Will the S&P Downgrade Affect Interest Rates?

Daily Real Estate News | Monday, August 08, 2011


Standard & Poor downgraded the U.S.’s credit rating on Friday, despite Congress reaching a deal in the final hours on the debt ceiling crisis last week. And now many of your customers may be asking: What does this mean for interest rates?“The impact on your wallet of the Standard & Poor’s downgrade of the nation’s credit rating is similar to what would happen if your own credit score declined: The cost of borrowing money is likely to go up,” the Washington Post explained in the aftermath of S&P’s decision.

S&P downgraded the U.S.’s top-notch AAA credit rating for the first time in history, moving it down one notch to AA+; the rating reflects a downgrade in S&P’s confidence in the U.S. government’s ability to repay its debts over time. It’s not clear, however, whether S&P’s downgrade will instantly effect rates, analysts say.

The 10-year Treasury note is considered the basis for all other interest rates. And “the downgrade could increase the yields on those bonds, forcing the government to spend more to borrow the same amount of money,” the Washington Post article notes. “Many consumer loans, such as mortgages, are linked to the yield on Treasurys and therefore would also rise.”

Watch this video with NAR Chief Economist Lawrence Yun for more information.

While consumers who have fixed interest rate mortgages will be immune to any changes in borrowing costs, home buyers shopping for a loan or those with mortgages that fluctuate may see a rise in rates later on, some analysts say.

Mark Vitner, senior economist at Wells Fargo Securities, told the Associated Press that he doesn’t expect the downgrade to drive up interest rates instantly since the economy is still weak and borrowers aren’t competing for money and driving rates higher. However, he expects in three to five years, loan demand will be much higher and then the downgraded credit rating might cause rates to rise.

Analysts are still waiting to see if the other rating agencies, Moody’s and Fitch, follows S&P’s lead in its downgrade of the U.S. credit rating. If so, the aftermath could be much worse, analysts say.

The debt deal reached by Congress last week was expected to save the U.S. from any credit rating downgrade. However, S&P said lawmakers fell short in its deal. Congress’ deal called for $2 trillion in U.S. deficit reduction over the next 10 years; S&P had called for $4 trillion.

Source: “5 Ways the Downgrade in the U.S. Credit Rating Affects You,” The Washington Post (Aug. 8, 2011); Questions and Answers on Standard & Poor’s Downgrading of U.S. Federal Debt,” Associated Press (Aug. 6, 2011); and S&P Downgrade Will Shake Consumer and Business Confidence at a Fragile Time, Economists Say,” Associated Press (Aug. 6, 2011)

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Real Estate OK in Debt Deal But Risks Remain

What Happens to Borrowers After Foreclosure?

The after-effects following a foreclosure to a borrower may not be as bad as once thought, according to a new paper by Fed economists. With the wave of foreclosures plaguing the nation, Fed economists sought to find out what happens to households following a foreclosure.

Overall, the study found that post-foreclosure borrowers don’t fare too bad: The majority of these borrowers do not end up in “substantially less desirable neighborhoods or more crowded living conditions.” Also, the study found that from 2006 to 2008, 22 percent of post-foreclosure borrowers moved to a multifamily rental building, while about 75 percent still lived in a single-family structure. What’s more, the places where they moved were not found to have significantly lower median income, median house value, or median rent than their old neighborhood.

“These results suggest that, on average, foreclosure does not impose an economic burden large enough to severely reduce housing consumption,” according to the report.

Source: “Foreclosure Effects Found Not So Bad,” National Mortgage News (July 26, 2011

Housing markets

Will housing save America’s economy?

Jun 20th 2011, 14:35 by R.A. | WASHINGTON

BACK in February of 2009, Paul Krugman was worrying about an insufficient policy response to the recession and he pondered the question: if America is to muddle through with too little stimulus, then how will growth return?

