True Gotham

Yesterday, in part I of this Article, I discussed the main components of the Economic Stimulus Package. Today, in Part II, I will address (i) who will benefit from these higher limits; and (ii) what the effect this law will have on the real estate market in Manhattan specifically, the Metropolitan area generally and the economy overall.

Since there has been such a large disparity in interest rates between conforming and jumbo rates, as was previously noted, there are a lot of borrowers with loan amounts between $417,700 and $729,750 who will be candidates for refinancing once the Package takes effect. As a result, the immediate impact of the Package will be a flurry of refinance activity.

Anyone who bought a home in the past two years and has a fixed rate loan of 6.25% or more (which is most of them) will be in a position to refinance. They will now be able to get a fixed rate loan in the mid to upper 5s on a 30 year fixed or low to mid 5s on a 15 year fixed.

In addition, anyone who has an adjustable rate mortgage (i.e. an ARM) in these loan amounts, will also be able to refinance into a conforming rate. They will either be able to refinance into a fixed rate mortgage at a low rate or into another ARM at the conforming ARM rates. In either event, it will be a short-lived opportunity that should not be missed.

Assuming that rates stay stable over the next few weeks, which we expect that they will, there will be a mini-refinance market created by this activity. It will result in people saving hundreds of dollars per month on their mortgage payments, which will help their monthly cash-flow. In addition, it will improve the business prospects of those involved in the mortgage industry who have been struggling such as appraisers, title companies, mortgage companies and closing attorneys.

The refinancing activity by itself will most likely be a short-lived phenomenon and will not by itself do too much to improve the real estate market. However, with the lower interest rates on loans of up to $729,750, which we are presuming is the amount that will be in affect in Manhattan, there should be some increase in purchases of apartments in the $900,000 to $1,200,000 range. These purchasers will be helped most by the lower rates since (i) the loans best match up with these purchase prices and (ii) the lower monthly payment of $600 or so ($729,750 at a savings of approximately 1.25% from 7% to 5.75%) will have the most affect on the low, mid-range of the market.

The larger impact in the real estate market will be felt in the suburbs of Manhattan, specifically, Westchester, Long Island, Northern New Jersey and Southern Connecticut. In these areas, house prices have dropped by 10-25% over the past two years. And, more troubling has been the lack of liquidity in the suburban market where sellers have been unable to sell their homes.

A loan amount of up to $729,750 should help stimulate the mid-part of this market which has seen few sales the past two years. Though many suburban houses sell in excess of $1,200,000, the vast majority of them sell in the $500,000-$1,000,000 range. This is exactly the market that will be helped by this Package and the lower payments resulting from it.

Though we do not expect the housing market to rebound robustly as the result of this Package, we do expect increased activity as we enter the traditional spring buying season. We still think that it will continue to be a buyer’s market due to the excess inventory and that the number of homes sold will pale in comparison to those sold in 2001-2005. Nevertheless, the Package should have the effect of stemming further loses in suburban housing market and help us start to come off the bottom. In effect, it will turn what would have been a disastrous house-buying season into a below average to fair one.

With respect to the overall economy, we do not expect the Package to have much effect overall. There are many factors that are affecting our economy that are not controlled by the housing market or interest rates. These include consumer spending (most of all), the weakening of the dollar, the underperformance of many companies’ earnings (especially those in financial services) the job market and events affecting world economies. At this point, unfortunately, even a strong real estate market, which we do not expect to have for several years, will not be enough to turn around the economy. Other factors, beyond the scope of this Article, will need to do that.

The Package will help out consumers by making mortgage money cheaper for many as noted above. This will help some people buy homes and others refinance. It is a good thing for the real estate market, but far from a savior. Individually, many people can and should take advantage of low rates to either (i) refinance their loans that were jumbos and now are not or (ii) buy homes that are now on sale with cheaper money. As this relief is only in affect for 2008, we suggest that everyone take advantage of it as soon as they can.

By: Daniel M. Shlufman, President and General Counsel
FCMC Mortgage Corp.
dshlufman@fcmc.net

Doug- How do you think this will affect the Hunter's Point section of LIC? I've read that the conforming amount will be based on the average price in the area at 125%. My question is that since Queens average price is around $470,000 while Hunter's Point LIC is much higher, do you know how they will calculate the amount one can put on a conforming loan? Will it be the average price in Queens or computed on comps from the area one is buying? I know this question isn't dealing with Manhattan but given LIC's close proximity to Manhattan, I figured I'd ask it anyway...

Thanks,
Ethan

Great question Ethan and my understanding as it is now is that "area" isn't specifically defined so it remains to be seen how they will calculate conforming loan amounts. I suspect that "area" may have to be defined specifically by relative comps but again, unclear at this time.

Maybe Dan will chime in with his thoughts too?

It has not been determined yet how the average medium income area will be defined. However, since the law was fast tracked and the regulations should be too, it is very likely that the calculation will be made county by county since this information is readily available. They can try to do it by zip code which would help in your situation, but I would be surprised if that happens since I am not sure that they can access that data and analyze it quickly enough. It is possible that they will do it by region if they find the county-wide solution is unfair, but it is hard to know. We should have more information on this in the next two weeks as Fannie Mae and Freddie Mac work through these and other issues.

I'm 3 years into a 30 year fix mortgage on my NJ home that I owe 407k on. When I purchased the home for 480k I put approx 20% down and my rate was and still is 6 5/8. I've tried to refinance several times over the past 2 months because I've seen rates as low as 5 1/8 but because i no longer have 20% equity in my home I have to pay PMI on the refinanced loan. This PMI payment, even with a significantly lower rate on the loan, often brings the monthly payments to identical levels so that the refi does not make sense. Is there anything in this package that will help me. I've never been late on a payment in my life and have great credit but i feel like those things may actuially be hurting me now.