Over the last few months, it seems like a week doesn’t go by without some new headlines about housing, mortgage rates, the Fed etc… I wanted to spend this newsletter discussing the reality versus the headline. Let’s start with some cold, hard facts.. At the last Fed meeting, the Fed cut rates by 0.25% and as we’ve discussed, the immediate knee-jerk reaction to these cuts is that mortgage rates go up.
Over the following 2 weeks, mortgage rates settled back down and we’re only about 0.125% higher than pre-fed meeting. Fed rate cuts take about 3 to 6 months to cycle through the economy and to actually see the impact of the cut. Since our last newsletter, we’ve also seen the longest government shutdown in U.S. history, which finally ended this week.
Without getting off topic, the thing that was lost in the shuffle is that the September jobs report was skipped due to the shutdown. We now anticipate the September jobs report to be released somewhat soon and it will be interesting to see if it also shows weakness in the labor market. The October report should show real weakness, as the government workers who were let go were paid through September, and should start to show up as unemployed in the October report.
Remember, the weaker the labor market, the more likely the Fed is to continue to cut. Weak labor markets also impact stocks and generally send stock prices down. When stocks sell off, investors buy bonds, and when a bunch of money moves into bond markets, yields go lower. As bond yields go down, so do mortgage rates, so the cascade effect of these reports is something we’ll be keeping an eye on.
Now to the fun stuff… I’ve had family members, past clients, and real estate agents all reach out to me this week about a variety of headlines surrounding mortgages. President Trump floated the idea of a 50-year term versus the traditional 30-year term. I’ve seen headlines about the government considering a “portable mortgage” where you can transfer your mortgage from one property to another, keep the same interest rate and terms, and not start over.
I’ve seen headlines about Fannie Mae offering interest-only loans and adjustable rate mortgages again… The list goes on and on and on… I wanted to paint a realistic picture and give everyone some perspective on what this could mean or would mean if these headlines were actually going to happen.
Let’s start with a 50-year loan term: The concept behind this is to make consumers’ monthly payments more affordable by extending the length they’ll owe on the loan. That is true, when you extend a term, the payment is cheaper per month, but it’s still not as cheap as an interest-only loan. The other things to consider are that there are already 40-year terms available, and very few clients opt to use these because the 40-year term has higher interest rates than the 30-year term.
Why are rates higher? Because there are fewer investors on Wall Street interested in them. Think of it this way, you’re an investor or Bank on Wall Street, and you’re lending $1M with the expectation of getting paid back. Do you want your money tied up for 50 years or 30 years? Most investors would take 30 years, so at the end of the term, they can reinvest the money.
Having cash tied up for 5 decades is a tough sell to the investor community, so if this were to be rolled out, I would expect to see much higher rates and, in turn, fairly low adoption. The other thing I’ve seen is the portable mortgage, where you could get a loan today for $900K at a rate of X% and then when you move in 7 years, you could just take your loan with you and keep all of the same terms.
Your rate would be the same, you’d still only owe on it for 23 years, and life is good, right??? Well, sort of. In this scenario, you started with a $900K loan and a rate of X%. After 7 years, let’s say you only owe $800K. When you move, you could now take your $800K mortgage with you, but what if you need more money?
What if you need to borrow $1M this time because the home you’re looking at is a higher price than the home you sold? Well, you’d have to bring the extra cash to closing out of your own pocket. This could be a decent idea for people doing an even trade in price, or retired clients who are downsizing, but that is a fairly small segment of the overall transactions that happen nationally.
Finally, there is news that Fannie Mae and Freddie Mac may start offering interest-only loans or ARMs (Adjustable Rate Mortgages) again… In the Jumbo Market, Interest-only loans and ARMs are quite prevalent. We utilize them all of the time, and when used correctly, they are a great way to finance a home and meet other financial goals.
Of all the rumors I’ve seen, this would have the biggest impact on the housing market nationally. Let’s not forget that pre-2008 both Fannie Mae and Freddie Mac offered ARMs and interest-only loans. After the crash, when the government put the clamp down on both Fannie and Freddie, they felt these loans were too risky and, in turn, only started offering vanilla or chocolate ice cream.
Would we run the risk of having another housing crash because of these loans? I guess it’s possible, but only if they were used like they were in the early 2000s. Keep in mind, back then you could finance 100% of your home and do it with an interest-only payment.
A more reasonable approach this time around would put equity restrictions on these loans. For example, if you have 30% equity in your home, you can do an interest-only loan. You can’t do an adjustable loan unless you have 6 months of cash reserves after you make the down payment. These are just two simple ideas, but if there are restrictions put in place, I feel like the interest-only loans and ARMs could help create affordability without a significant drop in rates.
You’ll continue to see more and more headlines throughout the remainder of the month and heading into next year. Always feel free to reach out if you have any questions on how they impact your specific situation, and we’re more than happy to schedule a call.