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Fed's Rate Decision Has Big Implications for Home Buyers, Sellers

by KRISTIN WONG

The Federal Reserve's expected announcement of a rate increase on Wednesday has big implications for prospective home buyers and sellers, but experts have four words for anyone who's feeling that they need to act immediately: Don't do anything rash!

The Fed is widely expected to raise the federal funds rate by a quarter point, from a zero-0.25 percent range to 0.25-0.50 percent, for the first time in nearly a decade in an effort to keep the economy from overheating. When the Fed's rate goes up, so do interest rates of all kinds of other consumer loans, including mortgages.

Because mortgages are longer term than many other loans, even a small increase in interest rates can mean a buyer will pay many thousands of dollars more over the life of the loan. But moving quickly to try and lock in the lowest rate may not make sense, depending on your overall financial picture, experts say.

"Homeowners should not accelerate or decelerate their purchase decisions based on a market forecast," said Peter Lazaroff, wealth manager and director of investment research at Plancorp. "All markets, including interest rates, are forward looking. That means that debt prices have already built in expectations for slightly tighter monetary policy."

The Fed's rate and mortgage rates

While the Fed's impending rate decision already has sent mortgage interest rates inching higher from historic lows and a rate hike will send them higher, experts note that it won't happen at once and it won't happen quickly.

The federal funds rate is directly tied to short-term market rates — credit cards, for example — but long-term mortgage rates are not directly affected by the Fed. Nonetheless, Lazaroff said it is reasonable to expect higher mortgage rates over time.

Ahead of the Fed's meeting, the average 30-year fixed mortgage inched up to 3.95 percent last week, a slight increase from 3.93 percent and almost two-tenths of a point from its six-month low of 3.76 percent.

But Lazaroff said further increases are likely to be gradual, meaning that prospective buyers and sellers have some time before higher rates really begin to bite.

That doesn't mean that there is no need to start moving if you're serious about buying a home, said Melanie McShane, an independent real estate broker in Southern California.

Even a slight change in interest rate can make a big difference on your home loan, she said. For example, let's say you have a $300,000 loan with a 3.95 percent 30-year fixed mortgage. Your total interest payment would be $212,500. With a rate of 4.25 percent, you'd pay a total of $231,295 in interest. At less than half a percentage point increase, that's nearly a $20,000 difference.

"I've been in the industry for 11 years now and have seen the impact interest rate fluctuations have on homebuyers," she said. "As the interest rates move up, the total loan amount that the buyer qualifies for decreases. Typically a buyer has a fixed amount in mind of how much they are comfortable spending monthly. As the interest rate moves up, that fixed monthly payment buys less and less home."

And with mortgage rates still near historic lows, this remains a good time for potential homeowners to lock in a low, fixed interest rate, she said.

But timing a purchase depends on more than just mortgage rates, said Robert R. Johnson, president and CEO of The American College of Financial Services. As interest rates rise, the market is likely to become more competitive.

"There is often a hidden benefit to higher rates," Johnson said. "All else being equal, if interest rates are higher, home prices are generally lower because of supply and demand effects. If there is lower demand, sellers may be forced to sell homes at lower prices than might exist if rates were lower."

McShane, however, doesn't think the impact of waiting will be that substantial.

"I don't believe that there is going to be a benefit to waiting other than more selection," she said. "I do not believe that home prices will fall enough to be a significant factor in waiting to purchase a home."

Lock in a fixed rate

Most experts agree that new buyers should prefer a fixed mortgage. Because further increases seem likely over at least next year, an adjustable rate mortgage would almost certainly mean paying more interest.

"I believe that new homebuyers should look to lock in fixed rate mortgages sooner rather than later," said Johnson. "Rates have nowhere to go but up and homeowners should access cheaper money now."

The draw of adjustable rate mortgages (ARMs) is the initial rate is usually slightly lower than a fixed rate loan. But if interest rates increase over time, ARM increases will usually cancel out any savings.

For example, let's again say you're borrowing $200,000. If you have a 10/1 ARM at 3.95 percent (meaning it will stay at the initial interest rate for 10-years), with a maximum rate of 8 percent, you would potentially pay $180,000 in interest over the 30-year life of the loan. With a 30-year fixed mortgage at a higher rate of 4.25 percent, you'd only pay about $154,000 in interest over the life of the loan. There are a number of factors that can influence these numbers, such as the length of time you live in a house. (You can use this calculator to crunch the numbers yourself.)

As a potential homebuyer herself, McShane is looking to lock in a fixed rate sooner rather than later.

