Europe – The Reason Interest Rates Are Low

It has been about two months since the Federal Government stopped buying mortgage back securities. Everyone in real estate including myself predicted rates would rise. Not only have they not risen they dropped this morning to historical lows with out the help of the our Fed. We have five other Feds in Europe to thank. Here is an article from a very good friend of mine that discusses why rates have remained low. I bet you wouldn’t have guessed why.

The “PIIGS” Are In Play…What Do They Have To Do With Interest Rates?
by John McClellan on May 10, 2010

The Feds program to buy mortgage backed securities was put into place in December of 2008 in an effort to stimulate home-buying and refinancing. By becoming the major purchaser of MBSs (mortgage backed securities) the Fed purposefully created demand for these securities when there was none. By increasing the demand on MBSs they drove up their price which in-turn drove down the yield they were paying investors which in-turn drove down interest rates on conventional mortgages(mortgage rates follow the MBS yield). All in all they purchased 1.25 Trillion dollars worth over a 16 month period, in fact at times they were 70% of the demand. Everyone (including this Mortgage Professional) thought that as soon as they backed out of this program then rates would naturally bounce up at least a point…maybe even more. So what happened?….

Europe happened. They have been coined the “PIIGS” which stands for Portugal, Ireland, Italy, Greece, and Spain. These five little “PIIGS” have brought the US market and World wide markets to it’s knees. You cannot help but hear of the riots in Greece every time you turn the news on. The cause is multi-layered but it can be boiled down to two things.

1.Easy – cheap money.
2.Accountability on the part of each nation within the Union.

The easy money was provided by the World Bank in the form of cheap loans, which are now starting to come due, and Greece’s total government debt is at 115% of GDP which means they don’t have the money to pay it back. Greece’s Federal deficit is now in excess of 14% of GDP based on some reports (the European Union allows for a maximum of 3%). I don’t think that they are alone in there pain, the other 4 little PIIGS are also racking up the debt and we most certainly fall into the same trap that Greece is in now. The European Union says that it’s members must remain under 60% of GDP for all federal debt and Greece is currently at 115% and projections are for it to hit 149% by 2014! Unfortunately they have company Portugal’s total federal debt is at 85% of GDP and Italy is at 112%.

Accountability is what is lacking in the European Union at this time and we as Americans should take head. The European Union is based upon a single currency with multiple countries involved. Normally when a country is in trouble such as Greece and the other PIIGS they would have their currency devalued thereby increasing their exports and stimulating their economy, the countries within the European Union do not have this option. Frugal countries such as Germany are left to take up the slack for countries like Greece and the other PIIGS and this is not a sustainable course of action. Fundamentally the problem is that these countries all share a common currency and monetary policy however what they don’t share is a common sustainable fiscal policy.

So what happens to the US stock market? Why were we so affected by what is happening across the pond? I believe that the current rate of spending in the US is not sustainable and the American investor realizes this and realizes that the PIIGS crisis is a window into our future and investors are afraid. This is causing investors all across the world to look to quality investments such as US treasuries and MBSs. This is what caused rates to drop last week – However as of the writing of this article the IMF has approved a 1 Trillion dollar bailout for the European Union. This move dubbed the ” Nuclear option” has the stock market set to rebound but unless the “PIIGS” change their ways then soon in the future we will be back to square one. Long term this is just a band aid and if they don’t change their ways we should keep these interest rate levels in place for a while.

This crisis proves that out of control spending and borrowing can only lead to financial ruin and we as Americans need to look at the similarities of how the “PIIGS” have run their countries and how we as a country have been running ours. Our national debt is at 80% of our GDP which is not far behind most European Union Countries. I believe that the realty of what is happening in Europe is a wakeup call for us……let’s not hit the snooze button.

John McClellan

John is a mortgage banker in Austin and is consistently listed in the top 5 of the Austin Business Journals “Heavy Hitters List.”

If you have any questions about mortgage rates please feel free to give me a call.

Paul Smith

March Market Stats

The Austin Board of Realtors has just released it March 2010 Market Stats.  At a first glance the numbers look great!  The homes sold are up 27% from March 2009 to March 2010 and the number of pending homes is up 31%.  Based on these stats you would think Austin is going to enter double digit appreciation.  I think if we could sustain this type of volume we probably would see that type of appreciation. Unfortunately I do not think we can.  There are 168 hours left until the federal government stops handing out incentives for buyers.  Once the government stops shaking the fence it will be interesting to see how many buyers are left.  The other factor that has contributed to this seller’s market has been the federal government purchasing Mortgage Backed Securities.  The $1.25 Trillion that the fed had allocated to this dried up in March.  I think we all predicted that rates would rise almost immediately, I know I did.  The good news for buyers and sellers is rates have not spiked like we thought.  It appears that factor of the real estate equation is operating without a crutch.  Here is a chart of pending homes for the past year.  It shows that the yearly real estate cycle in Austin is very similar to the temperature.  As it starts to heat up in Austin during the month of March and starts to cool down in October.

March 2010 - Properties Under Contract

In March there were 4.25 months of supply on the ground in Austin.  For the month of March it was definitely a seller’s market in the $400k and below price range.  I know of several homes that sold in 30 days or less that received very little traffic in 2008.   Supply and Demand is a major influence of pricing.  When supply is high there are more properties on the market and it is imperative to be the best house with the best price to get the attention of the fewer buyers.

