The Market Impact of Higher Jumbo Mortgage Rates

I heard something on NPR this morning saying that the central government liquidity has been working to calm international markets so I think if broader crisis is averted New Yrok (and Brooklyn) will be okay in short term. Of course, if 30 year mortgages go above 8% that's going to hurt for sure.

Posted by: guest at August 13, 2007 9:12 AM

European markets are up today fwiw

Posted by: guest at August 13, 2007 9:22 AM

We closed about three weeks ago, locking in a jumbo rate at 6.75 a few days beforehand. We'd been hoping to close in August, but compromised a bit with the sellers and moved up the date... now I'm so happy we did!

Posted by: guest at August 13, 2007 9:31 AM

I was wondering when this would be covered on Brownstoner. I think everyone is a bit too positive on this blog. At the moment those bonds that wall street are holding are getting close to being worthless, since at the moment no one can tell the good from the bad, so everything is bad. This will have an impact, probably not in the short term <3-4 months, but look for prices to fall in the 6-12 month frame.
Of course the markets were up today but only because the rest of the market is sound. Tech stocks are even doing well, people got carried away last week because we didn’t know if this would spread long term to the healthy side of the market.

Now, the banks have to tighten their belts and there will be less money to go around. The only way the banks can sell the mortgages is by giving investors the security of a mortgage with a higher interest rate. Which means that there will be a lot less people being able to get the money needed for that 1mil+ townhouse. Start looking for more stories in the coming months of people with stellar credit unable to finance 800K +.

The good news is that everything under 417K will still sale and fast!

Posted by: guest at August 13, 2007 9:44 AM

I think we are going back to what was considered normal conditions until a few years ago.

Twenty percent down, or 10 percent with private mortgage insurance.

Self-amortizing mortgages, mostly fixed rate, with rates between seven percent and eight percent for a 30-year.

A purchase price of no more than 3X income, or perhaps 4X in NYC. No more than 30% of income for housing or, again, perhaps a little higher, like 36% to 40% here, if you don't have a car and car loan.

Jumbos? The $417K with 20% down means a purchase price of $521K. That will be the upper limit for any first-time buyer. To buy something at a higher price will require a higher downpayment, or other offsetting collateral.

Prices will have to adjust to these conditions.

Posted by: guest at August 13, 2007 10:02 AM

"We locked in our rate with Wells Fargo several weeks ago for a jumbo loan at 6.875%. Two weeks later, the rate was 8% at Wells Fargo, with several other banks following suit."

We got 6.5% back in late June (from WF), and locked so when we closed at the end of July, we were lucky. A friend of mine was just quoted 6.8 on a CONFORMING mortgage (though another bank quoted 6.3 - still, high enough).

They are afraid to lend because let's be honest - we probably all overpaid for our places. Things are just priced too high and many homes will lose value. It sucks, so our plan is to hold for 10 years or more. But it's what seems to be in the near future.

Posted by: guest at August 13, 2007 10:12 AM

Following up on the 417 number, 521 may be limit for first-time buyers, but for many people with normal salaries, a 400k mortgage has always been pretty high.

We're not close to first time buyers and our mortgage is 400k. We just roll equity from one place to the other. Our last co-op was 820k and we had to put down the bulk of that to keep a reasonable carrying cost. With avg maint fees, that's still $3500-4000 a month.

If you can afford to carry a lot more than that, you can probably swing a 8% (normal by any era's standards) mortgage.

Posted by: guest at August 13, 2007 10:13 AM

I am in the process of refinancing a 600k mortgage for 15 years(my 5 year ARM is up) and have been quoted a 6.5% rate. The mortgage brokers stated there are less lenders but certain smaller banks are willing to lend to grade A credit risks with income verification and loan to value of 50% or less. These banks are willing to carry these loans. so there are still choices for refinancing.

Posted by: guest at August 13, 2007 10:21 AM

Well, that's a benefit then, MGP. And you're still under 7% (and not so different from 6.5%, really) - imagine you had done it now at 8%, that would have sucked. That conforming loan I mentioned was quoted just last week, and they are people with excellent credit (as were we). It just kind of blows out there, and we're paying for the excesses of the last few years - we're likely the last people for a while to get rates under 7%.

