ingredients for pasta primavera. Currently, though, fancy refrigerators mostly play music and post notes for the next person nearby to buy that milk. Plus, thewirecutter says, the software in general can’t be upgraded. Wait until these things have developed further.

Smart dishwashers.
Huh? Do you really need an alert when your dishwasher is done? Personally I set mine to run either overnight or in the morning before I leave for work. I find it’s usually done by the next time I’m in the kitchen

eKeys.
Kwikset, a pretty well-known maker of locks, has developed an ekey system. You can share a key with anyone, so no more fake rocks in the yard or placing a spare above the front door (or sending your five-year-old through the doggy door, ahem). Keys can be assigned to multiple people and can be revoked right from your phone. Know when your door is opened when you’re not home. You can even create a “scheduled” ekey that only allows access on certain days at certain times. Pricey, but super-convenient for key losers, especially if your car is also keyless.

Connected thermostat.
The Nest is still the top pick for most people when it comes to home technology. The Nest Learning Thermostat is not only attractive, it’s smart—it can learn your preferences, and your daily schedule, and adjust the temperature in your home accordingly. So it saves you money as well as helping to keep you comfortable. Its interface with your phone is considered the best of all the smart thermostats out there, as well.

Smart lightbulbs.
Control color to suit your mood, turn lights on when you’re out late or away on vacation, or schedule lighting changes from your phone or tablet. Cree, GE, and Belkin make smart LED bulbs that get pretty good reviews.

The Hub.
Of course, you can’t really hook up your smart home without a hub. Hubs help you get all of your smart devices controlled under one app, making life easier, which is really the ultimate goal of a smart home, right? PCMag recommends the SmartThings Hub and devices from IControl, and Logitech. There’s also the Wink Connected Home Hub, Apple’s Homekit, and the Insteon Hub to turn your Wi-Fi enabled home features into remotely controlled smart accessories that you access on the go. If you’re working on a budget, the Quirky Pivot Power Genius is a smart power strip that you can use to control plug-in items you already have in your home.

Our lives are getting easier — or are they getting more complicated? Either way, these smart, connected home appliances and features can help you take care of your home with the touch of a few buttons, and soon these tools will be taking care of us!

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What’s Ahead For Mortgage Rates This Week – June 29, 2015

What's Ahead For Mortgage Rates This Week - June 29, 2015Last week’s economic news was largely positive as both new and existing home sales beat expectations. FHFA reported that home price growth held steady in May, while weekly jobless claims edged up, but were lower than expected.

New and Existing Home Sales Exceed Expectations

According to the Commerce Department, new home sales reached 546,000 on an annual basis for May. This surpassed expectations for 525,000 new homes sold and April’s revised reading of 534,000 new homes sold. Expectations were based on the original reading of 517,000 new homes sold in April.

Existing home sales rose by 5.10 percent in May to a seasonally-adjusted annual reading of 5.35 million sales and hit their highest level in five and a half years. The National Association of Realtors reported that this was the fastest pace of sales for previously-owned homes since November 2009. Expectations were based on an April’s original reading of 5.04 million sales, which was later revised to 5.09 million existing homes sold.

With wages and hiring picking up, more first-time buyers are expected to enter the market. Economists said there are signs that mortgage credit is becoming more available as lenders gain confidence in stronger economic conditions. A larger supply of available homes was also cited as driving sales of previously owned homes higher.

FHFA: Home Prices Show Steady Growth in May; Mortgage Rates Mixed

The Federal Finance Housing Agency (FHFA), the agency that oversees Fannie Mae and Freddie Mac, reported that home prices related to mortgages owned by Fannie Mae and Freddie Mac held steady with a growth rate of 5.30 percent year-over-year reported in May. This was the same year-over-year home price growth rate that the agency posted in April.

Freddie Mac reported mixed developments for mortgage rates. The average rate for a 30-year fixed rate mortgage rose by two basis points to 4.02 percent; the average rate for a 15-year fixed rate mortgage fell by two basis points to 3.21 percent and the average rate for a 5/1 adjustable rate mortgage also fell by two basis points to 2.98 percent. Average discount points were 0.70, 0.60 and 0.40 percent respectively.