March 2010 - Months Supply of Inventory

In any market it is important to price your house ahead of the market.  If you determine that you are in a declining market do not list it sit on the market.  List it to sell.

This next graph depicts properties that actually sold for the past year.  What I want to point out is these homes were put under contract the previous month.  The average sales cycle in is about 30 days.  If the majority of the 2421 units that went under contract in March close in April, April’s stats will be off the chart.   The sellers that were able to get there houses listed in the past three months were able to sell.  I know on several occasions my buyers were in multiple offer situations.

March 2010 - Properties Sold

I think in seven days the market will adjust into a neutral market.  I am grateful to be selling real estate in Austin.  We have not been hit nearly as bad as other parts of the nation.  We have a lower then average unemployment rate, great national media coverage, and a large amount of new people moving to the area.  I think that will keep us from shifting into a complete buyers market.  As always if you have any questions please don’t hesitate to ask.

Paul Smith, GRI
Austin City Living
1145 West 5th Street, Suite 101
Austin, TX 78703
512-228-8074 (Direct)
512-495-9213 (Fax)

Mortgage Rate Movement

Government Incentives Timeline - Paul Smith Austin Real EstateA good friend of mine recently wrote Two Predictions For Future Mortgage Rate Movement, an article in which he brings up some good points on mortgage rates that some of us might not think about.

I recently heard a stat from a local economist that said for every percent interest rates go up buyers loose 6.7% of their buying power. For anyone thinking about selling, that could be the difference between a buyer qualifying for your house or not. For first time homes buyers that means if you were qualified for a $150,000.00 home now you qualify for $140,000.00. For investors that could be the difference between a property cash flowing or not.

I have been talking a great deal lately about the Fed’s exit from its program of buying mortgage-backed securities (MBS). Over the last 13 months the Fed has spent more than one trillion dollars—that’s $1,000,000,000,000.00—to buy these securities in order to drive up their price, thereby artificially keeping interest rates low. This program has succeeded in keeping mortgage rates in a tight spread between 4.5 percent and 5.25 percent. The classic supply-and-demand formula is to drive higher demand for anything and the price will go up. (Price and yield are the inverse of each other, which is how mortgage rates are determined.)

USDA Loans Could Lose Funding

USDA Loans | Paul Smith Austin Real EstateHere is an article from a good friend of mine, John McClellan. He’s a Mortgage Banker in Austin and host of a real estate talk show on KLBJ. John discusses how USDA loans could lose their funding in April of this year. This loan product is a zero-down loan that is typically used for homes under $180k, in rural areas. The loan program has income limitations that keep it in the first time home buyer category. The first time home buyer category has been one of the only bright spots in the Austin Metro. Some neighborhoods have less than two months supply. This category has been artificially propped up by the governments $8,000.00 first time home buyer tax credit and historically low interest rates. Both of those factors will be pulled out from under the feet of the market like a rug. On top of that is the potential dry up of the UDSA funds and there will definitely be a negative impact on your market, especially in the rural areas that have been relying on this loan product.

I understand that the government can’t keep propping up the national real estate like a kickstand on cheap bike, but the USDA program has been around for a long time and has a purpose. It was not utilized in the past because there were other zero-down programs available. Now that this is the only game in town I hope the government funds it for the rest of the year.

-Paul Smith

USDA In Jeopardy!

It has recently been announced that the USDA loan program will be out of money by the end of April 2010. In any typical year the USDA loan program has plenty of funds to make loans through the end of the year. Over the last few years as other “0? down loan programs have disappeared, USDA has stepped up to fill the void and provide affordable “0? down loans for first time homebuyers across the nation. This increased demand for USDA loans has led to a shortfall the last two years in funds needed to keep this program solvent. Last year the stimulus money was used to bridge the funding gap and business went along as usual. This year however there is no stimulus money left to bridge the funding gap and it looks like that sometime in April we will be out of funds and USDA will stop issuing commitments until their normal refunding takes place (sometime in the late fall).

This will hasten the slowdown that I have predicted will happen after the June 30th deadline for the FTHB credit and as I have said remove the last “0? Down, affordable mortgage program available in today’s market. If the government is truly trying to increase the availability of affordable alternatives when financing a home then they need to refund the program immediately. Think of all the homeowners who had planned to use the USDA program over the next couple of months to help them qualify for the FTHB tax credit, those borrowers are now left with no viable option.

I have included a list below of the members of the ”United States Senate Committee on Appropriations, Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related Agencies”. Try and say that without taking a breath or try putting it on a business card.

Democratic Members

Republican Members

Call your local Senator or email then to let them know the importance of this funding….

John McClellan – Supreme Lending

February Market Stats

ABOR has just released the February market stats for the Austin Metro. I wanted to point out some of the facts based on the numbers. Please feel free to ask me about a specific area. The overall opinion in Austin seems to be positive the more people I talk to. I think people for the most part feel we have weathered the storm and are general more optimistic about Austin’s future.

There have been several publications lately. Time magazine just did an article on the local Austin economy and how large companies are moving their company head quarters to the Capital of Texas. I don’t want to say we are out of the woods yet but I think we can see the clearing up ahead. Here is a graph that compares active and sold units for February 2009 to 2010.

February Market Stats | Paul Smith Austin Real Estate
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