Posted by: guest at August 13, 2007 10:25 AM

Markets are up today, but this is unrelated compared to the overall news which is that the days of easy mortgage lending are over.

You have to show income, no-doc or low-doc loans are all but dead. Way too much toxic waste was sold by people with no vested interest in seeing the loan stand up and this stuff is coming back to remind everyone, each month from now, till well into 2008. (I think it peaks Jan next year, so we are still at the thin end of this wedge).

Personally I think this is gonna knock the consumer economy on the head. There is a deadly spiral across the country of foreclosures leading to fire sales leading to downward valuation leading to more foreclosures and this unwinds over months, not days.

I also think wall street bonus season will be thin this year, we have by no means seen the end of headline grabbing collapses. And the consumer economy which was driven by home equity withdrawals, credit card debt and ignoring risk is going to be knee capped. But gradually, and inexorably. I'm not sure how "hot" new york can be when wall street has a head cold and the country is struggling with flat to negative economic growth.

This thing has only just begun. The fed is fighting spot fires and brush fires only.

Posted by: guest at August 13, 2007 10:38 AM

We locked a jumbo at 6.25 with WF in March. We'd be renting this one out if we'd acted much later

Posted by: guest at August 13, 2007 10:39 AM

Nationally, especially in markets buoyed by speculators -- Florida, Vegas, Phoenis, Southern California -- this will cause a double-digit decline in housing prices.

At a local level this will simply temper increases or create a flat market in Manhattan and prime Brooklyn. Bear in mind, Brooklyn brownstones remain a strong value relative to Manhattan real estate and unless this credit crash impacts deal flow, Wall St. bonuses and law firm compensation should remain high keeping the high end of the market intact.

Additionally, this should have little effect on the co-op market, which already has high standards, but the condo market (which one could make a case that there's already too much supply) is likely to see a decline (5-10%) in price.

Still, the response to this mess could be an aversion to investing real estate. If that happens...

Posted by: guest at August 13, 2007 10:41 AM

"We're not close to first time buyers and our mortgage is 400k. We just roll equity from one place to the other. "

Thats the vulnerability the nyc market has. With a spike downwards in valuations, the transaction rate will dry up because a lot of people have incomes to match their 500k mortgages but not to match their 1m places. Without being able to roll a 250k valuation gift over two years into the new larger digs, people will just sit and wait rather than trade up. Prices will be depressed for a while until incomes catch up.

Posted by: guest at August 13, 2007 10:44 AM

my 7yr I/O ARM is 4.15% and we still have 6 years at that rate (and then it goes up 1% a year for 3 years).

Posted by: guest at August 13, 2007 10:45 AM

I think they fact that people have 50%+ equity in their homes makes this market more stable, not vulnerable. Maybe the market will slow down, but it won't have the panic sellers/foreclosures that make a market tank (cf, Las Vegas, So Florida)

Posted by: guest at August 13, 2007 11:10 AM

Still, the response to this mess could be an aversion to investing real estate. If that happens...

I don't agree. MOST people view buying real estate as a means to put a roof over their families. That will not change. Especially in NYC where rents are atronomical. People will WANT to buy, whether they can afford to or not. THAT'S part of the reason why we are in this minor mess to begin with...people really want to own property. It's an innate human thing in most of us, I'd say.

Posted by: guest at August 13, 2007 11:14 AM

I'd think for this fall you'll see a slight drop in prices in brownstones/pre-war co-ops. (no comment on new condos...). maybe prices will be flat for a while. They still ain't making any more of them. I'd think upper-end co-ops won't really be affected, as you need 25% down anyway plus 4x income, plus cash reserves.

What I hope happens as a homeowner is that the mortgage market shakes out the unqualified borrowers, mostly for the borrowers' sake. I know that people have to take personal responsibility for their finances but honestly, how many of us could say that we were financially sophisticated when we bought our first place?