"Fixed rates right now are very attractive and I would certainly recommend that for anyone who does purchase," she said. "First time home buyers should understand that even with a slight increase in interest rates, now is still a great time to buy. But they should not purchase more than they can comfortably afford. We are not in the market cycle where rates are going to decrease so that they can refinance." 

Analyzing Ford's Return on Equity (ROE)

Finanzas: Noticias.
By Jeremiah Strider | December 10, 2015

Ford ’s (NYSE: F) recent return on equity (ROE) tells investors that the company is creating measurable net income for its stockholders. Although Ford may have been the only auto manufacturer that did not take government bailout dollars during the financial crisis of 2008 and 2009, it nonetheless suffered significantly during those years. In fact, like the other large U.S. automakers, Ford’s equity balance was substantially below zero during those years and the years that followed. Essentially, the company owed more than its assets were worth; therefore, there was no shareholders' equity on the balance sheet. That negative equity, along with several years of net operating losses, made the company's ROE unsuitable to consider for several years. There simply cannot be a return on shareholders' equity when there is no equity. In 2011, Ford's shareholder equity and ROE turned positive, ending at 281.62%, a number that was skewed by the equity balance being extremely low and having the highest annual net income for the past 10 years at $20.3 billion.

Recent Three Years

For the most recent three calendar years of 2012 to 2014, Ford's ROE has been 36.58%, 33.81% and 12.45% respectively. Net income during those same years was $5.6 billion, $7.2 billion and $3.2 billion respectively. The ROE does not correlate to the net income trend because Ford also raised its dividend during each of those years: from 0 in 2011, gradually increasing up to 50 cents per share by the end of 2014. While this is generally viewed as a sign of strength to investors, it may skew the equity calculations and make the yearly ROE difficult to compare. Ford has also bought back a small portion of company shares during recent years, decreasing shares outstanding from 4.1 billion in 2011 to 4 billion in 2014.

Comparison to Competition

Ford Motor Company, ’s largest domestic competitor in the highly consolidated automotive manufacturing industry is General Motors, which also experienced years of negative shareholder equity during the economic downturn but returned to positive figures in 2010. During the same most recent three-year period of 2012 to 2014, GM's ROE has been 18.14%, 11.54% and 7.48% respectively. Net income during those same years was $6.1 billion, $5.3 billion and $3.9 billion respectively. GM returned to paying dividends in 2014 after several years of none, paying an average of $1.20 per share that year. GM's shares outstanding has remained relatively level during recent years with no major share repurchases or new share issuance.

The two companies are relatively close in overall size; GM generates more annual revenue than Ford, but Ford has more overall assets than GM. Ford also has carried more long-term debt than GM in recent years. Both companies' ROEs indicates that they have returned to more stable economic footing and that they are beginning to reward shareholders reliably for their investments through dividends. Both companies' stock prices have also recovered from severe lows during the economic recession.

Other Considerations

The amount of new debt a company takes on is often a factor that an investor should consider in addition to an ROE analysis. Although Ford carries a higher amount of debt compared to its competition, it has not substantially increased that debt in the last three years. This indicates that its capital needs are not being met via debt financing, which often skews an ROE analysis.

Ford’s annual revenues have returned to their highest level since the recession, but they are still substantially lower than annual revenues before the recession. However, it appears as though the company is learning how to manage its assets and shareholders' equity at this new level as demonstrated by the return to positive ROE figures posted in each of the past three calendar years.

How to Reduce Real Estate Investment Taxes

By Zina Kumok | December 14, 2015

With the Federal Reserve likely to raise interest rates soon, many people are pulling the trigger on purchasing a rental property. It can be a great way to earn passive income and diversify your portfolio. But don’t jump in with your eyes closed. Even if you’re a homeowner, owning rental property is a different beast. Real estate tax law is not the same for rental properties as it is for residences. Here are some ways to save yourself from the tax man and get the most from your real estate investment.

Tax Tips

If you’re used to paying taxes on your home, there are some differences in property tax for landlords. Here’s what you need to be aware of when it comes to real estate rental taxes: (For more, see: Tax Deductions for Rental Property Owners.)

