October 2006

Credit insight from Credit.com

Introducing our Mortgage Guru

We are pleased to introduce Randy Johnson , our mortgage industry insider, who will demystify loans and real estate for you. Randy has financed over $1 billion in properties as a mortgage broker and has authored several books on the real estate world.

"May you live in interesting times." This alleged Chinese saying was thought to be more of a curse than a proverb. Do we live in interesting times? Is it really a curse?

I look back over my twenty-five years in the real estate and mortgage business and I think that all my years have been interesting, but every five year period was interesting for a different reason.

In the first five year period, 1980-1985, we saw inflation hit 14% and prime rate went to 23%. Zounds! Fixed rate loans were 16%. In the late 80's, the savings and loan industry was disintegrating. Interest rates fell consistently and we did a lot of adjustable rate mortgages. This was good for homeowners because rates adjusted down automatically.

The early 90's were particularly troublesome. The economy took a few hits and people who wanted to move couldn't sell their homes. Property values ended up declining anywhere from 10%-20% in southern California. But when interest rates dropped in 1994, people who could got to refinance into fixed rate mortgages for the first time in years.

The late 90's brought the big explosion in the stock market. Those who had invested correctly, particularly in dot com and other high tech stocks, made a bundle. Home prices increased modestly, and interest rates had a short period of rates, in the 6% range, in 1999.

In the 2000-2005 period, the dot com era ended with a bang and millions of people saw their stock portfolios and retirement accounts savaged. Capital was re-deployed into harder assets, like homes, so sales of homes increased. Interest rates also fell dramatically as the Fed tried to keep the economy afloat.

The mortgage industry also made two big contributions. First, it significantly relaxed mortgage underwriting criteria, allowing many who would never have qualified before to buy homes. Additionally, the subprime side of the business expanded. They lent to people with bad credit, and they found a lot of takers. The result was a huge spike in demand. This produced dramatic home value appreciation, as much as 20%-30% per year in some markets. Everyone who had good credit refinanced into a 5% loan, a loan that could be good for the rest of their lives!

This brings us to the present period, 2005-2010. The Fed has raised rates some seventeen times in the recent past, and prime rate is now 8.25%, up from 4%. Everyone expected this to be the "end-of-the-world-as-we-know-it."

However, the market forgot to read these predictions. The yield on the 10-year Treasury note, which closely follows mortgage rates, is still at a low 4.59% today, while the yield on 6-month T-Bills is 4.77%. That's an inverted yield curve.

Thus, 30-year fixed rate mortgages are again available to borrowers under 6% today! Three years ago, rates like that touched off a frenzy of buying! But not today. We seem to have a bunch of "bubble sitters." Buyers think that sellers want too much for their homes, and they are sitting tight and guarding their wallets.

These were all interesting times, but I never saw the curse.

So what happens next? I don't know, and neither does anyone else. The question is, "What are YOU going to do?" That depends on YOUR market and YOUR needs. But whatever is likely to happen, it makes a lot of sense to get prepared. Make sure your credit is as good as possible, and learn about home buying with the help of Credit.com. You can visit the " Buying a House " section to get started and can find more articles in the Learning Center . Plus, you can email me your mortgage questions.

Whatever "interesting times" are ahead, you will be ready!

Randy Johnson

Quote of the Month

Ask about your neighbors, then buy the house.
- Jewish Proverb