Posted by: guest at August 13, 2007 11:15 AM

I have a credit score of around 800 and was quoted 6.25% from Wells Fargo for 600k in March. Now I am waiting for the CO before I can lock in. My mortage broker told me that that Wells Fargo is off the charts at above 8%. Some other New York Banks like Apple are still in the high 6's but even the mortgage broker is freaked out by what is going on. At this point I am trying to stall the construction in hopes that rates go back down.

Posted by: guest at August 13, 2007 11:48 AM

The game is over folks. What's happing today will be considered a cakewalk. Double digit rates are coming back and you will pay for your folly. 600 k for a 2 bedroom condo give me a break!

Posted by: guest at August 13, 2007 11:48 AM

I am astounded by the "it can't happen here" attitude.
First, the argument was real estate never depreciates. Second came the argument, only areas where there was a lot ofspeculation (Las vegas, South Florida) would be hit by a market correction. Third, is the belief that only 'subprime' borrowers would be hurt.
Now it appears the correction is hitting the upper end of the market as well.
The market WILL come down, even in brooklyn and manhattan. Not because buyers will squeeze the sellers, but because people simply can't afford to pay the crazy prices that have been the norm for several years.

Posted by: guest at August 13, 2007 1:45 PM

Anyone thinking the slowdown isn't here should chew on this:
http://www.nypost.com/seven/08132007/news/regionalnews/a_alute_to_manhattan_co_op_bds__regionalnews_.htm

Basically co-op boards are ensuring that those who can still get mortgages have to pass a still higher hurdle.

Compared to last year there must be half the number of fully qualified buyers per co-op even IF confidence in the market has stayed the same.

That has already deflated prices. It just isn't obvious yet because of the summer malaise. If you ask a broker about lack of listings, traffic and bids they just wave their arms around and talk about summer being slow. Bull. Wait for 1st october, my bet is that there is no take off. It'll be like summer traffic, except with more listings == price drops.

Posted by: guest at August 13, 2007 2:48 PM

I was quoted a rate of 6.25% yesterday - not too bad. Don't expect the Fed to cut rates now or in Sept - they have to manage the perception that action can give to the int'l and domestic economy that things are really bad - and it will mainly only help bail out these large players. In fact their cutting rates in the past started all this mess. The impact of this recent market mahem is felt mainly by the rich and greedy - consumer confidence is still relatively strong - so no real need to cut rates at this time.

Posted by: guest at August 14, 2007 7:58 AM

I am scheduled to close at the end of the month and need a $475,000 loan after a $200,000 down payment. The interest rates have zoomed up since we went to contract. Right now we will be lucky to get around 7% from our lender since we have not yet locked. I am worried that if we do not lock soon 7% will be a thing of the past. We are stuck since we have to close- I think our best hope is if we can scrounge up the other $58,000 to get a conforming loan at 6.25%.

Posted by: guest at August 14, 2007 10:58 AM

Guess that flight to quality won't be taking place as planned.

Posted by: guest at August 14, 2007 2:15 PM

One could split their loan into a confirming, and carry a second trust for the balance - then the bulk of your loan is conforming, at a much better rate, and a small portion of the balance should be a smidge over 7, like 7.125 with a 30 year fixed on it. Pay down the second more aggressively if you can, but either way you're sitting at a better than 6.875 rate.

Posted by: guest at August 19, 2007 6:05 PM

I have been in the mortgage business for 15 years and while the rates have risen they are not going to rise as much as people think- for jumbos too. The yield curve is steepening - short term rates are dropping faster than long term rates are rising. Many lenders with access to capital will do very well with out relying on the secondary market. For example is you are a bank paying 4% on a money market ( which will drop as the fed drops) and you loan money at 6.5% you are making a great spread - 2.5%.That is the highest it has been in years.

There will be problems for the REITs (mtg banks without capital) b/c they can not last too long using their own funds to make loans until the secondary market returns to normalcy but the s an ls should be fine and be able to ride out the storm without charging high rates.

Also - inventory in NYC is going down faster than demand which would only keep prices stable- you should read today's real section
of the NYT.

Posted by: guest at August 19, 2007 7:45 PM