Category: Real Estate

Lou Wieland – Realtor

Visit www.louwieland.com for real estate information and services from Lou Wieland, Realtor with Berkshire-Hathaway HomeServices.

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Rates Over 4.5%, Heading Toward 5%

By Geoff Smith

Mortgage interest rates seem determined at this point to keep marching toward 5% for a best-execution 30 year conventional loan. There are a lot of reasons for this: The Federal Reserve seems set on raising their short-term interest rate 3 and maybe 4 times this year. Even though the stock market stumbled mightily over the last few weeks, investors still are not going after bonds like we would think they would, and bond yields keep rising. And the underlying economy shows no signs of weakness – which only strengthens the Fed’s resolve in raising their rates, and dampens the worry about the recent drop in the stock market.

A healthy economy should have mortgage interest rates up over 5%. Before 2008, the last time rates dropped below 5% was during World War II when no one was buying homes because so many of our citizens were fighting overseas. So while many of your clients will be lamenting that they missed out on a 4%-loan, from a historical perspective, we are still at historic lows.

For now, you can expect rates to keep rising – which makes buying sooner than later even more important. And actually, if I were a buyer, I’d be more concerned about home values going up – which they have done from 3% to 8% every year for the last several years.

What this Means to You:

Mortgage News Daily says the average rate for a best-execution, 30-year mortgage are at 4.5%.

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Rates Jump; and a Brief History of the Mortgage

By Geoff Smith

Industry experts began each of the last four years predicting a steep rise in mortgage interest rates. And each year they were proven wrong.

This year, the rates are doing the talking.

When rates dropped below 5% in 2008, it was the first time they’d been that low since the 1940’s and 1950’s. During World War II, very few people were buying houses and rates dropped into the 4%-range. But once our soldiers returned home and our country began to try to normalize, rates went up back over 5%.

Mortgages started to come more into fashion in the early 1900’s, but they looked a lot different than they do today. Back then, banks took all of the risk. As such, the terms were less favorable. Most loans required a 50% down payment and called the loans due after five years. It wasn’t until the Great Depression and the creation of the Federal Housing Administration(FHA) that mortgages became more affordable for the average home buyer.

You have heard of FHA, Fannie Mae, Freddie Mac, the VA, and maybe even USDA. But you may not know exactly what they do. These organizations essentially take risk off of the banks by establishing guidelines and telling banks that if they underwrite the loans according to those guidelines, they will compensate the banks in one way or another should the borrower default on the loan. Essentially, the only risk to the bank is that they underwrite the loan properly. Of course that risk is not to be overlooked.

Our system for making sure those loans were being underwritten properly pretty much fell apart in the years leading up to the collapse of our economy in 2008. As described so well in Michael Lewis’s book The Big Short, the appetite for mortgages on Wall Street became so strong, that the ratings agencies were pressured to turn a blind eye to the weak lending practices that ultimately spread rampant throughout the mortgage industry. Lenders were making FHA, Fannie Mae, etc…loans that really weren’t those kinds of loans. Plus they were making loans that weren’t backed by an agency like the FHA. They were ‘portfolio’ loans where the bank assumed all the risk and underwrote according to their own guidelines. And the appetite for loans was so strong that companies were buying and selling those kinds of loans too. It was completely wild-west and ultimately collapsed our economy.

After the downturn, the Federal Reserve dialed back it’s short-term interest rate to 0% and started buying bonds at about $90 billion a month – two moves which dropped rates to their lowest levels in recorded history in November of 2012. Average rates for a 30-year Fannie Mae loan were at about 3.3%.

Rates were supposed to rise above 5% by the end of 2014. But instability kept popping up around the globe including a skirmish between Israel and Palestine, the rise of ISIS, and the Russian invasion of Crimea. All of that kept the economy cautious and interest rates low. In 2015, the same optimism ensued – right up until oil prices dropped and China’s growth rate lowered for the first time in a very long time. In 2016, we worried about China, then Europe found it hard to find traction.

In 2017, we got the surprise of Donald Trump winning the presidency. Only this actually pushed rates up as investors raced to put money into companies they thought would do well. That lasted right up until the healthcare bill failed and folks pulled off the gas, waiting to see if the new president could actually do what he said he would do.

This year, the tax reform bill passed and inflation finally started rising and every economic indicator is hinting at a strong economy. Since January 1, we’ve seen our steepest increase in rates in about 2 years. The average 30-year rate started the year at 4.03% and sits today at 4.35%. With the Fed calling for several more increases to its short-term rate this year, one would expect mortgage rates to keep going up and over 5%. Or at least until the next surprise pops up.

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2017 Statewide Annual Sales Recap

2017 Real Estate Sales Recap

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