Month: August 2023

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Being a landlord isn’t all lounging around in designer sweatpants while the rent checks roll in.

If you’re managing your property yourself, you’ll find there’s more than a little legwork involved. Whatever your reasons, (and there are plenty, ranging from investing in property to getting stuck with a house you don’t want to live in), buckle up. We’ll be walking you through how to be a landlord.

How to price your rental

A lot of factors go into pricing a rental, but in the end, it’s all pretty simple. If you don’t hit the sweet spot, it’s either going to sit empty or cost you money.

Either way, you lose.

Here are the most important things to keep in mind:

1. What are your costs? Before anything else, do the math and find out how much you need to charge to not actively lose money. Take into account your mortgage payment, housing taxes, HOA fees, upkeep and repair costs, and anything else that will eat into your profit.

It’s okay to not pull in much extra cash right away, so long as you’re in the rental business for the long term. With time—and smart money management—you’ll pay off the mortgage and get your rental income (mostly) free and clear.

2. Timing is important. Just like the housing market, the rental market has slow and busy times of the year. Generally, they match up pretty closely. Demand is highest in the summer, when schools are out and the weather is good. You’ll be able to charge slightly higher prices in the warm months than the dead of winter.

3. High rent is not worth a bad tenant. Sure, the goal of a rental property is to make you money. But there’s more to it than setting your rent as high as you can and accepting anyone who’ll pay it. A good tenant—one who sticks around for multiple years, pays rent on time, and doesn’t damage your property or suck up your free time—is worth more than an extra few hundred dollars.

4. How much are other apartments going for? When in doubt, take a gander at comparable units on the sites you’ll be using to advertise your property. Just remember to take more than zipcode into account. Other factors include:

  • Nearness to amenities
  • Appliances (washer, dryer, dishwasher)
  • Renovations
  • Square footage
  • Layout
  • Carpet vs hardwood

5. Tenants will pay for something that looks like a good value—even if it really isn’t. Ever seen rental listings advertising things like “heat and water included?” This is a tactic used to attract renters without costing you money.

How?

It’s pretty simple.

If you’ve rented out this particular property in the past (or can get in touch with someone who knows what’s what), then you have a good estimate of what the monthly utilities cost—and that you can use in your favor. Say electricity usually costs about $70 a month. By rolling that into the monthly rent at $80 or $90 a month, you get a little extra cash and an attractive offer for renters.

How to advertise your rental

Once you’ve figured out your pricing strategy, it’s time to start attracting potential tenants. Back in the dark times, that meant putting an ad in the classified section of your local newspaper and hoping for the best.

These days, though, renters tend to start their search online, and that means you need to know where and how to put your best foot forward.

First, pictures. To really sell your property, you’re going to want to use recent pictures of your (clean!) rental. When writing the description, make sure to include all your good features. If there are one or two negative things about your rental, don’t try to hide them. Being honest can actually help you build trust with potential renters.

Which sites you use depends on your needs. Landlords generally agree, for instance, that Craigslist gets them a lot of attention, but that Zillow delivers the better quality tenants.

Here’s a quick list of some of the sites you should consider using:

Of course, some old school techniques like yard signs and referrals are definitely worth trying out. Test out your options. Soon you’ll find a combination that works best for your area and clientele.

How to screen potential tenants

Attracting the tenants is the easy part—it’s the picking that takes some time and energy.

1. Ask for a rental application. You can find templates online. Look for one that asks for current and previous employers, income level, contact info of previous landlords, number of occupants, number of pets, and personal references.

2. READ that application. Okay, so this is probably a no-brainer, but you should be able to weed out a lot of applicants at this stage. So they aren’t employed? Don’t have a (net!) monthly salary that’s at least 3 times the rent and can’t get a cosigner? Have previous evictions or references that don’t check out?

Those are all very good reasons to not rent to an applicant.

3. Run a credit and/or background check. Once you have your handful of maybes, it’s time to dig a little deeper. All three off the credit bureaus (Experian, TransUnion, Equifax) offer credit screening for landlords, and some even do background checks, too. They each had different offerings, so take a look at each before deciding.

Remember, though: a credit check doesn’t tell the whole story. While they’re usually a pretty good barometer when it comes to judging a person’s fiscal responsibility, there are situations where they don’t show you the whole picture. After all, filing for bankruptcy 5 years ago and staying current with your payments ever since is a little different than, say, skipping out on your last 4 credit card bills—both of which can tank your score.

4. Meet for the in-person walk through. Don’t be afraid to go all Sherlock on prospective tenants in-person. There are plenty of questions to ask yourself in order to get a sense for what sort of tenant a person will be.

  • Did they show up on time?
  • Is their car well-cared for?
  • Are their children well-behaved?
  • Do they know what kind of questions to ask about your property?
  • Have they tried to lie about their credit score or job?

Just make sure not to base your decision on age, gender, race, religion, or disability—that’s against the law and can get you sued (plus, it’s generally agreed upon to be pretty gross).

How to write a rental contract

First things first—are you a lawyer?

If the answer is no, don’t write your own lease.

As we’ll get into later, there are a lot of laws surrounding housing agreements, and when you’re not familiar with all of them, it’s alarmingly simple to get yourself into trouble.

To get started, you can find templates online for your state or city.

From there, though, it’s worth the money to have a lawyer look over it, especially if you’d like to customize it. If you do it right, it should be a one-time cost for a lease agreement you can use over and over.

How to figure out your rights as a landlord

Did you know that you can’t enter your rental without giving the tenant advance notice?

Or that you can’t evict a tenant by changing the locks—even if they haven’t paid rent in months?

A long list of laws govern the relationship between landlord and tenant, and it’s part of your new job to know them.

The tricky part is that many of these laws vary from state to state. While there’s no replacement for consulting a lawyer if you run into trouble, this resource on state landlord/tenant laws is a great place to educate yourself before you get started.