• Record your deductions. Like any small business, you can deduct the costs of running your real estate property from your taxes. These might include advertising, maintenance, utilities, insurance premiums, management fees, repairs and more. You can also deduct any mileage related to maintaining the rental property. Keep a small notebook in your car to log your mileage.
• Know the difference between a repair and an improvement. According to the Internal Revenue Service (IRS), there are two types of changes you can make to a rental property. One is a repair, which can be deducted from your taxes. A repair implies a fix to something that is broken, such as a water heater or faulty wiring. An improvement is when you make a change that increases the value of the home, such as finishing the basement or adding energy efficient insulation. Improvements must be depreciated over a period of time. (For more, see: How Rental Property Depreciation Works.)
• You may not be eligible to deduct anything. The IRS limits deductions to married couples filing jointly earning $150,000 or more. Deductions begin phasing out starting at $100,000. If you earn $100,000 you can deduct up to $25,000. However, any losses that exceed that amount can be carried over to future years. If your salary exceeds this amount, make sure to set aside money for your rental taxes.
• Count your time. According to certified financial planner (CFP) Chris Hardy, if you spend more than 750 hours a year working on your real estate business, you can deduct expenses even if you exceed the income threshold. This could be a huge boon for high-earning professionals. Track the time you spend working on your rental property. This way, you’ll have a record in case the IRS comes calling. (For more, see: Tips for the Prospective Landlord.)
• Live there first. Hardy says that another way to save on taxes is to live in your rental property for at least two years before renting it out. Single people can receive $250,000 in capital gains without paying taxes (or $500,000 for married couples filing jointly). When you sell your home, you’ll be able to deduct up to that amount from any profit you earn. This is great for people looking to buy houses and flip them later.
• Vacation homes have special rules. If you own a vacation home that you rent out, you don’t have to pay any taxes if it’s rented for less than two weeks a year. This can be a great way to make some extra money on your property without paying extra taxes on it.

The Bottom Line

Real estate tax law can get hairy, but don’t let that stop you from buying a rental home if you’re in a suitable position to do so. The above tips will help. If you have more questions, consult a tax professional who can guide you. (For more, see: The Pros & Cons of Owning Rental Property.)

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Mortgage Rates Highest in a Week Ahead of Retail Sales Report

BY: MATTHEW GRAHAM

Dec 10 2015, 5:21PM

Mortgage rates moved moderately higher today, bringing them to the worst levels in exactly one week.  That said, the movement over that time has been minimal overall--not even enough to affect contract rates.  In other words, you would likely have seen the same interest rate on any quote during the past 5 days.  The changes in "rates" would instead be driven by the changes in the upfront costs.  Taking these closing costs into consideration allows us to observe changes in mortgage cost on a smaller scale (sometimes referred to as "effective rate).  The most prevalently-quoted conventional 30yr fixed rate remains 4.0%, though fewer lenders are quoting 3.875% today.

With next week's Fed Announcement being the biggest item on the near-term calendar, none of the recent economic data or events have been important enough to be of much concern.  One of the only possible exceptions will be tomorrow morning's Retail Sales data.  While it certainly won't deter the Fed from its likely hike next week (and while it may not even have much of an effect at all), it at least stands a chance to have some small impact on the short term path for mortgage rates.

Even then, the bigger picture is now more important than the short term path.  With the Fed hike being a relatively foregone conclusion, investors are now turning their thoughts not only to the rate hike outlook for 2016, but to the general state of the economy both at home and abroad.  Reports like Retail Sales can help shape that bigger picture outlook, and that can (and will) do just as much to inform mortgage rates as the volatility surrounding Fed policy.  In other words, if Retail Sales are weak, mortgage rates can still improve even though the Fed is hiking next week.

Loan Originator Perspective

"The hoped for post supply rally didn't happen today.   Rates continue to be range bound and the risk at this time is a break to higher yields.   That said, I think it may be wise to lock in today.  With the Fed decision on a rate hike in a week or so, I do not see anything that would cause rates to break through the current floor other than some new tapebomb such as a terror attack, increased QE in Europe, etc..." -Victor Burek, Churchill Mortgage

"Rates were largely unchanged today, as both treasury and MBS prices hovered in recent ranges.  The Fed's looming overnight rate interest hike is priced into markets, and I see little motivation for rates to change dramatically up/down, given oil's continued bear market.  It's tough for anyone to be concerned about inflation (which is bonds' archenemy) when oil is trading at multi-year lows.  The lock/float decision in times like this boils down to "do we wait and hope your lender credit rises slightly (knowing full well it might drop instead), or do we lock and concentrate on packing?"  I'm 50/50 lock/float now for new files, but only with the caveat that huge gains are highly unlikely." -Ted Rood, Senior Originator

Today's Best-Execution Rates

• 30YR FIXED - 4.0%
• FHA/VA - 3.75%
• 15 YEAR FIXED - 3.25%
• 5 YEAR ARMS -  2.75 - 3.25% depending on the lender

Ongoing Lock/Float Considerations

• 2015 has been largely about rates rising unevenly from a long-term low brought about by the onset of quantitative easing in Europe.  In May and June, the Fed increasingly began telegraphing a 2015 rate hike.  At that point, the "rising rate environment" seemed like a sure thing, but the Fed's plans hit several snags.  Economic data began deteriorating at home and abroad, causing markets to rethink the higher rate rhetoric.  Mortgage rates hit 6 month lows at the end of October, just as the Fed surprisingly changed it's policy statement to specifically suggest December as a rate hike possibility (something they haven't done since 1999).

