Mortgage rates are near historic lows and yet confidence in the real estate marketplace is in the dumper. The latest Fannie Mae National Housing Survey shows that fewer and fewer of us think home prices will rise in the coming year (46 percent) or that mortgage rates will increase (57 percent). Only 27 percent of us believe the economy is on the right track.
“Housing market sentiment has clearly suffered in the wake of the recent government shutdown and debt ceiling debate,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “In October, we saw attitudes toward both the economy and the current buying environment experience their largest one-month drops in the survey’s three-year history."
But there's a piece of good news in the real estate marketplace that's generally little known nor much understood, something which should elate anyone who looks at housing: Mortgages are less risky than just a few years ago. Very much less risky.
For borrowers, owners and prospective owners this is important. Happy investors mean more cash for borrowers and lower mortgage rates.
Mortgage rates are a by-product of supply and demand: Investors supply money that borrowers demand. If you're a borrower -- and that's most of us -- you want to see a lots of investors lined up to fund mortgages across the country.
The catch is that investors can plant their money anywhere, say the stock market, bonds, commercial real estate, art, wine cellars, etc. They're not forced to make money available for mortgages nor are they required to invest in the US and yet they do. Why?
Investors weigh risk and reward. As risk increases so do mortgage rates. One reason mortgage rates today are so low is that lenders have virtually no chance of taking a loss on a home loan.
Why do lenders have so little risk?
One reason is that most loans today are insured or guaranteed by the FHA, VA, Fannie Mae and Freddie Mac.
But a second -- and arguably more important reason -- is this: Loans made since 2010 when Wall Street Reform was first passed are virtually foreclosure-free.
Let's look at two charts:
First, the latest data from RealtyTrac shows recent short sales, bank sales and foreclosures. However, this data is a "lagging" indicator -- it tells us about loans made in the past that are now showing up on official records. The best example of this concerns FHA loans. There are a lot of FHA foreclosures but virtually all of them stem from loans originated between 2000 and 2009. Since the passage of Dodd-Frank, HUD actually churned out $20 billion in profits from 2010 through 2012.
Mortgage Rates and Delinquencies
The second chart to check comes from CoreLogic. It shows six-month delinquencies by year, in other words it shows that there were few delinquencies before the mortgage meltdown and there are far fewer today.
Why is this chart important? Loans must first be delinquent before there can be foreclosures. Fewer delinquencies are "leading" indicator, they suggest what will happen down the road meaning -- in this case -- fewer foreclosures and lender losses.
Investors love this chart. It tells them the American mortgage market is back, that it's safe to invest money in the US housing market and that low mortgage rates are justified. After all, the greatest measure of public confidence in the housing market is the willingness of borrowers to pay their mortgage bills.