Useful tips for first time landlords

If you found your way here, I’m going to take a guess: you haven’t been at this landlord thing long. Heck, maybe you’re in the middle of buying your first rental property right now.

Here are a few things the pros already know:

1. Set your available hours. Unless you’re okay with tenants calling you to fix their toilet at 10pm, find a window of time that works for both of you and agree to it ahead of time.

2. You can collect rent payments online. Technology, amiright? These days, you collect rent from anywhere in the world—awesome if you don’t live near your property or choose to interact with your tenant as little possible. There are plenty of services available (Rentpayment.com, Cozy, and ClearNow are just a few). Do your research to find one that fits your needs.

3. Be wary of renting to family and friends. You’ve probably heard that sage advice to never do business with family or friends. Well, you probably don’t want to rent to them, either. If you value the relationship, it’s best to keep money out of the equation.

4. Your tenants don’t need to know you’re the owner. Think about it: instead of telling your tenant they can’t paint the kitchen chartreuse and facing their resentment, you play property manager and blame the owner for being a spoilsport. This is an especially helpful (and legal) tip if you’re not great at confrontation or have any reason to be extra conscious of your safety. Just remember: if your business contains your name, you’ll need to change the name of the LLC so paperwork won’t tip off your tenants.

5. Document the state of your property before and after each tenant. It’s possible to wind up with a wild animal of a tenant no matter how well you screen. By knowing exactly what sort of damage has been wrought upon your property—and having the pictures to back it up in court—you’re in a much better position to hold onto your money.

6. Document any agreement you make. You’re probably noticing a pattern here: when in doubt, document. That holds especially true for any changes you agree to make to your standard lease after it has been signed. In this case, what you need is called an “addendum to a lease.” You can find templates online, but it can pay to use a lawyer.

7. Consider insurance. Landlord insurance may not be required by law, but it can definitely be worth it in the event of property damage or accidents.

Source: totalmortgage.com

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Regions Bank is in the process of shutting down three mortgage production offices that are “outside of [its] traditional branch network footprint.” 

Unlike the bank’s 1,250 full-service branches, these three locations only offered mortgage products. A company spokesperson said all branches can “refer customers to mortgage loan officers who are based in dozens of locations across [its] retail banking footprint.”

Offices set to sunset in mid-October are located in Kansas City, Chicago and Cincinnati, a company spokesman confirmed. A little over two dozen employees will be impacted.

“As a normal course of business, we evaluate our network of locations to ensure we are leveraging our resources and making investments where customers need them most,” the company spokesman said. “After careful consideration, we have decided to close three mortgage offices that are outside of our traditional branch network footprint.”

The Birmingham, Alabama-headquarted bank is also making “a limited number of reductions” in its home loan direct division corresponding with changing customer needs as interest rates have risen, the spokesman added.

Interest rates most recently hovered around 7%, which has continued to put pressure on the mortgage lending business.

Loans issued from the three soon-to-be closed branches “will continue to be serviced by Regions, and [its] digital tools, as well as [its] wide network of mortgage professionals in several states remain available to meet customers’ needs.”

In the second quarter, the bank reported its total revenue increased 12% to $2 billion on both a reported and adjusted basis, driven by growth in net interest income. Meanwhile, the bank’s mortgage non-interest income dipped by almost half to $26 million, down from $47 million in the second quarter of 2022.

The bank’s presence stretches along the Southern and Midwestern part of the country, with offices in 15 states.

Regions Bank is not the only depository choosing to downsize its presence in the mortgage market.

Earlier this year, Wells Fargo left the correspondent lending channel, North American Savings Bank Financial and its thrift subsidiary NASB confirmed that it is exiting its consumer-direct business, while Republic First announced plans to end home lending in May. 

Source: nationalmortgagenews.com

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Everyone Thinks Rates Should Go Lower. Is That Why They’re Rising

The GFC (great financial crisis) shaped and reshaped the worldview of any market-watcher that lived through it.  The 70s/80s were increasingly seen as a one-off aberration against a baseline of generally low, flat long-term rates in the 1-3% range.  Due to that paradigm, the post-covid volatility in inflation and rates has been accepted only slowly and painfully.  The paradigm continues informing the belief that 4.3% in 10yr yields is too damn high and buyers surely have to be lining up.  Unfortunately, when too many investors are on one side of the trade, the market often moves in the opposite direction.

At least that’s one of the old sayings.  Other variations include things like “the market will do what it must in order to prove the maximum number of traders wrong.”  But a closer look at

It’s true that their net long position is the highest it’s been in a long time, but not much longer than it was at the end of 2018.  It was also the longest in years in the middle of 2015 and the market did nothing to punish the imbalance.  In fact, bonds rallied to all-time low territory by the following summer.  

There are plenty of other traders who are short bonds.  Interestingly enough, leveraged accounts are net short 1,287m contracts.  That goes a long way toward offsetting the net long among money managers of 1.303m contracts.  

Long story short (no pun intended), glib witticisms about what the market “always does” are never as simple as they sound.  Bonds are adjusting to a new normal with shorter-term yields more anchored by Fed Funds Rate expectations (thus putting pressure on longer-term yields to un-invert the curve).  Additional pressure comes courtesy of a particularly heavy imbalance of Treasury issuance versus revenues as well as foreign governments selling Treasuries to prop up their devalued currencies. 

As has been and continues to be the case, short term yields need to fall significantly before long term yields get significant relief.  That won’t happen until the Fed signals a willingness to cut and that won’t happen until inflation and econ data do a lot more than they have to show the impact of the Fed’s policy tightening.  For inflation, that could merely mean repeating the recent 0.2% m/m core performance, but for econ data, things are going to have to start looking a lot more contractionary.

