San Diego mortgage brokers are always asked what "the rate" is. We used to flippantly answer that question two ways:
1- With another question; "Are you talking about the "best rate"? (meaning an ARM product)
2- with opacity; that depends on the credit, equity position, and capacity to handle the debt
Of course, we know what your asking. "The rate", more specifically defined, is the 30-year,fixed rate mortgage, with an equity position of 30% or greater, documented income, and excellent credit. Even today, "the rate" is stratified into three loan size classes:
- under $417,000: 4.750% with 1% origination fee
- $417,000-546,250: 5.125% with 1% origination fee
- over $546,250: 8.125% with 1% origination fee and 2 discount points
Pay mind to that last quote (8.125% with 3 points); that's the REAL, free-market, cost of mortgage capital and that's where we're eventually headed. The lower, more attractive loan amounts are subsidized by the government, through the FHFA (which guarantees all FNMA/FHMLC loans). That subsidy can't last forever.
San Diego real estate broker Steve Berg screams for help for this non-subsidized market:
Readers of this weblog know this; I outlined this problem in the 2009 San Diego Real Estate Market Outlook:
Next year, I suspect we’ll see a convergence of housing prices as the higher-priced homes follow the lead the of the lower priced homes’ decline. The median price may very well drop but the lower-priced homes will hold value. The government is doing everything possible to provide liquidity to the lower end of the market but there will be NO financing available, over $625,000 next year. Watch Solana Beach, Encinitas, Poway and Scripps Ranch nose dive while the cash-heavy communities of La Jolla, Rancho Santa Fe, and Del Mar drop just a bit. Sell that duplex in Cardiff and buy a four-plex in Imperial Beach, if you’re an investor (I imagine Jeff Brown will tell you to just get the hell outta Dodge).
The key component to the housing recovery for San Diego remains in the ability for a home buyer to get financing. The US Treasury stepped in to provide financing for properties under $625,000, by:
(a) increasing the loan limits for FHA, conforming and VA loans to 115% of median price (expected Jan,2009)
(b) nationalizing Fannie Mae and Freddie Mac (guaranteeing the loan from default)
San Diego REALTORs know this; it's not just Mr. Berg who calls for federal subsidies for the tony communities of San Diego county. The National Association of REALTORs wants the US Government to subsidize higher loan amounts. I was in Orlando, at their convention, when they called for it in their "four part housing stimulus package"
Why won't more bailouts work? A commenter in that post, named Smithers, nails it:
I suspect the fed has to drawn the line somewhere, since voters in Kentucky are not thrilled with guaranteeing high-priced CA mortgages. (I’m not either, and I live in CA). While I think it is bad policy to prop up housing prices beyond what people can actually afford (e.g., in form of artificially low interest rates maintained by fed), politicians are hell-bent on doing it to suck up to our “gimme, gimme, we deserve it” mentality. However, the current politicians are also exploiting class-jealousy, which makes it hard for them to justify propping up prices that, for the vast majority of Americans, are for “the rich”.
The concept of classism is coming into play. I talked about this in my 2008 Real Estate Market Outlook:
There will be a marked class distinction that develops within the next 6-7 years. It won't be determined by assets but by debt and its utilization. Those that respected money will get more of it; those that didn't respect it will lose it. That will have a profound effect on productivity as the "hourly worker" will become despondent about his life and stop pushing for the overtime. Why work the extra hours to make the mortgage payment when the house was lost in foreclosure? A commitment to mediocrity will be the mantra of the American worker because every disposable dollar will be spent payig the bar tab he ran up five years ago. Personal bankruptcies will rise.
When we scream for "bailouts" for California real estate we forget that Iowans think that we're ALL rich. Now, we might be able to logically explain that a family living in a $700,000 home "ain't really rich" but perception is reality when it comes to asking for federal subsidies. If Californians keep beating up Congress for more money for cheap mortgage rates, the Kentuckyans, Texans, Iowans, and Georgians are gonna get REALLY mad. Igor Panarin's prediction of Civil War, based upon that class distinction, just might come true:
This map is from The Wall Street Journal's article, dated December 29, 2008.
Am I trying to scare you?
Damn skippy, I am !
The real, free market cost of mortgage capital is 8%. Federal subsidies are bringing mortgage rates down to 4.75%, for a 30-year fixed rate loan, for a limited period of time. The federal subsidies can only last so long before rampant inflation comes into play. We've been printing money for the past 18 months and, eventually, that will drive interest rates up to the free market rate. We know that free market cost of mortgage capital to be 8% or greater for homes with equity.
Protect yourself from this today. Call me at (858)-777-9751 and we'll see if you can get your bailout money, at 4.75%.
Am I crazy or just "keeping it real" ? Contact me to find out.
