Builder Confidence Drought Justified in Low Home Starts – Daily Mortgage Rate Update for July 20th, 2010
Home starts down; Permits up; Corporate revenues disappoint; Jumbo loans returning? FHA seller credits may drop – Daily Mortgage Rate Update for July 20th, 2010
In results that should have surprised no one after yesterday’s dismal home builder confidence figures, new home construction activity slipped in June, decreasing to an annual pace just below 550,000 new homes per year. Condominium construction was hit even worse, declining by over 26%. Is this really surprising? Over the past 4 years, many homes and condominium units have been completed, but never occupied, as builders overestimated demand. Because of this, some builders went bankrupt, while others dramatically scaled back building. In Providence’s downtown alone, there are 4 large condominium projects totaling around 1000 units that have experienced substantial difficulty in selling sufficient numbers of units to operate independently of the original developer. It is clear that builders have scaled back in order to avoid excess inventory.
One bright spot in the home starts report is applications for new building permits, which increased by 2.1% in June. This suggests that builders may feel they are better able to sell new units later this year and into next year.
Mortgage and stock pricing this morning is principally being driven by poor results from two large companies, Goldman Sachs and IBM. Both reported gross sales significantly lower than Wall St. expectations, and this has tainted the rest of the financial markets. Investors are seeking lower-risk assets, like US Treasury securities and mortgages, which at least almost guarantee a certain return with little risk of capital loss.
An article on Yahoo! via CNBC yesterday suggested that Jumbo loans are back. I have to disagree with its findings. The author searched a popular interest-rate consolidating website and found average jumbo rates around 5.5% for a 30-year fixed term, which is about 1% higher than average rates for smaller loan sizes. Guess what? About 6 months ago, when average conventional 30-year fixed rates were closer to 5.5%, 30-year fixed jumbos were closer to 6.5%. So, where’s the improvement? I would argue that, yes, rates on jumbos are substantially better than before, but the Jumbo market is far from fixed. Compare this to 2005-2006 when the average spread from conventional to jumbo loans was closer to 0.25% to 0.5% and you can see that there is still a significant lack of liquidity in jumbo-sized loans.
Some lenders are offering solutions. Of course, there is always the extended conventional loan option, currently up to $475,000 in Rhode Island, and up to $523,750 in many parts of Massachusetts. Many lenders are offering very attractive Jumbo ARM rates, with some 5- and 7-year ARMS offering rates in the low 4′s. One lender we use offers a combination first mortgage / second mortgage to avoid jumbo status altogether.
HUD is currently debating major changes to FHA seller concessions allowances. At present, sellers are able to contribute up to 6% of the purchase price of the home to assist home buyers with closing costs and prepaid items like taxes and insurance. Now, for a buyer of a $300,000 home, this is completely unnecessary, as even a 3% concession would equal $9000, which, in all but the rarest of cases would more-than-equal all closing costs and prepaid expenses on a no points FHA mortgage. Imagine, however, the case of a person buying a home for $125,000 in East Providence, RI, a town which requires 12 months taxes be escrowed. Assuming average taxes around $3600 per year, a 3% seller concession ($3750) barely covers the taxes much less other closing costs.
This FHA change will place an undue burden on purchasers of lower priced homes, who, coincidentally, tend to be lower income families who are less able to save money for down payment and closing costs. This change will put home ownership out of reach of a number of families who are currently able to purchase. There is something we can do about this. Because this change is still in proposal stage, HUD is accepting comments here. I recommend that you click the preceding link and share your thoughts on this change while you still can.
Mortgage pricing opened better today on weak builder numbers and corporate revenues, effectively erasing yesterday’s late losses. It appears that pricing should remain relatively stable today, with some possibility of continued improvement. Risk of price worsening appears relatively low at the moment, as there are few events that could take place that would cause a dramatic worsening. I would continue to consider floating rate locks due to the lack of other market-moving news and the poor results received already.
There is little data tomorrow that could move mortgage pricing, except for the purchase component of the Mortgage Banker’s Association application survey, which is expected to show another decline in home purchase activity. If you have questions regarding Rhode Island Refinance Rates, or whether or not to lock your loan, please don’t hesitate to contact me by cell at (401) 263-8655, or by commenting on this post. Have a great day!
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Dan Hartman is a Senior Mortgage Advisor with Province Mortgage Associates, and serves as an Adjunct Professor of Finance and Economics at Roger Williams University and the University of New Haven. He has been helping homeowners and homebuyers with their mortgage questions for over 10 years.
July 20, 2010 by Dan Hartman · 1 Comment
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I have worked as a residential mortgage advisor since February of 2000 and a part of the founding team here at Province Mortgage. We believe that by doing right by a family today, we can create a relationship for life, and, hopefully, and ambassador who will share the experience with others. It is our team of professionals that helps us to create this experience.
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[...] in the US, problems continue for builders of new homes. Their confidence level dipped to a new low, as new home starts hit rock bottom, possibly starting [...]