Source: mortgagenewsdaily.com

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With mortgage rates continuing to hover near record lows, mortgage applications jumped 3.8% last week according to a report from the Mortgage Bankers Association (MBA).

The refinance wave showed no signs of stopping as refinance activity gained 6% from the previous week – up 88% higher than the same week last year. According to Joel Kan, MBA’s associate vice president of economic and industry forecasting, borrowers made a grab for both conventional and government refi’s.

“The drop in rates spurred an uptick in demand for refinances,” Kan said. “Mortgage rates continue to hover at record lows this fall. The 30-year fixed mortgage rate remained essentially unchanged at 3.01 percent last week, but rates for 15-year fixed-rate loans, FHA loans and jumbo loans all fell to new MBA survey lows.”

Refinancing’s share of mortgage activity also continued to climb last week and surpassed the two-thirds share the week prior as refi’s rose to 68.7% of total applications.

Purchases, on the other hand, slowed for the fifth time in six weeks, falling 1% on a seasonally adjusted basis. However, purchase applications are 25% higher than the same week a year ago, and have increased year-over-year for six straight months.

Despite volatile conditions like heightened unemployment rates, increased home prices and an adverse market refinance fee, Black Knight estimated over $4 trillion in mortgage origination volume by the end of 2020 with record levels across purchase and refi.

Here is a more detailed breakdown of this week’s mortgage application data:

  • The FHA’s share of mortgage apps fell to 11.1% from 11.7%.
  • The VA share of applications increased to 12.2% from 11.4%.
  • The USDA share of total applications remained unchanged at 0.5% from the week prior.
  • The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($510,400 or less) increased to 3.01% from 3%.
  • The average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances (greater than $510,400) fell to 3.18% from 3.28%.
  • The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA fell to 3.08% from 3.14%.
  • The average contract interest rate for 15-year fixed-rate mortgages fell to 2.55% from 2.6%.
  • The average contract interest rate for 5/1 ARMs fell to 32.67% from 3.05%.

Source: housingwire.com

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The Economy, Though Volatile, Has Shown Resilience in the Face of Rising Interest Rates

The housing market has also been impacted by high rates as millions of homeowners locked into previously low mortgage rates and are content to remain in their current homes, therefore helping to keep inventory low

The U.S. economy has been resilient in the face of rising interest rates and grew at its long-run average rate of 2% during the first quarter of 2023. The labor market remains strong with an unemployment rate below 4% and rising labor force participation for the 25–54-year-old age group. The housing market has also been impacted by high rates with millions of U.S. homeowners locked into previously low mortgage rates and content to remain in their current homes, helping to keep inventory low and the balance tilted in favor of home sellers over buyers in most markets. In this month’s spotlight we show that this “mortgage rate lockin effect” is the largest ever in U.S. history, and is likely to impact the housing market for years to come.

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Recent developments in the U.S. economy

Per the U.S. Bureau of Economic Analysis, the third and final estimate of first quarter 2023 Real Gross Domestic Product (GDP) was much stronger than previously reported. Quarterly growth was revised up 0.7 percentage points to an annualized rate of 2%. While real GDP was revised upwards, the pace of growth continues to slow mainly due to the drag from the interest rate-sensitive sectors such as residential fixed investment and business investment. But the undaunted U.S. consumer has remained resilient, and consumer spending grew at an annualized rate of 4.2% in the first quarter, contributing to the upward revision of real GDP growth.

Consumer confidence and sentiment play a pivotal role in boosting consumer spending. The Conference Board’s June 2023 measure of consumer confidence jumped to the highest level since January 2022, reflecting improvements in the current conditions as well as in the future expectations. Expectations of inflation fell in June to 6%, the lowest reading since December 2020.

On the labor market side, according to the Bureau of Labor Statistics Employment Situation Summary for June 2023, the economy added 209,000 jobs in June led by the government, health care, social assistance, and construction sectors. The unemployment rate ticked down to 3.6% to remain near 50-year lows. The prime age (25–54-year-old) labor force participation rate has been rising and is now at the highest level since April 2002 (Exhibit 1). This suggests that the tight labor market is bringing many of the younger workforce, who were on the sidelines, back into the market.

The economy added 209K jobs in June, and the unemployment rate ticked down to 3.6% to remain near 50-year lows.

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Inflation has been cooling in recent months, and the measure tracked by the Federal Reserve, the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures, excluding food and energy (Core PCE), came in at 4.6% year-over-year in May. While housing continues to be the largest contributor to the increases in inflation and prices, it has started to cool off. Another inflation measure that the Federal Reserve has been tracking recently is the supercore service inflation (core services excluding energy and housing). Supercore inflation has been decreasing and the year-over-year change in May 2023 came in at the lowest since March 2022.

Inflation has been cooling in recent months, and the U.S. Bureau of Economic Analysis’ “core” price index for personal consumption expenditures came in at 4.6% year-over-year in May.

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Recent developments in the U.S. housing market

The divergence between existing home sales and new home sales has grown wider in recent months. Existing home sales receded 20% from a year ago, while new home sales surprised on the upside and increased 20% from a year ago in May. The mortgage rate lock-in effect continues to impact the listings of existing homes, which are down 35% as of April 2023, compared to the pre-pandemic average between 2016-19 (Exhibit 3). Pending home sales, which are a forward-looking indicator for existing home sales, also declined during May and were down 2.7% over the month and 22.2% over the year according to the National Association of Realtors®.

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On the other hand, according to the NAHB/Wells Fargo Housing Market Index builder confidence improved to the highest level in nearly a year due to continued housing demand and easing of supply chain issues, as well as the lower level of existing homes for sale. All three subcomponents of the HMI increased: the sales expectation component saw the greatest increase of 6 points to 62, current sales conditions increased 5 points to 61, and buyer traffic rose 4 points to 37.1 The current sales conditions and the sales expectations rose to levels above 60 for the first time in a year as homebuyers warm up to mortgage rates in the 6-7% range.

