A few quick reminders:
I. “Interest Rates” Are Not Always “Mortgage Rates.”
When the media is telling everyone that interest rates are climbing, it does not always mean that mortgage rates are climbing. We have been seeing this play out recently, as the 10-Year Treasury Yield (the benchmark interest rate) has been edging higher, but mortgage rates are holding relatively steady.
In other words, the “spread” between mortgage rates and the 10-Year Treasury continues to tighten. Interest rates can in fact refer to many things such as mortgage rates, mortgage-backed security rates (different from mortgage rates), Treasury bond and bill rates, the Prime Rate, the Fed Funds Rate – and more.
I wrote a short but informative blog about this several years ago: What Are “Interest Rates?” Do They All Move In Unison?
II. Inflation Is Cooling But Growth Is Heating Up.
Truflation is a blockchain-based (non-government) platform that provides real-time price analyses based on thousands of products, and many consider it much more accurate than the government’s PCE and CPI reports. It currently shows inflation running at 1.2%! This is well below the Fed’s 2% target, and it bodes extremely well for rates.
The primary reason for falling inflation is not lower rents, energy, or food prices – it’s the tightening of our money supply from about 12 to 18 months ago, as Steve Hanke reminds often.
Will it last? Probably not, as Hanke reminds us that the money supply is now expanding much faster. So – we probably have another 12 to 18 months before inflation sets in again – right after the midterms…
BUT – even good inflation numbers can be offset by strong growth numbers – which we are also seeing, as GDP came in stronger than expected for Q4. Hence, we are seeing the inflation vs. growth push/pull that I have discussed many times.
III. JVM’s A Banker AND A Broker.
I bring this up often because agents ask this question so often. We are a mortgage banker in that we underwrite and fund most of our loans “in-house,” before selling them on the secondary market. But we also broker many loans to third-party “wholesale lenders” if those lenders provide better options for our borrowers.
Many mortgage banks do not let their loan officers “broker” loans because mortgage banks make so much less money on brokered loans. This seems short-sighted to me, however, as it sometimes prevents loan officers from finding the best loan options for their clients – and in this day and age, clients will figure that out.
IV. Land-To-Value Ratios On Appraisals; Can’t Have Too Large Of A Lot.
Mortgage lenders don’t want to make “land loans” because they are much riskier than “home loans,” as borrowers don’t feel as wedded to land and are more willing to walk away if values fall. Hence, when a property’s value is mostly because of the land and not the improvements (the house), mortgage lenders get nervous.
The rule of thumb is that the land cannot comprise more than 50% of the value of a property, but that is not hard and fast, and the rules vary by loan program and lender. We do, however, often see deals in Texas on 40 acre lots that will not fly as residential loans, and we also often see properties in CA’s mountains that sit on too much land. I’ve even seen deals in high-end suburbia (in the SF Bay Area) blow up with old, tiny homes on acre+ lots because the property’s value was 80% land.
I’ve blogged about this several times too: When Huge Lots Kill Transactions; What Are The Rules & Solutions?
