For Home Buying California

For its last move in an action-filled year, the Federal Reserve announced it will begin buying its pledged $500 billion in mortgage-backed securities next month.

For home buyers and mortgage rate shoppers, the timing couldn’t be better.

Because December 31 is one of Wall Street’s most thinly-traded days of the year, low volume is exaggerating the announcement’s impact on mortgage markets.

Mortgage rates are lower this morning.

However, you may not have much time to act. Few mortgage lenders permit after-hours rate locking and bond markets close at 2:00 PM ET for the holiday. If you miss today’s Fed-fueled low rates, markets re-open Friday for your second chance.

Mortgage markets are like any other market — in order for goods to change hands, a buyer and a seller must first reach an agreement to “trade” at a specific price point.

In general, the more buyers and sellers there are for a particular item, the easier it is to find that “fair value” and make the deal.

An abundant number of buyers and sellers often creates a liquid market in which assets — in this case, mortgage bonds — can be sold rapidly with minimal loss.

This week, though — with so many traders on vacation — the “liquid market” has gone illiquid. The treasury market posted just 41 percent of its normal, daily volume Monday, leading to erratic pricing in the mortgage bond market which, in turn, caused mortgage rates to follow.

For example, mortgage rates started the day lower yesterday before sprinting higher over a 30-minute, early-afternoon span. Markets were largely unprovoked by economic data, geopolitical developments, or technical factors. It just, kind of, “happened” and the move left mortgage rate shoppers in the dust.

That could happen a lot this week. So, if you’re in the market for a mortgage, be ready to lock quickly. With low liquidity, rates rarely sit still for long.

In a week defined by low volume and lack of conviction, mortgage markets idled ahead of the holiday last week. Friday’s post-holiday action was even slower.

After falling for two consecutive weeks, mortgage rates held flat last week.

It’s somewhat surprising that mortgage rates didn’t rise considering the flow of negative economic news last week:

• Joblessness appears to be worsening
• Consumer spending sputtered
• The U.S. dollar is showing weakness

Lately, each of these elements has played a role in mortgage rate movement but it’s the last bullet point that could throw home buyers and refinancing Americans for fits.

It’s because of the relationship between mortgage rates and the strength of the U.S. Dollar.

All things equal, a strong dollar pressures mortgage rates lower whereas a weak dollar pressures mortgage rates up. And, because the dollar’s recent beat-down has been swift, it wouldn’t be unexpected to see similar mortgage market movement at any time.

This week, like last, is interrupted for the holiday. Regardless, there’s much going on. Aside from two economic reports, there is nothing else for markets to digest and no planned speeches by members of the Fed.

Expect just a small number of traders to show up for work this week. This means volume will be especially light. But don’t be lulled into taking your eyes off the market — low volume on Wall Street is sometimes accompanied by high levels of volatility.

For now, mortgage rates are hovering near their 2008-lows. Given the path of the dollar and low-volume trading, that could all change in a flash.

With home prices falling across most parts of the country, investors in real estate are finding good value in certain rental properties. Unfortunately, they’re also finding it harder to get approved for a home loan.

After getting stung by defaults, conforming mortgage standards for non-owner occupied home loans tightened dramatically last quarter.

One major change was the reduction in the total number of homes Fannie Mae or Freddie Mac will finance for any one borrower.

Prior to the chance, the number of financed properties could be as high as 10. Today, that number is 4, stinging investors with large real estate portfolios. Going forward, buying properties isn’t the problem; financing them with conforming mortgage money is.

Another guideline change mandates larger downpayments.

Versus early-2008, when a real estate investor could buy a home with 10 percent down, today’s investor is required to pay 15. But, as an added wrinkle, few private mortgage insurers write policies against rental homes anymore, rendering the 15 percent downpayment insufficient. The de facto requirement, therefore, is now 20 percent down.

And then came the fees.

As part of its “pay-for-risk” pricing model, Fannie Mae added mandatory fees to all of its investor property mortgages this year. Based on loan-to-value, the fees are:

• 75% LTV or less: 1.750 percent of the borrowed amount
• 75.01 – 80.00% LTV : 3.000 percent of the borrowed amount
• Greater than 80% LTV : 3.750 percent of the borrowed amount

So, if your personal plan includes the purchase of investment properties in 2009, consider the impact that tighter conforming guidelines, larger downpayments and higher fees will have on your bottom line.

All things considered, now may be a good time to make that rental property bid. Sure, prices may fall going forward, but increased acquisition costs may wipe out the long-term gains.

For the first time in over a year, the sales of “used homes” fell below the 5-million unit trendline, helping to push the total home inventory higher by 0.1 percent nationwide.

Based on the rate at which homes are selling nationwide, it would take 11.2 months for the existing housing supply to be exhausted.

For home buyers, this is an opportune time for negative news on housing.

First, sellers know that between now and the Super Bowl, housing activity will be light. The general scarcity of buyers may force a seller to accept a bid he wouldn’t have accepted otherwise.

Second, the economy is showing weakness and that, too, can concern a home seller. Buyers are less likely to extend themselves during times of economic uncertainty, further reducing the buyer pool and, again, putting pressure on the seller to “make a deal”.

And lastly, because the government has been trying to force mortgage rates down as a way to stimulate the economy, the weak housing data is actually making it cheaper to finance a home. This means that a well-qualified home buyer can better stay within budget.

Each 0.500 percent rate reduction saves $33 per $100,000 borrowed.

It is important to remember, though, that the U.S. housing market is not national — it’s highly localized. This is one reason why national real estate reports can be misleading. Just as figures from Phoenix have little to do with statistics from St. Paul, even data from neighboring ZIP codes can vary.

The universal truth, however, is that a home that is priced fairly will sell more quickly than a home that is not. And, until the Super Bowl passes in 45 days, expect fewer buyers to be out there competing for them.