This increased builder confidence was also reflected in the housing starts, which jumped 21.7% in May. Furthermore, the monthly increase in total starts at 291,000 units was the highest in over three decades. Permits also increased over the month of May and were up 5.2% on a month-over-month basis, despite being down 12.7% year-over-year.

House prices may have bottomed and continue to firm up in the short run. Per the FHFA’s Purchase- Only House Price Index, house prices increased nationally 0.7% from March to April 2023. While house prices increased across all the divisions over the month of April—ranging from +0.1% in the Pacific division to +2.4% in the New England division—the variation is wider when we consider the house price appreciation as compared to a year ago. The 12-month changes ranged from -3.8% in the Pacific division to +6.1% in the East South-Central division.

Recent developments in the U.S. mortgage market

The 30-year fixed-rate mortgage as measured by our Primary Mortgage Market Survey®, settled at 6.7% in June, partly due to the Federal Reserve’s decision to pause increases in the Fed Funds Rate. Partially in response to the stabilization in mortgage rates, purchase applications increased 7.1% over the month of June, while refinance applications increased 2.8%, both after seasonal adjustment according to the Mortgage Bankers Association Weekly Applications Survey.

Delinquency rate went down 11 basis points in May to 3.1%, close to the historical low of 2.92%; foreclosure starts remain 41% below 2019 levels.

With respect to mortgage performance, the delinquency rate, as measured by loans 30 or more days past due went down 11 basis points in May to 3.1%, close to the historical low of 2.92%, according to Black Knight’s May Mortgage Monitor. Serious delinquent loans (90 or more days past due) also fell by 18,000 over the month and are down around 30% since May 2022. While foreclosure starts increased 2.2% over the month of May, they remain 41% below 2019 levels.

The outlook

The outlook remains volatile as we enter the second half of the year. The Federal Reserve’s pause on interest rate hikes after ten consecutive increases since March 2022 was a welcome breather for the economy. The labor market remains strong with low unemployment and inflation appears to be moderating. Downside risks as a slowing economy could tip into recession, but on balance our outlook is cautiously optimistic.

General economy, rates, inflation

The U.S. economy will continue to grow, unless consumers pause their spending. While the labor market is gradually moderating, it remains sufficiently tight, and combined with consumers’ excess savings and recent wage gains, consumers will continue to spend and the economy will continue to expand, although at a reduced pace.

While the labor market is gradually moderating, consumers will continue to spend, and the economy will continue to expand, although at a reduced pace.

Under our baseline scenario, we expect inflation to continue cooling as the long and variable lags of monetary policy work through the economy. The slowing growth in prices of goods and services will further reinforce consumers’ purchasing power. However, even though inflation is expected to slow it will be gradual and the pressure on long term rates including mortgage rates will not likely abate this year. Therefore, we expect mortgage rates to stay above 6% for the second half of 2023. High mortgage rates will increase the cost of owning a home, likely leading to a reduction in other spending. However, savings from cooling inflation could be enough to offset the increased housing costs. If this is the case, consumers will keep spending, and the economy will continue to grow unless the labor market further moderates significantly.

Home sales

On the housing front, home sales are plagued by a combination of a lack of inventory of existing homes and high mortgage rates. Due to the mortgage rate lock-in effect (described further below), many existing homeowners are unwilling to list their homes for sale, and we do not expect sufficient existing homes to come on the market any time soon to significantly boost existing home sales. Therefore, we expect existing home sales to remain low through the rest of 2023. However, new home sales are expected to pick up through the rest of the year. Although new home sales’ contribution to the total sales has been increasing in recent months, they are a fraction of the total home sales, we expect total home sales to remain muted for the rest of the year.

Home prices

Our official corporate forecast for the next 12 months has house prices falling by 2.9% and an additional 1.3% over the subsequent twelve months. However, given the current housing market conditions with historic low inventory and an early read on our data, we will likely revise our home price forecast in the next iteration of the Economic, Housing and Mortgage Market Outlook. We expect tight inventory will push sales volume down, and we expect it to keep home prices up.

Mortgage originations

Due to lower home sales, purchase origination volumes are expected to remain muted this year, while high mortgage rates keep refinance activity low. As homebuyers get accustomed to the new normal in terms of mortgage rates, we expect home sales to pick up and purchase originations to resume modest growth in 2024.

JULY 2023 SPOTLIGHT:

Mortgage rate lock-in and the housing market

The recent rapid increase in mortgage rates from historical lows to 20-year highs has created a scenario that we have not seen in more than 40 years. Because so many households have a fixed-rate mortgage, which exists in part because of financing from Freddie Mac and Fannie Mae, they were able to refinance into low interest rates in recent years. This contrasts with variable-rate mortgages, which have increased significantly as a result of rising mortgage rates. Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. Given current market rates, many of those homeowners have locked in payment savings, but they also may have locked themselves into a forever home. Throughout this spotlight we use the term “mortgage rate lock-in effect” to refer to the ownership of a mortgage on favorable terms compared to current market interest rates.

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Nearly 6 out of 10 borrowers now have a mortgage rate at or below 4%. While those homeowners have locked in payment savings, they also may have locked themselves into a forever home.

The mortgage rate lock-in effect is a benefit to homeowners with fixed-rate mortgages. To illustrate the benefit of the mortgage rate lock-in effect, suppose a lucky homeowner has refinanced their mortgage of $250,000 at 2.65% in January of 2021. Their current monthly principal and interest payment would be $1,007 and after 29 months of payment their current outstanding balance would be $236,379. If the borrower obtained a new 30-year mortgage of $236,379 at the prevailing market interest rate of 6.81%, their monthly payment would increase to over $1,500 a month.