[R]ecovery comes because low investment eventually produces a backlog of desired capital stock, through use, delay, and obsolescence. And eventually this leads to an investment recovery, which is self-reinforcing.

And what do we mean by use, delay, etc.? Calculated Risk had a nice piece on auto sales, which I find helps me to think about this concretely. As CR pointed out, at current rates of sale it would take 23.9 years to replace the existing vehicle stock. Obviously, that won’t happen. Even if the desired number of vehicles doesn’t rise, people will start replacing vehicles that wear out (use), rust away (decay), or just are so much worse than newer models that they’re worth replacing to get the spiffy new features (obsolescence).

He mentions automobiles, but there is another, somewhat surprising possibility—that housing will lead the way to a durable recovery. This may seem strange to suggest. An epic housing collapse following a massive housing boom helped to trigger the downturn. Residential investment has been a drag on growth for five consecutive years. And yet some writers, like Karl Smith and Calculated Risk, are hinting that a housing recovery may be on the way. Matt Yglesias hints at one reason why with this chart:

As Mr Yglesias notes, housing starts have been at an unprecedentedly low level for a strikingly long period of time. And during that period, America’s population has continued to grow. Eventually, whatever the economy is doing, Americans require new houses, new houses mean new construction, and new construction means new employment. Rising rents were one of the factors pushing core inflation higher last month, and increasing rents will soon translate into construction.

Meanwhile, there is a larger demand backlog than most people may imagine:

America doesn’t simply face a situation in which housing has failed to keep pace with the growth in population. Since the onset of recession, household growth has fallen short of population growth as families doubled- and tripled-up on housing to economise. There are now nearly 2m fewer households than one would expect given growth in population. As economic conditions improve, many individuals and families now living with others in order to save money will seek their own homes. That should spark a period of catch-up household growth, which should in turn spark a large rise in rents and new construction. A recovering construction industry would help soak up unemployed workers, continuing a virtuous cycle of recovery. After five long years, housing may finally start pulling its economic weight again, or so many Americans must hope.


One long, grueling summer for California’s recovery

By Tara Tran • Jun 20th, 2011 • Category: Feature Articles, Journal Articles, June 2011 Journal

This article reviews indicators in the market which signal the long-awaited national housing recovery and evaluates the California real estate market’s progress towards recovery.

The worst is (almost) over

Meditating on the landscape of American housing doesn’t bring much peace of mind, yet economists claim a nugget of hope is wedged somewhere beneath the muck of this real estate bust, even for the more deeply entrenched California.

2011 has thus far failed to yield an economic recovery of leaps and bounds and thrust us beyond the Great Recession. Low interest rates (courtesy of the Fed and generous government housing subsidies) triggered an artificial leveling of home prices nationwide going into 2010, but were insufficient in duration and intensity (or reception) to bridge the recession gap.

Many economists predict an additional 25% decline is not out of reach for reasons now known to all involved.

Prices nationally in the first quarter of this year hit a new low – 5% lower than one year ago, according to the S&P Case-Shiller Index. Thus, the nation’s home prices have returned to mid-2002 levels. Many economists predict an additional 25% decline is not out of reach for reasons now known to all involved. [For more information on tracking the market with the most recent data from the S&P, see the first tuesday Market Chart, S&P 500: Stock Pricing vs. % Earnings (P/E Ratio.]

A look at other circumstances in the national real estate market lead some to believe this is the worst of the storm and a sustained recovery is now on its way, in spite of current price adjustments.

