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Melonie
12-10-2003, 11:01 AM
Some curious developments in today's financial news regarding homes.
#1) applications for new mortgages have dropped to the lowest level in 18 months. I take this to mean that people are either running out of credit/overextended so that they can't afford a new payment, or that houses are too expensive such that less people are interested in buying them.
#2) stocks of major homebuilding companies have dropped 5%-10% in value in the last two days despite the fact that they reported excellent profits. The 'talking heads' on Wall Street take this to mean that fear has begun to spread in investing circles in regard to future ability to sell new houses at high prices.
#3) fully 29% of the remaining mortgage applications are for adjustable rate mortgages or ARMs, meaning they have a very low interest rate for the first 3 years or so, but then the interest rate and monthly payments are free to rise to whatever the going rate is at the time. I take this to mean that these people could not afford the monthly payments of a 6% standard mortgage, and opted for say 3 years of payments at a 4% interest rate which they could afford, but with no regard for their ability to continue to make payments 3 years down the road when their adjustable interest rate could increase to 8% or 10% or higher and their monthly payment could increase by half again or double.

montythegeek
12-10-2003, 12:03 PM
Au Contraire Ms. Melonie, LOL

If you read the Mbaa press release at
http://www.mortgagebankers.org/news/2003/wk1210.html

you will see that what made the total index weak was a drop in refinancing which fell to 18 TIMES that week used as a base from 1990. If you look at the index of new home purchase applications you will see it was down from last week but was 4 TIMES what it was in 1990, and is falling from a level which was associated with an alltime record high sales pace for homes. I can not remember the number with precision but the average level for the refi-index in most of the late 1990's was about 20-25% of 1990.

Also be aware that the MBAA numbers are do not take into account that people's normal seasonal decline in housing purchases in the winter or the fact that the midwest and east were getting hit with the snow storm. This series is more volatile than a politician's lie-detector test.

Home builders are getting downgraded by Wall Street analysts because the stock prices more than fully discount a massive alltime record level of earnings for q3 and q4. Wall Street analysts are just selling on the news.

A normal ARM share of new home financing is about 20-25%. It was only way below that when long rates were in the 5-5.5% APR rate for 30-year mortgages(fully pricing in fees). A current comparable APR is 6%--the advertised rate not pricing in the fees is roughly 5.5%.

michele
12-11-2003, 01:44 AM
Melonie,they still have to qualify for an adjustable rate morgage and lenders take into consideration debt to income ratio on what the payment is now at say 4% and what it will rise to,the rated are capped at a percentage rate,they wont go ant higher than the cap,so your theory is off on that one.The reason adjustable rates are probably up is,they are easier to qualify for,if your vredit score is lower,or you are more of a risk,they like to give you these types of loans.I had to shop around because I did not want that kind of loan,I didnt want my payments to fluctuate like that,bank of america would only ofer me that loan,so I went elsewere.

scorpio
12-12-2003, 10:41 PM
the reason for the rise in ARMS is that because of the lower rate, people are getting smarter and taking advantage of the lower payments. A fixed rate benefits no one except the bank. In theory, the smart people take the monet that they save with an ARM, and re-invest that towards their principal. By refinancing every three years, the approximate average for the fixed rate term
of an ARM, they can drastically reduce their principle. In reality, most people take the lower rate as an excuse to overextand and buy far more house than they can actually afford. Leverage in the form of creative finance is ok, but most of the morons I see make 100K combined household income and think that they are rich. So they buy a 400K house, and of course have the Lexus and BMW, and the 50K in Credit card debt.......you get the picture.