• In the bigger picture, rates had been at a crossroads, trying to determine if they would move back to 2015 highs or if the late summer swoon was merely the first wave of a longer campaign. 
  
  
• While there is still plenty of room to be concerned about increasingly weak global economic growth, that's not a solid enough reason to float in this environment.  With the Fed almost certainly on track for a December rate hike, there is much  more risk that rates move quickly higher vs quickly lower.  The big picture global malaise can serve as the basis for long term hope, but in the short term, assume upward pressure on rates when formulating your strategy.
  
  
• As always, please keep in mind that the rates discussed generally refer to what we've termed 'best-execution' (that is, the most frequently quoted, conforming, conventional 30yr fixed rate for top tier borrowers, based not only on the outright price, but also 'bang-for-the-buck.'  Generally speaking, our best-execution rate tends to connote no origination or discount points--though this can vary--and tends to predict Freddie Mac's weekly survey with high accuracy.  It's safe to assume that our best-ex rate is the more timely and accurate of the two due to Freddie's once-a-week polling method).

About the Author

Matthew Graham

Chief Operating Officer, Mortgage News Daily / MBS Live

A former originator, Matthew began writing for Mortgage News Daily in 2007, covering a wide range of topics. Seeing a need in the marketplace, his focus increasingly shifted toward relating MBS and broader financial markets for loan originators

Is Miami in a housing bubble?

Real estate company Zillow polled housing experts

They said Miami doesn’t need to worry as much as San Francisco and New York

Read more here: http://www.miamiherald.com/news/business/real-estate-news/article48884525.html#storylink=cpy

BY NICHOLAS NEHAMAS

nnehamas@miamiherald.com

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Is Miami’s housing market in a bubble? Experts say no. Or at least, not yet.

Online real estate company Zillow polled nearly 70 housing experts about which local markets across the U.S. are experiencing a price bubble.

Only four of them said Miami was currently in a bubble, although six said there’s “significant risk” of one forming in the next year. Nineteen experts said we could see a bubble in the next three to five years. Thirteen said we shouldn’t expect one at all. (The rest didn’t have an opinion on how frothy Miami’s market is.)

The experts were more worried about places where oil and tech booms have led to rapid, possibly unsustainable price increases including San Francisco, Houston and Seattle. New York City also made the list of bubble markets.

Home prices in South Florida have skyrocketed since the housing market began recovering in 2011, fueled by investors from abroad. But the growth hasn’t returned the region to the heady pre-crash days. Home values still stand at about 70 percent of their all-time high in 2006, according to the S&P Case-Shiller Home Price Indices.

And as Latin American and European economies struggle, Miami has seen its pool of foreign buyers shrink and price gains slow down. Already, developers have canceled several condo projects slated for downtown.

The slowdown in price growth could be a good thing for locals. Because of low wages, Miami is one of the least affordable housing markets in the U.S. That situation would improve if paychecks catch up with prices.

Read more here: http://www.miamiherald.com/news/business/real-estate-news/article48884525.html#storylink=cpy

4 reasons 2016 is the year to buy a home

By Kathryn Vasel   @KathrynVasel

If you've been on the fence about buying a home, 2016 is the year to take the plunge.

Mortgage rates have been bouncing around record lows for a while now. But even though they're likely to start going up, you haven't missed your chance to get a deal on a house.

A number of factors are coming together, making next year a good time to buy:

1. Home prices will finally calm down

Real estate values have been on the rise for a while, but are likely to slow their pace next year. Prices are expected to rise 3.5%, according to Zillow's Chief Economist Svenja Gudell.

Buyers who've been stuck behind the wave of rising prices may finally get the chance to jump in.

And that could lead to a flood of buyers, said Jonathan Smoke, chief economist at Realtor.com.

"We have the potential for about six million home sales just through the months of April through September; that is basically impossible to do," he said.

But not everyone will be in a position to take advantage.

Despite the slowdown, Zillow still expects home values to outpace wage growth, which can make it tough to afford a home, especially for lower-income buyers.

Plus, prices in the country's hottest markets -- like San Francisco, Boston and New York City -- aren't expected to pull back as much next year.

