This Week’s Highlights:
- Outcome of Open Market Committee Meeting
- Digging Through the Data: False Alarms
- A Sale Story: The Importance of Reading Contract Details
Outcome of Open Market Committee Meeting
The Open Market Committee finished their two day meeting on Wednesday and upgraded their economic outlook for the economy. They found that the progress made on vaccination administration has reduced the spread of COVID-19 in the United States, leading to stronger interest rates, employment numbers and overall economic activity. While industries like restaurants still remain weak due to the pandemic, there have been signs of improvement. Additionally, inflation has risen, largely reflecting transitory factors. That’s been a concern that we’ve been keeping an eye on for the last couple of weeks, and the path of the economy will depend significantly on the course of the virus progress. While vaccinations will likely continue to reduce the effect of the pandemic on the economy, risks to the economic outlook still remain.
This comes after the Open Market Committee’s previous statement on the subject. They originally predicted that the gross domestic product (GDP) would increase 6.5% year over year. They have now updated that to be a 7% increase, which is a big deal.
Once again though, it’s important to remember that the lockdown took up most of 2020, and the economy shrank 3.4%. Because of this we compared 2021 to 2019, and it turns out we’re actually going to be up 3.79%. To put that in perspective, in a 10 year period starting in 2010, the highest we ever hit was 2.9%, and in 2019 the economic growth was at 2%. This gives us clear evidence that 2021’s 3.79% over 2019 is a very good and strong sign.
Finally, the Open Market Committee also said that they would continue buying $40 billion of mortgages every month, along with $80 billion of US treasuries until “substantial, further progress has been made in the recovery.” At the end of the day, this is what affects long-term mortgage rates
Digging Through the Data: False Alarms
CNBC reported on Thursday afternoon that mortgage rates jumped to 3.5% after the Federal Reserve announcements, suggesting that the rate jump would make it harder for some home buyers to qualify. Meanwhile, on the very same morning, Freddie Mac released their weekly mortgage rate survey and their headline suggested that mortgage rates continue to decrease. So who’s right in this situation?
Think of mortgage rates as scales. If you weigh yourself every day of the week, you’ll notice that the number is never exactly the same. Mortgage rates (and stock prices, for that matter) tend to move in a similar way. For that matter, these rates also come from different sources. CNBC cited Mortgage News as their source, who are not likely charging any points on their rate. Compare that to the Freddy survey which announced that they’re charging seven tenths of a point on the rate on a purchase. This means that the two reports are completely different beasts.
The Freddy survey consisted of data collected mainly on Tuesday, the day before the Fed announcement, and it reported 2.937 tenths of a point. If you were to add that to normal closing costs, you’d be looking at $2,984 on a $250,000 loan. Mortgage News, on the other hand, updates their information every single day, which leads to the conflicting reports. Freddy is going off of Thursday’s information versus Mortgage News’ Tuesday information. That said, CNBC suggested that this could really affect loan payments and how much buyers can qualify for. But when we really calculate how much that quarter of a percent affects the payment on a $250,000 loan we see that the payments would only increase $35.42 cents per month. If the $35 is the thing that tips buyers over from qualifying to not qualifying, that buyer is already way too close to the line of comfort. This suggests that sometimes headlines are a little too “flashy,” since once you do the math, it’s easy to see that rates are still great.
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A Sale Story: The Importance of Reading Contract Details
We recently helped a buyer who was faced with a proposal that featured oddly worded contingency language. It’s almost a requirement, especially if you’re looking in competitive price ranges, that buyers give the seller some appraisal wiggle room. When this contract came in, we paid close attention to every detail on every page, and we noticed that a box was checked for the standard appraisal contingency language. Essentially, this version allowed the seller to force the transaction forward upon receipt of an appraisal that’s lower than the agreed upon purchase price. Alternatively, the power would be in the hands of the seller to lower the purchase price down to the appraised value.
The offer went on further to state that the buyer would be required to pay $20,000 over the appraised value if the appraisal came in low, but only up to the agreed upon purchase price. This was a red flag to us, because what if it came in around 50 grand under the accepted offer price? Would the seller get to decide if they would go forward with the contract because of the normal appraisal contingency language, or is it automatically understood and agreed upon that the buyer would pay $20,000 over the appraised value? This contract was unclear on those points, leaving us with conflicting provisions.
With muddy terms like this, there are numerous ways the sale could play out. On one hand, it could be argued that sellers have no intention of lowering their asking prices, especially in this market. In that case, the seller would likely want to find some middle ground to negate that conflicting language, and both the buyer and the seller win.
On the other hand, what if the appraisal is $100,000 less than the agreed upon purchase price? The buyer could take the position that because of other language in the contract, they should be able to buy the house for $80,000 less, having agreed to pay $20,000 more than the appraised value. Hazy contract language like this can only cause more headaches for not only the buyers and the owners, but agents and lenders as well. That’s why to think about all the possibilities when you’re crafting additional contract language as a real estate agent.
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