I know 2022 was the worst year for mortgage rates. And The homes were appreciating by roughly 40% nationally. Just looking at the chart how the home price index spiked during 2020 thru 2022. Home sales exploded into levels well above anything else during the past decade. Rates plummeted well into new all-time lows and stayed there for much longer than any previous time. Shifting gears a little to the stock market we find gains of almost 50%. Even after the crummy 2022, stocks are still up roughly 20% from pre-covid levels. Looking ahead, we're in a similar position to much of the past few months in that we're waiting for inflation and economic data to confirm a shift in the forces that pushed rates so abruptly higher this year. There are certainly already signs that shift is at hand. The Fed has even acknowledged them. But it's important to remember that the Fed is intently focusing on painful lessons from the past in which rates were cut too early after a potentially similar shift 4 decades ago. They believe it's better to overtighten (i.e. push rates higher than they really need to go) instead of risk an inflationary rebound and a big 180° on rate hikes as seen in 1981. The Fed's bellwether for their ability to keep policy tight will be the strength of the labor market. If people are employed and wages aren't falling, they'll conclude that they have what they call "policy room." In other words, they can keep doing things that hurt the economy and bring down inflation if the economy isn't showing many symptoms of being hurt. Which factors in the surge in labor costs (including wages and benefits) is a legit problem for them, and it can be seen in the Employment Cost Index data running well above all of the past decade (you'd have to go back to the 80s to see higher levels). Now let’s take a look at our local market, here are the stats for St. Charles County this past year in 2022. Our median home sale price stayed around $310K throughout most of the year. And again median sale price is half of the homes sold above that price and half the homes sold below that price. Our median days on the market are still low hovered around 9 days. And currently we have 3.4 months of inventory. You can see by the chart we are climbing out of a Seller’s Market into a Balanced Market. If you have real estate needs that you would like to discuss. Please feel free to reach out and Stay Safe,
HOW Your Interest Rate Is Determined for a Mortgage!
Well most people are going to need a loan in order to buy their home. Since most don’t have cash or some other place to borrow against. Like a 401K or insurance policy. So when you are making those phone calls to bank and other loan entities…know what questions to ask and understand what makes you a strong buyer. By you agreeing to take on debt of a home and pay interest over the life of the mortgage…well now you are exactly what investors are looking for Even though investors is a broad term, you may have investments that are managed funds like a 401K and if those funds have a “fixed income” component, it’s quite possible that a percentage of that fund is allocated to bonds that are backed by mortgages. In that sense, even you are part of the investor side of the equation. The important part is that there is “money” out there looking for a home where it can generate a return for investors.
Most mortgages becomes investments via the securitization process. A government agency or government-sponsored enterprise, like Fannie Mae and Freddie Mac sets certain standards for loans it will insure. The agency also provides a framework that mortgage companies can use to evaluate (or “underwrite”) your loan scenario. If your scenario makes it through the agency’s hoops, your eventual mortgage is eligible to become part of a pool of similarly eligible mortgages. Mortgages grouped together in this way are called Mortgage-Backed-Securities or MBS.
MBS carry guarantees from one of the agencies, Freddie Mac or Fannie Mae. These guarantees protect the investor in the event the mortgage borrower doesn’t make payments for any reason, and ensure they’ll receive all the interest and principal they would have otherwise received for as long as the underlying mortgage exists.
When we have a high number of individual units/mortgages meeting the same criteria-especially when those units are destined to be mixed together anyway…it’s easy to establish a standard price at any given time based on supply and demand. It’s this price that has the most direct effect on what you’ll pay for your interest rate on your mortgage.
Well, this “going rate” that big investors are paying for pools of mortgages, is quite simple of a certain category of mortgage-backed-securities. These are essentially bonds with either an explicit or implicit guarantee from the US government. That means MBS prices move up and down with a high degree of correlation to the price of other government bonds of similar length of time.
The catch is that the consumer mortgages underlying the mortgage securities can be paid off any time (selling, refinancing, foreclosure or shortsale) so they provide less predictable cash flow for investors than US Treasuries which will keep paying the same amount throughout their lifespan. The implication is that the average life-span of a pool of 30 year fixed mortgages ends up being in the neighborhood of 6-11 years depending on the real estate market and whether or not rates drop enough to cause a surge in refinancing.