Hints of a national recovery

Positive signs – nationally – thus far include:

  • advantageous home purchasing conditions due to low decade-old prices and very low mortgage rates, both slipping downwards at the same time;
  • gross rent multipliers (GRMs) such as home prices and home price-to-rent ratios of between 9-11 times the annual rental value which mirror the stable long-term trend of pre-bubble years [For more information about the GRM, see the June 2010 first tuesday article, Renting vs. buying: the GRM.];
  • lower apartment vacancies and higher rents, which typically help bolster home prices;
  • an 18% decrease in new foreclosures from the previous quarter and improved household delinquency rates for a fifth consecutive quarter as more borrowers catch up with their mortgage payments versus those who fall behind; and
  • 200,000 new jobs added to the economy in each of the past three months and 1.2 million jobs in the past year (more jobs mean a lot of positive things, but it is a particularly good sign for the construction industry which, if given a leg up, may consequently boost home prices). [For more information on positive indicators in the nation’s housing market, see the Economist article, The darkest hour: Signs of hope among the gloom.]

A gauge for California’s recovery

That’s national, and this is California, the seventh largest economy in the world. But is recovery in California feasible, or just a far-fetched fantasy?

Here we evaluate the Golden State for the same (positive) signs and provide a forecast most Californians will likely have to live with:

  • Are home purchasing conditions advantageous? Yes, you can bet on that. Rarely do we get low prices, low interest rates and low down payment financing at the same moment in time. All that is needed is the will to buy, which in part requires brokers and agents to get the word out that mortgages are available at 4.5% if you apply.

Prices fell 2% in Los Angeles, 4% in San Diego and 5% San Francisco for the year ending with the first quarter of 2011, and further drops are forecasted for the rest of the year. Buyers have this information and what it is telling them is to wait until prices bottom to make offers. Agents have their work cut out to convince buyers that a further drop is likely but the present pricing will look most proper in three or four years, and will make no financial difference in ten years.

Interest rates have also been and are on a continuous decline. The average rate for a 30-year fixed-rate mortgage (FRM) in the U.S. Western region dropped to 4.45% the second week of June. The 15-year FRM also dropped in the same week to 3.63%. However, even with these deals and steals on the market, people are just not buying. The agent’s advice is that rates cannot move much lower, if at all, and they can and will rise in the future as the recovery gains steam – as will prices.

Home sales volume in California has dropped since the first quarter of 2010. 35,202 total homes sold in April 2011, trending consistently down from 37,908 in April 2010. [For more information on home sales volume in the current market, see the first tuesday Market Chart, Home sales volume and price peaks.]

  • Are prices stabilizing? Yes. The lingering drop in home prices across California in all tiers of housing is not a momentary dip from which they will fast rise akin to the fabled V-shaped recovery. Today’s home prices represent a resetting of the artificially high prices of the bubble years (which commenced in 1997) to their more stable levels consistent with historic trends. The end of 2011 may just likely see that reaction to low interest rates and a better informed and more confident public. However, that annual rise is more likely to reflect the consumer price index (CPI) rate of inflation rather than the 5 to 10% annual rate buyers are now thinking they will experience.

Except for those negative equity homeowners imprisoned and burdened by insolvency due to the steep price plunge, price stabilization is good news for California’s housing market in the long run. [For more information on historic home prices in California, see the first tuesday Market Chart, California tiered home pricing.]

  • Are rents higher? Yes. While home prices fall steadily, rents in California continue to rise, 4% for the year ending April 2011, according to the Spring 2011 Housing Report by (Although landlords in the bedroom cities of the state’s inland and central valley will beg to disagree.)

Rent prices are indicators of which way home prices will go since they are the primary fundamental used to set property values. However, any rise in home prices beyond the rate of consumer inflation will take several years. [For more information on rentals in California, see the first tuesday Market Chart, Rentals: The Future of Real Estate in CA?]

  • Are household delinquency rates better? Sort of. Compared to the 18% nationwide drop in foreclosures, California foreclosure numbers are loitering near stagnancy. 8% more homes were foreclosed upon in California’s high-tier areas in the first quarter of 2011 from a year earlier. An even higher 23% more homes in low-tier areas were foreclosed upon in the same period.