Following Quigley2, we compute the net present value of the mortgage rate lock-in effect by taking the difference between the outstanding balance of the mortgage and the present value of the mortgage at prevailing market interest rates.3 The value of mortgage rate lock-in is $86,136 in our example.4

Except for certain limited cases, the mortgage is not portable or assumable. In today’s market, most mortgages have due-on-sale clauses, requiring the borrower to terminate the mortgage when they sell the property. To enjoy the benefit of the value of their low mortgage rate, the borrower must continue to live there, maintain it as second home, let it sit vacant or rent it out. In our example, the homeowner is only going to be willing to sell their current home, and thus give up their low mortgage rate, if the net benefit of a move is worth at least $86,136. For some households who are pursuing a new job opportunity or moving to be closer to family the move could be worth it, but others may opt to stay put.

The national average mortgage rate lock-in effect for 30-year and 15-year fixed rate loans is $55,000.

For each 30-year and 15-year fixed rate loan in Freddie Mac’s portfolio active as of June 2023, we computed the value of the mortgage rate lock-in effect.5 Per these calculations, the national average mortgage rate lock-in effect is $55,000 per household but because of differences in average loan sizes and the timing of originations and the history of refinance activity, the average value varies considerably across the country and by year of origination. Across geographies the average mortgage rate lock-in effect varies from a high of $91,000 in Hawaii to a low of $32,000 in West Virginia. Considering year of origination, the highest average values are for loans originated in 2020 and 2021 with average mortgage rate lock-in effect of $77,000 and $85,000, respectively. But, as rates continue to increase, even mortgages originated in 2023 have an average mortgage rate lock-in effect of $10,000.

To get a sense of how significant the mortgage rate lock-in effect is for the U.S. economy, we can sum the mortgage rate lock-in effect over the Freddie Mac portfolio. Considering only 30-year and 15-year fixed-rate mortgages financed by Freddie Mac, the aggregate mortgage rate lock-in effect for borrowers in Freddie Mac’s portfolio is substantial. We estimate that, considering the company’s single-family mortgage portfolio, homeowners with fixed-rate mortgages financed by Freddie Mac have locked in savings of a collective $700 billion dollars in total value. This is equal to about 25% of the outstanding unpaid principal balances in Freddie Mac’s single-family mortgage portfolio.

Our aggregate estimate of 25% of outstanding mortgage balances is significant and shows that many have truly benefitted from their fixed-rate mortgage when rates hit record lows. For comparison, Quigley calculated the average mortgage rate lock-in effect equal to $1,800 in 1981 for households with mortgages, which represented about 5% of outstanding mortgage balances versus about 25% today.6 In Exhibit 4 (on the following page) we show a time series of quarterly average mortgage rate lock-in effect in the Freddie Mac portfolio since 2018. From March 2019 through December 2021, the average lock-in effect was negative, meaning that the average borrower had significant incentive to refinance. But since March 2022, the average lock-in effect has surged, reaching over $50,000 in each
of the past four quarters.

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The mortgage rate lock-in effect is already having a significant impact on the U.S. economy and will likely continue to do so for years to come. One of the major challenges to the current U.S. housing market is a lack of available-for-sale inventory. The lock-in effect is yet another layer contributing to the dearth of available inventory. How much so is an active area of research.

  • Footnotes

    1 The Housing Market Index is a diffusion index normalized so that a value of 50 indicates sentiment balanced between positive and negative. Any value above (below) 50 indicates that on average survey respondents have a positive (negative) sentiment. For more information on the index see https://www.nahb.org/news-and-economics/housing-economics/indices/housing-market-index.

    2 Quigley, J.M., 1987. Interest rate variations, mortgage prepayments and household mobility. The Review of Economics and Statistics, pp.636-643.

    3 The net present value of the mortgage rate lock-in effect is denoted by V and computed by using the value of the current mortgage balance (B) and the present discounted value of the payments (P) using prevailing market interest rates (r) discounted over the remaining (n) periods of the loan:

    4 In our example, the borrower’s current balance B is $236,379, but the present value of the monthly payments (P=$1,007) discounted for the remaining (n=331) months at 0.005675 (r=6.81/1200) equals $150,243. Thus, the value V is $86,136 ($236,379-$150,243) which represents the value the borrower gets by having locked in a low mortgage interest rate.

    5 Due to curtailment, or early payment of principal, our formula is slightly more complicated than the one presented above. To adjust for cases of curtailment we use the modified formula:

    Where n is now the remaining months left adjusting for curtailment and F is the residual partial payment due in period n to pay off the remaining balance.

    6 Per the 1981 American Housing Survey (https://www2.census.gov/prod2/ahsscan/h150-81a.pdf page 10 Table A-2) there were about 27 million households with a mortgage in the U.S. Multiplying $1,800 by 27 million gives us a little less than $50 billion in aggregate mortgage rate lock-in effect in 1981. Per the Financial Accounts of the United States, the total mortgage debt outstanding on 1-4 family housing was $1 trillion in 1981. $50 billion / $1,000 billion = 5%.

Prepared by the Economic & Housing Research group

Sam Khater, Chief Economist
Len Kiefer, Deputy Chief Economist
Ajita Atreya, Macro & Housing Economics Manager
Rama Yanamandra, Macro & Housing Economics Manager
Penka Trentcheva, Macro & Housing Economics Senior
Genaro Villa, Macro & Housing Economics Professional

www.freddiemac.com/research

Source: freddiemac.com

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The FHA finally released details about its much anticipated HAWK for New Homebuyers pilot program, which offers savings on mortgage insurance premiums to borrowers who complete housing counseling courses.

The agency revealed today that borrowers who complete housing counseling before signing a contract to purchase a home AND pre-closing housing counseling will receive a 50-basis point reduction in upfront mortgage insurance premium (MIP) costs, along with a 10-basis point reduction in the annual MIP cost.

