Arizona Mortgage Blog by Kelly Zitlow

It was only a few years ago many Arizona homebuyers were priced out of our real estate market. First time homebuyers, those who wanted to down size or those who were starting over after a short sale or foreclosure weren't able to afford the inflated prices.  There is a new Arizona market growing among us! Arizona mortgages and housing are once again affordable. Trulia.com recently ranked the Phoenix area as one of the top 10 most affordable cities in the country! Affordability is at a generational high due to low home prices and rock-bottom interest rates on Arizona mortgages fueled by a Fed Monetary Policy that won't last forever! The cost to own is many times less than the cost to rent. See example below.

Average SFR rental rate:               $1302
Average SFR purchase price:      $171,500

Using the average purchase price of $171,500 at an interest rate of 5% ~ the estimated principal, interest, taxes & insurance (PITI) payment using a FHA Loan with a low 3.5% down is $1196.43a month! Subtracting this from the average rental rate of $1302 the homeowner is saving $105.57 per month to own instead of rent! Once they account for the mortgage interest tax deductibility benefits, the savings is even greater!

Now let's look at the relationship between falling prices and rising interest rates for all of those Arizona people who are waiting for values to decline further. Using the same average purchase price of $171,500, a FHA Loan, and reducing the price by 5% we get a purchase price of $162,925.  With an interest rate of 6%~ (FHA Loan) the estimated PITI is $1244.98. To summarize, if the average price drops by another 5% and interest rates increase by a point the payment is almost $50 more per month to wait than buy now! The mortgage bond markets, which drive interest rates, have struggled to maintain a floor over the last week and as a result interest rates have trended upward.

One of the benefits of the large supply of homes on the Arizona market is that buyers have many options to choose from as well as negotiating power to receive closing cost contribution. I'm not saying it's easy ~ I know firsthand with all the foreclosures and short sales, this market is challenging on many different levels!  I also know this Arizona market will bring opportunity to those who choose to seize it!

Periodically, Fannie Mae reviews all factors that affect its pricing to be sure they are positioned to continue to provide liquidity to its mortgage lending partners. These reviews sometimes result in changes to how loans are priced which ultimately affects the associated interest rate. Recently Fannie Mae issued announcement SEL-2010-17 which implements more stringent pricing adjustments for certain loan to value and credit score ranges. A 20% down payment with a borrower who has an 800 credit score will now have a pricing adjustment which may have a small affect on their interest rate. The new threshold to avoid a pricing adjustment is 30% down and a credit score of 740 or higher.

What impact will this have in the Arizona marketplace? I anticipate more Arizona buyers will be utilizing FHA Loans as the loan to value and credit score adjustment included in the recent announcement only affects conventional mortgages. When comparing a 3.50% down FHA loan to a 3%-15% down conventional mortgage with a borrower who has a 720 mid credit score, the FHA loan fairs better in rate by roughly .375% under the new pricing structure. FHA does require mortgage insurance on all 30 year loans even with a 20% down payment, so we'll still factor in the total cost including mortgage insurance when comparing options for our Arizona clients.

Don't hesitate to call me and request a Brush up on FHA Loans meeting. Or, if you need CL Continuing Ed courses and want to find out the latest on Financing in Today's Market, join me on February 23rd from 9:00-11:45 at the Gainey Ranch Golf Club. This class is offered by Southwestern School of Real Estate, for more details go to: www.southwesternschool.com.

I hope you find some time to get out and enjoy our beautiful city this weekend ~

Kelly

Quote of the Week: Think big thoughts, but relish small pleasures. ~ H.Jackson Brown

What drives mortgage rates? There are several factors today influencing interest rates on mortgages in Arizona and nationally.  However, at the end of the day, mortgage bonds trading in the Bond Market is what drives the long term mortgage rates.  The supply and demand of bonds combined with the bond markets sentiment and perception of future inflation, deflation, rising deficits and risk vs. reward of other assets such as Stocks are all factors impacting the bond market.

We've seen very sharp and large swings in the bond market over the past 6 weeks.  The volatility can be head spinning at times! The Federal Reserve's November 3^rd QE2 (Quantitative Easing) announcement contributed to the most recent run in rates.  There's an old market saying, "Buy on the rumor, sell on the news." This is exactly what happened.  Hedge funds were buying bonds heavily throughout the summer on the rumor of the QE2.  Once it became news on November 3^rd, hedge funds sold, triggering the sharp decline in the bond market which caused mortgage interest rates to spike higher in Arizona.

Expect volatility to continue over the next couple weeks as we close out 2010.  Maybe you've heard of the "Santa Claus Rally"……the stock market tends to see a rally in late December powered by a happy feeling on Wall Street around the holidays.  Typically stock market rallies don't bode well for the bond market as investors take money out of bonds to invest in stocks.

It is not uncommon to see mid day rate changes of late. I follow the markets throughout the day and do my best to protect my client's in this type of rate environment. Although rates are no longer at the lows of months past, they are still good and when combined with the affordability factor of the Phoenix Metro and all Arizona markets, it's a great time to buy!

Have a wonderful weekend ~

Kelly

Quote of the Week: I like dreams of the future better than the history of the past ~ Thomas Jefferson