As of today, June 15th – rates are back to the 5.375 range after going as high as 5.625% last week..

While this was a welcome change for lenders to catch up on their underwriting turn times, it has definitely slowed down mortgage applications.

Of course a housing market recovery will greatly help the overall economy..  And I feel if we can get back into the higher 4% range and stay there for another 6 months to a year, the housing market will will finally begin to level out somewhat.  We’ll see – please read below. – Matt

05-28-09

Yesterday, Mortgage Bonds had their worst one-day performance since October.

So…what the heck happened and what’s next?

The main culprit for yesterday’s selloff…SUPPLY.  The Treasury has literally been printing money by way of Treasury auctions to pay for the massive spending.  And these hundreds of Billions of dollars of new Bond supply have to be absorbed by the market… So the additional supply literally weighs on the entire Bond market and drags prices lower – making mortgage rates higher.

Also, when you think of supply, consider all the recent refinances..  all those loans have been bundled, packaged and sold on Wall Street…and this additional supply has now started to hit the secondary market, as those closed loans are now getting turned around and sold.  This supply also must be absorbed, and while the Fed has been a buyer, they simply can’t buy enough to balance all the selling.  It’s Economics 101… Anytime supply vastly exceeds demand, prices will move lower.  And as prices move lower, yields rise – that rise in yield will attract new buyers as they get a higher return on their investment.  This is how the market finds balance – in turn it also raises our mortgage interest rates.

Many governments have made attempts to support a currency.  In other words, a country individually, or a group of countries, can join together to purchase a nations currency in an effort to “prop it up” or support it.  A historical perspective indicates that this may work as a temporary fix, but never works over the long term.  In some ways, we can draw parallels to what the Fed is attempting to do with mortgage rates.  As you know, we have been quite vocal on how a 4% mortgage rate was a myth, and it appears now that some clients who elected to hold out for that rate find themselves in a tough spot.

The question on everyone’s mind..will rates come back?  The answer is that we will probably see some improvement, but it will be difficult to see rates fight back to the levels they were at just last week.  There are both fundamental and technical reasons why a retracement back to last week’s levels would not be easy…  Fundamentally, the aforementioned supply issue still exists, with no end in sight to the amount of debt still to be issued – the printing presses are just getting started. Yes, the Fed will continue to buy Mortgage Bonds, which will help to some degree, but it’s like trying to clean up a flood with a sponge. 

The recent price declines have pushed Bonds into an “oversold” state, which means prices could be ripe for a bounce or reversal higher, yet we need to be mindful of a few things.  After a few bad days, we have fallen through several floors of support, which now become overhead resistance – so the long haul back to the mid to high 4% range may take quite some time while it battles the inflation of the summer months.

Matthew J. Goulart

Murphy Home Loans, Inc.

www.centralcoastmortgage.org

805.596.4455 SLO

805.773.6222 Pismo Beach

mattg@murphylends.com

DRE Lic. # 01794720

“Please remember, referrals to your friends & family are the best compliment I can receive.”

**Original orgin of material above taken from the Mortgage Market Guide

I want to take a second to thank Allyson Nakasone for sharing this article which she received from Michael Gray, CPA’s Tax & Business Insight. Please read below:

Housing Act includes a tax surprise.

President Bush signed The Housing Assistance Act of 2008 (H.R. 3221) on July 30, 2008. The tax part of this legislation is The Housing Assistance Tax Act of 2008.

The big surprise in the tax act that isn’t being widely discussed is a cutback in the home sale exclusion. The reduction applies for home sales in tax years after 2008. Gain eligible for the $250,000 exclusion for single persons, $500,000 for married, filing joint returns, is reduced for periods of non-qualifying use after 2008. For example, if you convert a principal residence to a vacation home or a rental, the gain eligible for exclusion is reduced for the period of non-qualified use. (Temporary absences, such as for a vacation or for medical treatment, still count as qualified use.) This is a major change that many people won’t understand, and is especially important for real estate investors who convert a principal residence either to or from rental or vacation property.

For example, John Taxpayer, a single person, bought a residence on January 1, 2007. It was his principal residence until December 31, 2008. He used it as a vacation home starting January 1, 2009. John sells the house on December 31, 2010 and has a $200,000 gain. Before the change in the tax law, the entire gain would be eligible for the $250,000 exclusion, resulting in no tax. After the change in the tax law, only one-half of the gain is eligible for the exclusion, the other $100,000 is taxable as a long-term capital gain.

The Act also includes a tax credit for first-time home buyers. The credit is 10% of the purchase price of a home, up to $7,500 ($3,750 for married taxpayers filing a separate income tax return. The credit is phased out for married persons filing a joint income tax return with modified adjusted gross income from $150,000 to $170,000, and for single taxpayers with modified gross income from $75,000 to $95,000. The credit is effective for homes purchased from April 9, 2008 through June 30, 2009. The credit is actually an interest-free loan that is repaid over a 15-year period. The balance must be repaid if the home is sold before the repayment period is over. A “first-time homebuyer” is defined as a person who had no ownership interest in a principal residence during the three-year period before the new home is purchased.