At the moment, the upfront MIP on FHA loans is 1.75% of the loan amount, so those who take part in HAWK (Homeowners Armed with Knowledge) will whittle that number down to a more reasonable 1.25%.

This fee is typically financed into the loan amount, so borrowers will save money on interest each and every month they pay their mortgage because of the smaller outstanding balance.

As far as annual premiums go, they range anywhere from .45% to 1.55%, with those taking out 30-year mortgages paying a minimum of 1.30%. For those that put down the minimum 3.5% and go with a 30-year fixed (pretty common), the annual fee is 1.35%.

All of these numbers would drop by .10%, which would provide additional savings to borrowers who complete the required counseling with independent non-profit organizations.

Additionally, borrowers who participate in post-closing counseling and stay current on their loans (no serious delinquencies after two years) will receive another 15-basis point reduction in annual MIP costs.

So for a borrower subject to the common 1.35% annual MIP, they’d see it drop to 1.10% after two years assuming they paid their FHA loan on time each month.

All in all, the savings are expected to total about $325 a year for the average home buyer ($180,000 loan amount), or roughly $9,800 over a 30-year mortgage term, which is certainly nothing to sneeze at.

Why Are They Offering a Discount for Counseling?

HUD is willing to offer the sizable discount because research has proven that mortgage delinquency rates for borrowers who have received counseling are 29% lower for first-time home buyers and 15% better overall.

Those are pretty strong numbers, so it will cost them less money to provide a discount to borrowers who actually understand what they’re getting into when purchasing a home.

At the same time, HUD has been getting a lot of flak from organizations like the National Association of Realtors, who have argued that the FHA is pricing out hundreds of thousands of would-be homeowners with all its recent premium increases.

This move should put those concerns to rest and increase business at the FHA, which has been waning thanks to the increased costs. Their book of business should also improve with better-educated buyers paying on time more often.

And with an incentive to stick with the FHA for a longer period of time, the agency can make more money by avoiding early prepayments.

As it stands now, many borrowers simply refinance into conventional loans after a short period of time to avoid the long-term costs associated with FHA loans.

The details of the HAWK for New Homebuyers four-year pilot program are open to comment, so final MIP reductions may vary based on the feedback received. Stay tuned for more details as they come!

Update: The House Appropriations Committee approved the fiscal year 2015 Transportation, Housing and Urban Development funding bill on May 21st, but included a provision prohibiting the use of funds for the the Homeowners Armed With Knowledge (HAWK) program. So while well-intentioned, it may not actually come to fruition.

(photo: devra)

Source: thetruthaboutmortgage.com

Apache is functioning normally

The 10-year yield closed today above my key level of 4.25%: Does that mean mortgage rates will hit 8%? To understand what’s happening, here’s how I look at the bond market and mortgage rates in my forecast for 2023.

In my 2023 forecast, the range on the 10-year yield was between 3.21%-4.25%, emphasizing that the bond yields can go lower than 3.21% only if the labor market breaks — which would require jobless claims to go over 323,000 on a four-week moving average.

That 10-year yield channel equates to 5.75%- 7.25% mortgage rates. And since the labor market isn’t breaking and the economy is doing well, mortgage rates are at the higher end of my range for this year. In fact, mortgage rates today were as high as they have been since December of 2000.

The big surprise in 2023 has been that the spreads with mortgage rates got worse, not better — all due to the banking crisis.

As you can see in the chart below, spreads were getting better, then the banking crisis hit and they got worse. This new variable is our 2023 reality until the Federal Reserve cries uncle.

Now let’s look at the 10-year yield: We closed today at 4.28%. For intraday action, I wanted to see if we could reach the highest level of last year at 4.34%. We didn’t, and in fact, yields headed lower toward the end of the day from the high peaks. For now, keep an eye out for that 4.34% level because breaking above that could cause more short-term bond selling.

As we can see below with a longer timeline chart, the 10-year yield has stayed in my range this year for 99.9% of the time. Considering where the economic data has been recently, it makes sense that we are at the higher end of the range because there is no recession in the data lines currently. 

The critical time was early this year when it looked like the bond market wanted to go lower due to the banking crisis, but my Gandalf line (the red line below) held. I believe as long as the economy isn’t breaking, the 10-year yield shouldn’t go under 3.37% — and the chart below shows that line has held up eight times.

I started forecasting 10-year yield ranges and mortgage rates in the previous expansion: It was a very boring channel. Every year starting from 2015, it was the same forecast; the 10-year yield would be between 1.60%-3% which meant mortgage rates between 3.50%-4.75%, roughly.

As the chart below shows, before the COVID-19 recession, bond yields mostly stayed in that range, although there were times between 2015-2020 when they broke below 1.60% and over 3%. Currently, we are slightly above 4.25%.

 When COVID-19 hit, I had a 10-year yield range for the recession at -0.21%-0.62. My COVID-19 recovery model began on April 7, 2020, as the 10-year yield was above 0.62% on that day.

In  2021, even though I was calling for higher mortgage rates because home prices could explode higher, the 10-year yield forecast was 0.62%-1.94% with an emphasis on creating a range between 1.33%-1.60%. That happened and we spent a good amount of time there in 2021.

In 2022, my 10-year yield call peaked at 1.94%, but I said that if global bond yields rose, we could hit 2.42%. March of 2022 brought a Fed pivot and the Russian invasion of Ukraine and we were off to the races with bond yields getting as high as 4.33% intraday in 2022.

So will mortgage rates go to 8%?

The inflation growth rate has been falling, but my bond yields range for 2023 was based on the economic data staying firm, meaning if economic data gets better, yields should be at the higher end. This week’s economics data, retail sales, and industrial production data beat estimates and the Atlanta GDP data is at 5.8%. The economic data hasn’t just stayed firm — it’s gotten better so bond yields are now above the range.