Last week’s economic reports ended on a high note with June’s Consumer Sentiment Index reporting a reading of 96.1 as compared to expectations of 94.6 and May’s reading of 94.6. All in all, last week’s economic news provided further indications of stronger economic conditions that should provide the confidence to ease mortgage credit requirements and enable more first-time buyers to purchase homes.

What’s Ahead

This week’s economic reports include date on pending home sales, Case-Shiller’s Home Price Index reports and construction spending. The Bureau of Labor Statistics will also release the monthly Non-Farm Payrolls report and National Unemployment reports. No economic news is scheduled for Friday, July 3 due to the Independence Day holiday.

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Orange County’s median home price inches higher to a 7-year peak

An article from Jon Lansner of the Orange County Register. June 18th, 2015

Home-Values-RisingHave Orange County house shoppers stopped paying up?

Orange County’s median selling price was $610,000 last month, CoreLogic reported Wednesday. And though that’s the highest price in seven-plus years, it’s up just 2.5 percent in a year.

The economic fundamentals of housing – local job growth, mortgage rates and availability – look solid. Those factors plus slower home price appreciation helped draw buyers. Orange County sales totaled 3,458 units – up 7.4 percent compared  with a year ago.

But Orange County’s price tag pressures loom large when when you look at the regional housing picture. That 2.5 percent year-over-year median price gain in Orange County was the smallest among Southern California’s six counties, though our local market is still the priciest in the region.

Ventura County had the region’s biggest annual gain. Its median selling price of $500,000 was up 8.7 percent compared with a year ago. Southern California’s median selling price for May was $426,000 – up 2.2 percent compared with a year ago.

Although that’s the slowest regional price growth in three years, it’s mainly due to a changing mix of sales throughout the region. Simply put, more people are buying inexpensive houses in Riverside and fewer people are buying pricey ones in L.A.

When it came to homebuying, Orange County’s 7.4 percent sales increase easily topped the region’s collective 4.9 percent annual gain. But note that Southern California’s sales hot spot, Ventura, was up 15.1 percent compared with a year ago. That high demand likely explains Ventura’s major price hikes.

To see how price tag pressure is playing out in Orange County, look at the performance of local builders, who typically sell the costliest homes.

New homes in Orange County had a median selling price in May of $861,000 – up 6.8 percent compared with a year ago. That’s darn expensive when you look at the resale home median of $667,500 – up 3.5 percent from a year ago – and the resale condo median of $415,000, up 2.3 percent compared with a year ago.

To my eye, too many builders have bet on Orange County’s high end, perhaps missing a chance to excite shoppers in more modest income ranges with their newly constructed offerings. If builders offered more $600,000 homes, they probably would go like hotcakes.

Orange County developers sold 278 new residences in May, down 24.7 percent compared with a year ago. That dip contrasts sharply with how quickly existing homes are selling. Resale house sales totaled 2,163 – up 8 percent compared with a year ago. Condo resales were 1,017 – up 20.1 percent.

Similar patterns were seen across Southern California. New-home sales were up only in the Inland Empire, where developers sell relatively inexpensive housing.

Riverside County’s builders sold 421 new homes in May, up 36 percent in a year. The median selling price was $384,000 – less than half of Orange County’s median even after rising 10.8 percent in a year. San Bernardino developers sold 186 homes, up 14 percent from May 2014. The median selling price was $417,250, off 1.6 percent in a year.

Sales of new homes were lower in the region’s three other counties. In Los Angeles (median price of $548,000), sales fell 16 percent compared with a year ago. In San Diego (median price of $539,000), sales were off 10 percent. In Ventura (median price of $477,500), sales were down 26.3 percent.

So who is balking in Orange County? I see one very curious pattern inside May’s sales data: the lack of homebuying growth in the midpriced communities.

I divided Orange County’s sales results by three price ranges, using the median selling price for 83 local ZIP codes. My trusty spreadsheet tells me that last month’s sales in the cheapest third – ZIP codes with median home prices up to $521,500 – were up 9 percent compared with May 2014. In the upper third – where prices start at $689,000 – May sales were up 13 percent compared with a year ago.

But I’m puzzled why homebuying in the ZIPs priced in between ran flat.

