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Economic Commentary

Just when you think the world can’t get any crazier, it happens. What a wild ride. In the past few weeks the government has taken over Fannie Mae and Freddie Mac and also now has rescued a major insurer, AIG, to the tune of $85 billion. In the meantime the government also let Lehman Brothers fall by the wayside without a rescue. Now the stock market has rallied upon the news that the Feds will start purchasing distressed mortgages from financial institutions. In a few hours the news mostly reversed a drop of almost 1,000 points over one week for the Dow Jones Industrial Average.

It is the housing crisis causing the financial crisis. Institutions are weighed down by mortgage debt that is defaulting. The more severe the crisis, the lower rates have fallen. And it is lower rates that can hasten the end of the housing crisis which will also end the financial crisis. As rates go lower and housing demand picks up (reports have indicated that this is already starting to happen), confidence will be restored in the mortgage markets. And this confidence will help banks lessen their present round of tightening of guidelines that is shutting many prospective homeowners out of purchasing their dream home. It may take some time but we say–let the next cycle begin!

Weekly Rate Review

The Markets. Rates continued their downward trend this week, reaching a level not seen since February of this year. Freddie Mac announced that for the week ending September 18, 30-year fixed rates averaged 5.78%, down sharply from 5.93% the week before. The average for 15-year fixed plunged again to 5.35%. Adjustables were also down significantly with the average for one-year adjustables decreasing to 5.03% and five-year adjustables falling to 5.67%. A year ago 30-year fixed rates were at 6.34%. "Interest rates for 30-year mortgages fell for the 5th consecutive week, amounting to a total decline of about 0.75 percentage points," said Frank Nothaft, Freddie Mac vice president and chief economist. "As a result, mortgage applications surged nearly 58 percent since August 15th, largely led by a 122 percent gain in applications for refinancing, according to the Mortgage Bankers Association (MBA). The MBA also reports that fixed mortgages are currently the predominant choice among homebuyers and families looking to refinance. Over the first two weeks of September, 95 percent of new applications were for fixed mortgages. Since the end of 2007, the number of ARM applications has fallen by almost 50 percent."

Real Estate NEWS

It’s more affordable to buy than to rent in many U.S. markets, according to data compiled by the National Low Income Housing Coalition. Of the 100 most populous metro areas, 57 have average three-bedroom rental costs higher than the cost of a 6-percent interest rate loan for a typical low-priced house, the coalition said in a just-released report. That means people renting two-bedroom apartments would be better off buying a low-priced home in 24 of the 100 largest metro areas. However, when determining if it’s better to buy or rent, credit history is a crucial component to consider. A prospective buyer who is credit worthy of a 6 percent mortgage will pay a third less in monthly payments than someone who qualifies for an 8 percent loan. And in many cities that can be a difference of hundreds of dollars and push them over the line to where renting actually makes more sense. Source: MSN Real Estate

Congressional leaders and the Bush administration are working with Treasury Secretary Henry Paulson and Federal Reserve Chair Ben Bernanke to prepare a massive intervention to revive the U.S. financial system. The proposed plan reportedly includes using hundreds of billions of dollars in government funding to buy bad loans, leaving banks with more money and fewer problems and allowing them to again lend money. Paulson and Bernanke urged lawmakers to approve the plan rapidly, presenting what some described as a “chilling” picture of the state of the financial system. Congressional leaders were told that the consequences would be grave if the legislation doesn’t pass by the end of next week. Taking over Fannie Mae and Freddie Mac, creating a new source of funding for investment banks, and assuming control of insurance giant American International Group obviously hasn’t been enough to end the crisis. It hasn’t stopped $79 billion in withdrawals from money-market funds, which are a critical source of funding for the U.S. financial system. "The costs of doing nothing are enormous," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. Source: The Washington Post

Activity is slowing in the commercial real estate market in response to tightening credit and weak economic growth, according to the National Association of Realtors. In its latest Commercial Real Estate Outlook, the NAR reports that financing problems stemming from the crisis on Wall Street, not a lack of demand, are curbing real estate transactions. "Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending," said NAR chief economist Lawrence Yun. "Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there’s been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth." Source: National Mortgage News

It appears that there are obviously many Positive Changes happening and that the Government is taking steps to ensure the Economic Markets. If you have any real estate questions, please contact me at 305-898-5556 or via email at SteveScarpone@msn.com