Investors aren’t willing to pay as much for loans with cash flow uncertainty. If I have $100 dollars to invest in Treasuries or MBS, I’m going to expect a slightly higher rate of return on the MBS, because if a fifth of the loan in that pool of MBS refi or sell, then I’m left collecting interest on only $80 whereas if I’d bought the Treasuries, I could be assured of a lower rate of interest for the entire term.
This brings us to the first core concept of what drives mortgage rates: they tend to move a lot like US Treasuries of similar durations. What an investor loses in utter cash flow certainty, they gain in a higher rate or return. If that rate of return looks like a good deal compared to Treasuries, demand for MBS increases, and the effective rate of return falls. Vice versa if MBS returns look weak compared to Treasuries.
While it varies over time, the gap between a 10 year US Treasury yield and the average top-tier 30 year fixed mortgage rate quote has maintained a range of 1.55-2.0% since September 2012. More than other factor, this is the foundation of the first several percentage points of any mortgage interest rate in other words, take the 10 year Treasury yield and add 1.5-2%) That’s it. That’s the baseline. From there, it’s really just fine-tuning based on variables pertaining to you and your lender.
Lenders vary somewhat with respect to what they can/will offer in terms of rates. This can be affected by profit margins, number of employees, advertising/legal costs, and other factors that affect overall efficiency. A lower rate isn’t necessarily a better deal if there’s a higher risk that something unexpected happens during the course of your transaction. Plenty of mortgage-seekers have had amazing experiences paying a rock bottom rate to a highly efficient operation without getting a ton of one-on-one time with their loan officer. Plenty have had amazing experiences paying higher rates because if afforded a higher level of customer service. To be sure, some companies are just better than others, as they represent a sweet spot that balances the many factors driving the final cost of the loan. It’s equally true that some loan officers are better than others even inside the same company.
There are several reasons you might end up getting a loan quote from any given mortgage company. Maybe you get several. During this process, keep in mind that the mortgage company you can only control the rates and fees that it charges. There are other fees as well. Some of them are more careful about underpromising and overdelivering on affordability. Others will attempt to minimize the appearance of 3rd party fees (the stuff you’re going to pay no matter whom you choose to do your loan) in order to give the appearance of a more competitive quote. When it comes to hard numbers, the ONLY basis for a direct comparison of one company’s rate to another is the interest rate itself and the fees charged by the mortgage company itself. From there, it’s up to you to decide how much value to place on trust, customer service, and other non-monetary considerations.
Now you know what to think about and ask when shopping for a mortgage.
Please feel free to reach out anytime,
And stay safe.
EXCITING News…..The Riverpoint Development
There is a new development in St. Charles, in its final design phase. They are anticipating the project to create 1,263 new jobs. And when it is completed is expected to produce an annual revenue of an estimated 1.5 billion dollars. In my video I will show you where it will be and how it will look after it is revitalized.
The city calls the project the River Pointe Development and is located on the east side of the Arena Parkway and South Main Street between Friedens Road & I-70. The Riverpointe Development will raise the acreage adjacent the island above the 500-year flood elevation, Their hoping to at the same time create economically viable and sustainable development sites.
St. Charles history and economic growth will be forever linked to its river roots.
However, approximately one quarter of the City’s Riverfront along Bangert Island sits unflourished and underutilized.
I appreciate if you hit that like button and leave a comment letting me know other areas that you would like to learn more about.
Well, the City’s intentions is to transform the riverfront property into a dense mixed use development. Their goal is to increase the economic development, while creating new job opportunities and housing.
So the city has transitioned to a partnership with Clayco and the area is planned to be a Chicken N Pickle. Which will feature numerous indoor and outdoor pickleball courts, shuffleboard and Bocce ball courts, and lawn games. The grading and site work has begun on the Chicken N Pickle project.
The foresee improvements consist of building parking, retail, restaurants, office space, entertainment and multifamily dwellings. And once the project is completed it’s expected to provide roughly 4000 jobs, increase the annual visitors by a million people, and produce an annual revenue of an estimated 1.5 billion dollars.
They are anticipating the project to be completed by 2024.