Foreclosures in both housing tiers dropped only 2% over the year ending April 2011. Mortgage delinquency in the state is improving at an equally slow pace. 9% of mortgage payments were seriously delinquent in the first quarter of 2011, a slight but steady decline from 11% a year earlier. Thus we have an inventory problem called excess supply (the REOs), and until the buyers enter and start to cut into that supply, the prices will remain low, market momentum will be negative and competitive buyers for a property will be rare.

California foreclosures and delinquency rates, like other sand states, are higher than the rest of the nation but are improving at a faster rate. So when the market shifts to positive volume and pricing, some buyers will be surprised. [For more information on first quarter 2011 California defaults and foreclosures, see the April 2011 first tuesday article, 1Q 2011 defaults and foreclosure data.]

  • Do we have more jobs? Yes, but not enough and not fast enough. As of April 2011, California has yet to replace 1,298,700 of the jobs lost since the peak of California employment in December 2007. 363,100 jobs have been added since the beginning of the recovery in January 2010 and employment numbers have gradually made small ticks upward since then.

Employment needed to rent or buy a home was up by 148,100 jobs annually in April 2011. But what we need is around 400,000 jobs annually to get back to the pace experienced in the late 1990s. Jobs are slowly returning but will not reach pre-recession employment levels until 2016. [For more information on the effect of statewide employment on real estate, see the first tuesday Market Chart, Jobs Move Real Estate.]

Slow and steady to the end

Now back to the first question: Will California get to the finish line of its recovery? Yes. But if we’re to have a robust and sustained economy, keep in mind, the recovery will – and must – be gradual.

We just need two more ingredients to add to the mix: more jobs and more consumer confidence.

Although California is definitely a step behind the nation heading for recovery (just as it was a step ahead of the nation in growth during the Millennium Boom a few years ago), the conditions for a housing recovery are not completely absent in the state. We just need two more ingredients to add to the mix: more jobs and more consumer confidence.

Brokers and agents can do nothing about jobs. What they can do is give prospective buyers great detail about a property and extensive justification for its value, and then escort them through the loan pre-approval process with a couple of lenders. These simple gestures of due diligence will get the confidence of buyers up immediately. They merely need someone they feel they can depend on for advice.

Without an adequately employed population both poised (read: ready and free of their negative equity homes) and willing to buy, California will continue to march across the rocky plateau of its flat-line recovery. [For more information on building public confidence in a depressed real estate market, see the June 2011 first tuesday Market Chart, A bounty of loan deals, a dearth of willing buyers.]

– ftCopyright © 2011 by the first tuesday Journal Online –;
P.O. Box 20069, Riverside, CA 92516

Readers are encouraged to reproduce and/or distribute this article.

Copyright © 2011 by first tuesday Realty Publications, Inc. Readers are encouraged to reprint or distribute this information with credit given to the first tuesday Journal Online — P.O. Box 20069, Riverside, CA 92516.

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A common question home buyers have today is: How long must I wait before obtaining financing after bankruptcy, foreclosure or short sale?

Below is an overview by loan type of this important information.



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Mortgage Defaulters Not Necessarily Credit Risk

Home owners who default on their mortgage but have
no other debts are not credit risks, according to a study released Tuesday from
TransUnion, which analyzed credit patterns of 129,000 consumers over a one-year

Home owners who default only on
their mortgage are less likely to default later on other new loans, such as car
or credit cards, than people who default on mortgages but have at least one
other debt at the same time, TransUnion’s research shows.

What’s more, these mortgage-only defaulters tend to see their
credit scores rebound faster too. For example, mortgage-only defaulters with
Vantage credit scores of 631 to 650 had their scores increase on average by 8
points about a year after defaulting on their mortgage. Yet, defaulters with the
same credit score range but who had more defaults than just a mortgage saw their
credit score drop by 2 points.

Mortgage-only defaulters “are less risky than they appear,” Steve
Chaouki, TransUnion vice president, told USA Today. “Lenders will want to lend
to these people in the future.”