Certainly we know if a home is “affordable” for Orange County it sells quickly. That explains buying enthusiasm among the lower third. And the upper-crust house hunter typically does not feel the impact of economic cycles as much those with leaner finances.

But what of the middle? Are people not seeing enough choice? Inventory data suggest that supply shortages may be turning off some shoppers. (Note to builders: Free market research right here!)

Or is this middle group’s skittishness another example of the home-affordability stress felt particularly by the local middle class – and an explanation of why home price appreciation has stalled?

Orange County home prices moved slowly higher in May with the smallest year-over-year gain among Southern California’s six counties.

CoreLogic reported Wednesday that Orange County’s median selling price for May was $610,000 – up 2.5 percent compared to a year ago.

Ventura County had the region’s biggest annual gain. Its median selling price $500,000 – up 8.7 percent compared to a year ago. San Diego County had the smallest gain after Orange County with its median at $459,000, up only 3.1 percent compared to a year ago.

Andrew LePage, a research analyst with CoreLogic, said: “It’s slow going, but in many ways, the housing market continues to edge back toward normalcy with fewer distressed property sales and fewer investor and cash purchases. While home sales remain sub-par, they’ve been trending closer to long-term averages.

“Job growth and other factors suggest we should see solid housing demand. But in the wake of the Great Recession and years of weak income growth, many would-be home buyers are struggling with affordability and credit hurdles,” he said.

Perhaps slower home appreciation drew buyers into Orange County as sales totaled 3,458 units – up 7.4 percent compared to a year ago. That was a swifter sales increase than the regional trend. SoCal sales totaled 21,644 – up 4.9 percent compared to a year ago.

Southern California’s homebuying hot spot was Ventura, which likely explains the county’s May price surge. Ventura sales totaled 977 – up 15.1 percent compared to a year ago.

A changing mix of sales throughout the region led to a curious move in the six-county median sales price. Southern California’s median selling price for May was $426,000 – up 2.2 percent compared to a year ago.

How can the regional sales gain be lower that any one county’s increase? Look to sales in Riverside County – the region’s second-most active and second-cheapest county – which surged 9.9 percent, twice the regional growth rate. ( End of Jon’s article.)

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The subprime mortgage crisis wasn’t about subprime mortgages

By Chris Mathews, of Fortune Magazine, 6/17, 2015

next-exitNew research challenges the conventional wisdom on the financial crisis.

In the years following the financial crisis, a cottage industry arose that tried to explain just what happened to the American economy and the financial system.

Early on in the process, journalists zeroed in on one set of villains: subprime lenders and the supposedly irresponsible borrowers who were their customers. We were regaled with stories of mortgage lenders like Countrywide handing out loans that borrowers couldn’t possibly repay, and then selling them on to investment banks, who packaged them into “toxic” bundles like Goldman Sachs’ infamous Abacus collateralized debt obligation.

When these subprime borrowers began to default, so the narrative goes, the dominoes began to fall, eventually helping to send the entire mortgage market, U.S. financial system, and global economy into crisis.

At the time, the press spent a lot of energy scrutinizing subprime borrowers and lenders, based on the fact that in the early days of the crisis, the rate and absolute number of subprime foreclosures were much higher than foreclosures in the prime market. It was around this time that CNBC’s Rick Santelli gave his famous rant against talk of bailing out underwater homeowners that helped launch the Tea Party movement, calling the folks who were at risk of foreclosure “losers.”

Furthermore, much of the reforms instituted since the financial crisis have centered around increasing scrutiny of mortgage lending, to make sure that these sorts of irresponsible loans aren’t made again.

But if journalism is the first-draft of history, then it’s about time for a second draft. In a new working paper by Wharton economists Fernando Ferreira and Joseph Gyourko, the authors argue that the idea that subprime lending triggered the crisis is misguided. The paper looks at foreclosure data from 1997 through 2012 and finds that while foreclosure activity started first in the subprime market, the foreclosure activity in the prime market quickly outnumbered the number of subprime foreclosures.