2. More homes will hit the market

The slowdown in home prices will prompt more owners to list their homes, Smoke said, giving buyers more choice.

"Because of the price appreciation they have experienced, you will have more sellers put homes on the market next year," he said.

The new home market is also expected to grow in the coming year with builders focusing more on starter and middle-range homes, which will also boost inventory and make it easier for buyers.

With more homes on the market, bidding wars will become less common and prices could ease even more.

3. Dirt cheap mortgages could disappear

The Federal Reserve is widely expected to begin increasing interest rates soon, which means the window for record low mortgage rates is closing.

While rates are expected to go up gradually, higher rates push up borrowing costs and monthly mortgage payments.

"You are likely to get the best rate you will possibly see, perhaps in your lifetimes through the majority of next year, but certainly, the earlier the better," said Smoke.

4. Rents will still hurt

Rent prices are expected to continue to climb in the new year, which means in most cities, buying will be cheaper than renting.

Even though mortgages could get more expensive, buying might still be the better deal.

Interest rates would need to rise to around 6.5% for the cost of buying to equal that of renting on a national level, according to Ralph McLaughlin, housing economist at Trulia.

CNNMoney (New York) December 4, 2015: 9:24 AM ET

Insider Information For Shopping Mortgage Rates

Mark Greene ,

 CONTRIBUTOR

I write about goings on in the mortgage universe.

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Mortgage consumers standing on the threshold of their mortgage lender leap-of-faith decision, would do well to holster two strategic pieces of information to gain an advantage in their lender shopping quest. Knowing who is on the other team and what the game rules are can go a long way towards leveling the playing field.

But first, some qualified pontificating; shopping for an interest rate and shopping for a mortgage are two very different things. Over time and with regular practice, mortgage consumers have become programmed to substitute “what’s your rate” as the mortgage lending proxy for “how much does it cost?”

Interest rates are just headlines, they are the bright and shiny, easy-to-read broadcast numbers that everybody sees, while all of the ifs, ands, buts and strings remain quietly below the surface. Lots of variables can change those advertised rates from bright and shiny to scuffed and bruised; credit scores, down payments, points, lender fees, lock-in periods, just to name a few, can have an impact on your interest rate and the price you pay for your mortgage financing. Different buyers with different borrower profiles can end up with very different rates.

Shopping for a mortgage is all about finding a lender that will help you navigate your way to the closing table and get you the best rate that your credit worthy wherewithal will allow. “What’s-your-rate” simply doesn’t cover enough ground.

The first thing you should know about shopping for mortgage rates is that mortgage people are sales people first and lender people second.  While you are busy trying to find out what rates the lenders you are calling are offering, the lender reps are trying to get you to apply with them. Most mortgage lender reps get paid a commission when your loan closes so they want you to make a buying decision while they have you on the phone. Lender reps know that consumers shop rates and are experienced (even trained) at fielding and deflecting these inquires without ever talking about interest rates. Everybody you talk to will sound like they have the best deal and be great to work with.  Mortgage people are professional sales people, remember that.

I posted A Look Behind The Curtain: How To Choose A Mortgage Lander, in March of 2013, might be worth another look.

The other thing that mortgage consumers should holster before entering the rate chasing fray is the idea that a great disparity exists between lenders and their interest rate offerings. The front end of the mortgage industry is an originating competition for new loans that is uber competitive with narrow profit margins and carefully managed costs.  It is not a landscape where lenders have the ability to deliver significantly lower interest rates than other lenders. Whatever perceived disparity may exist is carefully crafted marketing driven myth.

Of course, if you make enough inquiries, it is entirely possible that you may find a lender rep offering up a rate that is significantly lower than most of the other lenders you survey. It may sound too good to be true and chances are, it is. Whatever you decide,  get it in writing, our world is virtual and immediate, a couple of keystrokes and you should be able to get a rate quote with a closing costs estimate sent to your inbox. Ask for one.

You also need to know that rates can change every day; the quote you get today can be very different from the quote you get tomorrow.  Timing and trading can quickly discombobulate your rate shopping efforts, narrow your lender chase to a short list, contact each one on the same day, make a decision and apply for your mortgage.

A mortgage is a multidimensional aggregate of your personal, professional and financial borrower profile. A lot of things are measured; work history, income structure, credit use, savings and assets, family status, tax reporting practices and all manner of under the microscope tests are made. All of that all about you discovery is then plugged into a financing package that delivers best fit affordability to you the consumer while at the same time managing risk to the lender.  That requires an exchange of information, a review and analysis of that information, and an assessment of the risk profile that information presents.

Once all that is done, I can tell you what your rate would be, short of that, we’re just guessing.