“Study: Mortgage-only Defaulters May be
Safe Credit Risks,”
USA Today (May 23,

Some Sellers Offer Financing to Get Deals Closed

Buyers who have a foreclosure or
bankruptcy in their credit past wouldn’t be a likely candidate to secure
financing from a bank anytime soon for a home purchase. As a result, some
sellers are stepping in to offer seller financing to get a home sold.

Seller financing, once popular in the
1980s when mortgage rates spiked to 18 percent, is making a comeback in areas
flooded by foreclosures and where tight lending standards are keeping some
buyers on the sidelines, reports Bloomberg News.

“The market is locked up because there’s no financing,” says Gordon
Albrecht, executive vice president of FCI Lender Services Inc. “This is moving

Last year, 52,991 U.S. homes were
purchased with various forms of seller financing–a 56 percent jump from 2008,
according to the REALTORS® Property Resource LLC. In 2010, such deals made up
1.5 percent of all transactions.

popular form of seller financing is known as a land contract, which is when a
buyer takes possession of the home but the seller holds the title until the debt
is completely paid off. The loan’s terms–such as down payments and interest
rates–are negotiable. These arrangements usually consist of a balloon payment
in five to 10 years, which is when buyers will have to repay the seller or lose
the home, along with any money they already put into it.

Source: “Home Sellers Become Lenders to
Poor-Credit Buyers,”
Bloomberg (May
11, 2011)

Banks Propose $5 Billion to Settle Foreclosure

In negotiation talks with state and
federal officials, the nation’s largest banks said they are willing to pay $5
billion to settle an ongoing probe into claims of faulty foreclosure

Bank of America Corp., JPMorgan
Chase & Co., CitiGroup Inc., Wells Fargo & Co., and Ally Financial Inc.
made the offer during negotiation talks this week with state attorneys general
and federal officials. The five bank giants service more than half of mortgages
in the country.

The ongoing settlement
talks stem from an investigation into banks’ foreclosure practices, which
revealed last fall a “robo-signing” scandal in which thousands of foreclosures
were approved without proper reviews.

Since then, state attorneys general, along with other government
agencies, have worked to change banks’ foreclosure procedures and penalize banks
for shoddy practices.

The $5 billion
offer from banks comes at time when state attorneys general are pressing banks
to agree to a special fund that would cover principal write-downs for struggling
home owners, a proposal that banks have strongly opposed. The banks argue that
any plan that would reduce borrowers’ loan balances would just encourage more
home owners to default.

“Banks Said to Offer $5 Billion to Resolve
Probe of Foreclosures,”
Bloomberg (May
11, 2011)

Bankruptcy’s often overlooked tie to homeownership

By  Bradley Markano • May 4th, 2011 • Category: Charts

This report discusses the advantages and disadvantages of bankruptcy for troubled current homeowners and would-be future homeowners.

Chart last updated 5/4/11

2009 2008
Total CA Bankruptcies

Data courtesy of the American Bankruptcy Institute

Homeowners have found it dramatically more difficult to pay their bills during the recent Great Recession than in the past.  A few of the footprints on the path leading to the current homeownership trauma include:

  • the Federal Reserve’s belated decision in August 2004 to put a squeeze on the availability of money (credit)  by increasing  short-term interest rates (the triggering event for the Great Recession);
  • the Wall Street bond market’s massive 2002 to 2006 expansion into the mortgage banking market, which erroneously allowed anyone to qualify for any type of mortgage loan (bringing on a financial crisis concurrent with the onset of the Great Recession); and
  • the constant lobbying effort by mortgage bankers to preempt homeowners’ need to adjust loan balances (cramdowns) during the Great Recession. By 2005, their efforts caused Congress to bar bankruptcy judges from reducing a homeowner’s mortgage balance to match the reduced value of the home securing that mortgage.

In the absence of bankruptcy-ordered cramdowns, the relief available to homeowners in bankruptcy is limited. Nonetheless, bankruptcy is not without advantages for some underwater homeowners. The extent of these advantages is the subject of this report.