We also have to consider the Federal Reserve. The Fed now believes its policy is restrictive, which wasn’t case last year, so this is a reason why they’re not talking about more aggressive rate hikes.

How much higher can bond yields and mortgage rates go before the Fed starts talking about it? Hopefully, this chart below gives you an idea, because if the inflation growth rate cools even more, the Fed might step in to cut rates or stop their balance sheet reduction, which is another form of tightening policy.

So, can mortgage rates hit 8%?

Yes, they can, but it would require the economic data to stay firm. Short-term, as long as the economy outperforms, 8% is in the works. However, you can see the limits of mortgage rates now because the Federal Reserve has told us they believe their policy stance is restrictive. They don’t want to push the lever too much because one of their goals is to keep the Fed funds rate higher for longer.

The one thing that can change the Fed’s mindset is the labor market breaking, but for now they don’t have to worry about that.

Source: housingwire.com

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The average cost of homeowners insurance in Kansas is $2,955 per year, or about $246 per month, according to a NerdWallet analysis. That’s more than the national average of $1,820 per year.

Note: Some insurance companies included in this article may have made changes in their underwriting practices and no longer issue new policies in your state. Even if an insurer serves your state, it may not write policies for all homes in all areas.

Why you can trust NerdWallet

Our writers and editors follow strict editorial guidelines to ensure fairness and accuracy in our writing and data analyses. You can trust the prices we show you because our data analysts take rigorous measures to eliminate inaccuracies in pricing data and may update rates for accuracy as new information becomes available.

We include rates from every locale in the country where coverage is offered and data is available. When comparing rates for different coverage amounts and backgrounds, we change only one variable at a time, so you can easily see how each factor affects pricing.

Our sample homeowner had good credit, $300,000 of dwelling coverage, $300,000 of liability coverage and a $1,000 deductible.

The best homeowners insurance in Kansas

If you’re looking to buy homeowners insurance from a well-rated national brand, consider one of these insurers from NerdWallet’s list of the best homeowners insurance companies.

More about the best home insurance companies in Kansas

State Farm

Well-established insurer with a lengthy list of coverage options.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

State Farm

Well-established insurer with a lengthy list of coverage options.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

State Farm is a great choice for homeowners who like to work directly with a representative, as the company sells policies through a wide network of agents. And its attention to customer service has paid off; the company has fewer customer complaints to state regulators than expected for a company of its size.

State Farm offers a free Ting device as a perk for home insurance policyholders. Ting is a smart plug that monitors your home’s electrical network to help prevent fires.

Chubb

Perks and high coverage limits for affluent homeowners.

Coverage options

About average

Great set of discounts

NAIC complaints

Far fewer than expected

Chubb

Perks and high coverage limits for affluent homeowners.

Coverage options

About average

Great set of discounts

NAIC complaints

Far fewer than expected

Chubb generally serves affluent policyholders with high-value homes, offering lofty coverage limits and plenty of perks. For example, the company covers water damage from backed-up sewers and drains, and it pays to bring your home up to the latest building codes during reconstruction after a claim. (Many insurers charge more for these types of coverage.)

Chubb policyholders may also be able to take advantage of the company’s HomeScan service, which uses infrared cameras to look for problems behind the walls of your home.

Farmers

Those seeking benefits like diminishing deductibles and claims forgiveness may want to consider Farmers.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

Farmers

Those seeking benefits like diminishing deductibles and claims forgiveness may want to consider Farmers.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

Homeowners policies from Farmers may include two valuable types of insurance: extended dwelling and replacement cost coverage. Extended dwelling coverage gives you extra insurance for the structure of your house, while replacement cost coverage offers higher reimbursement for stolen or destroyed belongings.

Some Farmers policies also come with perks that can save you money. For example, with claim forgiveness, Farmers won’t raise your rate for a claim as long as you haven’t filed one within the past five years.

American Family

Comprehensive coverage for homeowners in 19 states, mostly in the West and Midwest.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

American Family

Comprehensive coverage for homeowners in 19 states, mostly in the West and Midwest.

Coverage options

More than average

Average set of discounts

NAIC complaints

Fewer than expected

Founded in Madison, Wisconsin, American Family receives fewer consumer complaints than expected for a company of its size. You may be able to customize your policy with optional add-ons such as identity theft, equipment breakdown or service line coverage, which pays for repairs to water, power or other underground lines that run to your house.

Homeowners may be able to save on their premiums by installing smart-home devices, bundling multiple policies or setting up automatic payments.

USAA

Offers perks and affordable rates for the military community.

Coverage options

Below average

Average set of discounts

NAIC complaints

Far fewer than expected

USAA

Offers perks and affordable rates for the military community.

Coverage options

Below average

Average set of discounts

NAIC complaints

Far fewer than expected

USAA sells homeowners insurance to veterans, active-duty military members and their families. If you fall into one of those groups, you might want to look into USAA’s offerings. The company’s homeowners policies include some unique perks such as deductible-free coverage for military uniforms and coverage for identity theft.

Homeowners in Kansas can take part in the company’s Connected Home program, which gives you a discount on your policy if you buy and install approved smart-home devices. These include water leak sensors, cameras and thermostats.

How much does homeowners insurance cost in Kansas?

The average annual cost of home insurance in Kansas is $2,955. That’s 62% more than the national average of $1,820.

In most states, including Kansas, many insurers use your credit-based insurance score to help set rates. Your insurance score is similar but not identical to your traditional credit score.

In Kansas, those with poor credit pay an average of $5,195 per year for homeowners insurance, according to NerdWallet’s rate analysis. That’s 76% more than those with good credit.

Average cost of homeowners insurance in Kansas by city

How much you pay for homeowners insurance in Kansas depends on where you live. For instance, the average cost of home insurance in Wichita is $3,250 per year, while homeowners in Topeka pay $2,605 per year, on average.