The following chart shows the total number of foreclosures and short sales per quarter in various classes of mortgages:

Screen Shot 2015-06-17 at 10.38.09 AM

While subprime borrowers default at a higher rate than prime borrowers, Fierra said in an interview with Fortunethat the data shown above suggest that the foreclosure crisis would have happened even in the absence of such risky lending. “People have this idea that subprime took over, but that’s far from the truth,” says Ferreira. The vast majority of mortgages in the U.S. were still given to prime borrowers, which means that the real estate bubble was a phenomenon fueled mostly by creditworthy borrowers buying and selling homes they simply thought wouldn’t ever decrease in value.

We can draw two conclusions from this data. One is that your chances of being foreclosed upon in the past decade was more a matter of timing than anything else. If you were a subprime borrower in, for instance 2002, who bought a bigger house than a more prudent and creditworthy borrower would have bought, chances are you would have been fine. But a prime borrower who did everything right—bought a house he could easily afford, with a large downpayment—but did so in 2006 would have had a higher chance of defaulting than the subprime borrower with better timing.

Since whether you were hurt by the crisis had more to do with luck than anything else, Ferreira argues we should rethink whether doing more to help underwater homeowners would have been a good idea.

The research also offers some sobering policy implications. Ferreira’s data show that even with strict limits on borrowing—say, requiring every borrower to put 20% down in all circumstances—wouldn’t have prevented the worst of the foreclosure crisis. “It’s really hard for certain regulations to stop the process [of a bubble forming],” Ferreira says. “I really wish my research had showed that it’s all about putting down 20% and all problems are solved, but the reality is more complicated than that.”

Furthermore, we still don’t have the tools to understand the cycles of real estate prices, or to recognize bubbles, in any asset class, before they form. So it would be a mistake to think that any regulatory reform will offer fool-proof protection against the next financial crisis.

The booms that capitalism confers on us, it seems, will inevitably be followed by busts. ( End of Chris’ article.)

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What’s Ahead For Mortgage Rates This Week – June 15, 2015

Posted in Market Outlook by southorangecounty on June 15, 2015

What's Ahead For Mortgage Rates This Week - June 15, 2015

Retail Sales, Consumer Confidence Up

Retail sales rose for the third consecutive month. May sales increased at a seasonally adjusted rate of 1.20 percent according to Commerce Department data. Auto and gasoline sales led the charge to higher retail sales, but analysts said that most retail sectors posted gains. Upward revisions of March and April’s retail sales provided evidence of stronger economic conditions.

Consumer sentiment jumped nearly four points from May’s reading of 90.7 to 94.6 in June. This appears to be great news compared to the year before the recession, when consumer sentiment averaged a reading of 86.9.

Weekly Jobless Claims, Mortgage Rates

Weekly jobless claims rose last week and were also higher than expected. 279,000 new jobless claims were filed against an expected reading of 275,000 new claims and the prior week’s reading of 277,000 new jobless claims. This was the fourteenth consecutive week that new jobless claims remained below 300,000, an accomplishment that hasn’t occurred in 15 years.

Mortgage rates rose sharply last week according to Freddie Mac. The average rate for a 30-year fixed rate mortgage jumped from 3.87 percent to 4.04 percent; the average rate for a 15-year fixed-rate mortgage rose from 2.08 percent to 3.25 percent and the average rate for a 5/1 adjustable rate mortgage increased by five basis points from 2.96 percent 3.01 percent. Average readings for discount points were 0.60 percent for 30 and 15 year mortgages and 0.40 percent for 5/1 adjustable rate mortgages. Higher mortgage rates may sideline some home buyers as they wait to see if rates will drop or are priced out of the market. Expectations that the Fed will raise its target federal funds rate this fall may be fueling higher rates.

What’s Ahead

Next week’s economic news schedule includes more housing-related readings. The National Association of Home Builders Housing Market Index, the Commerce Department’s reports on Housing Starts and Building Permits along with the weekly reports on new Jobless Claims and Freddie Mac’s mortgage reports are set for release. On Wednesday, the Federal Open Market Committee of the Federal Reserve will release its post-meeting statement and Fed Chair Janet Yellen will also give a press conference. These events are important as they may shed light on the Fed’s intentions for raising rates. When the Fed raises the target federal funds rate, mortgage rates and interest rates for consumer credit are expected to rise as well.

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