Average annual rate

Average monthly rate

Dodge City

Garden City

Hutchinson

Junction City

Kansas City

Leavenworth

Overland Park

The cheapest home insurance in Kansas

Here are the insurers we found with average annual rates below the Kansas average of $2,955.

What to know about Kansas homeowners insurance

When shopping for the best home insurance in Kansas, make sure to consider the potential for severe weather, including tornadoes, hailstorms, snowstorms, earthquakes and flooding. Read your policy carefully so you understand what’s covered and what isn’t.

Tornadoes

As part of Tornado Alley, Kansas gets more tornadoes than most states, seeing 68 tornadoes in 2022

. These storms can seriously damage homes, including roofing, windows and the structure itself.

Most home insurance will cover damage caused by strong winds. However, Kansans may have a separate wind and hail deductible, typically 1% to 2% of the dwelling coverage limit, which is the amount your insurer will pay to rebuild your house. So if your wind deductible is 1% and your house has $250,000 of dwelling coverage, you’d have to pay for the first $2,500 of wind damage yourself.

Another factor to consider is the cost of rebuilding your home if it’s destroyed. Talk to your insurer to make sure you have enough dwelling coverage to rebuild should that happen.

Flooding

Flooding is a concern for homeowners throughout Kansas because of heavy rain or rapid snowmelt. Standard homeowners insurance policies typically do not cover flood damage, so homeowners in flood-prone areas may need to buy separate flood insurance to protect their property from water damage.

To find out your risk, check out the Federal Emergency Management Agency’s flood maps and RiskFactor.com, a website from the nonprofit First Street Foundation. Even if your property is deemed low-risk, it may be worthwhile to buy flood insurance for extra peace of mind.

Remember that while you can buy flood coverage at any time, there’s typically a 30-day waiting period before the insurance takes effect. Here’s more information about flood insurance and waiting periods.

Thunderstorms and hail

Kansas is no stranger to spring storms, including punishing hailstorms bringing softball-sized hail that can damage your home. As with tornadoes, you may have a separate wind/hail deductible, typically 1% to 2% of your dwelling coverage.

Winter storms

Kansas can see harsh winter conditions, from freezing temperatures to blustering blizzards. A chilly winter wonderland can cause problems for Kansas homeowners, including frozen pipes or roof collapse under the weight of snow.

Homeowners insurance generally covers winter-related damage, but some types of damage may require extra coverage. For instance, you’ll typically need a separate flood insurance policy to cover flood damage caused by snowmelt.

Earthquakes

While not a massive risk for Kansas, the prevalence of earthquakes has increased over recent years, especially along the state’s southern border. However, standard homeowners insurance policies do not typically cover structural damage caused by earthquakes. You’d need to buy additional earthquake insurance.

Earthquake insurance often has a separate deductible, which can be between 5% and 25% of your dwelling coverage limit. If you have a 5% deductible on $200,000 of coverage, you’d need to pay $10,000 to repair earthquake damage before your insurance covers anything.

Kansas Insurance Department

The Kansas Insurance Department regulates the state’s insurance industry and provides consumer education on insurance and securities. The department’s staff can answer your questions about insurance by email at [email protected] or by phone at 800-432-2484.

Additionally, if you have a complaint about your insurer, the Kansas Insurance Department serves as an advocate. You can file a complaint online or can send in the consumer complaint form via mail or email.

Amanda Shapland contributed to this story.

Frequently asked questions

Is homeowners insurance required in Kansas?

Home insurance is not required by Kansas state law. However, your lender may require you to buy home insurance.

Does Kansas home insurance cover earthquakes?

Standard home insurance in Kansas does not cover earthquakes. If you live in a higher-risk area of the state, you may want to investigate separate earthquake insurance.

How can I save money on homeowners insurance in Kansas?

There are several ways to save money on home insurance in Kansas:

  • Shop around to make sure you’re getting the best rate.

  • Choose a higher deductible. In case of any claims, you’ll pay more out of pocket, but your premiums will be lower.

Source: nerdwallet.com

Apache is functioning normally

Baby boomers who’re planning on downsizing or leaving the real estate market altogether could send “shock waves” through the industry, according to a couple of new studies.

Fannie Mae’s Economic Strategic Research Group said in its report that homeownership demand from younger generations is “insufficient” to replace the void being created by departing older owners.

In a second study by the Stephen S. Fuller Institute at George Mason University, researchers say there is a significant number of older owners of large homes in the Washington D.C. area, and these could cause a “baby boomer sell-off” that could later be repeated in other parts of the U.S.

The concern stems from the fact that baby boomers, or those who were born between 1946 and 1964, own a significant portion of American homes – around two in five of the total residential properties in the country. Other generations own just 14 million homes between them.

As their twilight years approach, health and other issues will force baby boomers to move. Fannie Mae’s researchers say up to 11.9 million older owners will move out of homeownership between 2016 and 2026, while another 13.1 million to 14.6 million will depart between 2026 and 2036.

The fear is that this “generational unloading” of homes could have negative consequences for the home sales market, Fannie’s researchers say. Younger generations do not have the same desire or financial means to buy homes that baby boomers leave behind, they reason.

However, Dowell Myers, a professor at the University of Southern California, argued against this theory, telling the Washington Post it’s impossible to predict price impacts 10 years from now.

““We do not mean to be alarmists,” Myers said, though he said the issue will prompt more consideration for public and private policies that may cushion the potential fallout. He points to financing programs, for example, that could help urge more millennials to buy their first homes.

Meanwhile the National Association of Realtor’s chief economist Lawrence Yun also weighed in on the subject, saying he does not see any reason for despair. He said population growth in the U.S. and the impact of foreign buyers should ensure “no measurable declines” from baby boomers.

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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Source: realtybiznews.com