As kids are often quoted, “Bor-ing…” It’s the last Tuesday of the month and Case-Shiller posted the numbers from November. No surprises; prices down, sales up; blah, blah, blah.
When I was selling homes during the 1990’s and buyer’s were seriously considering adjustable rate mortgages because fixed rates were in the mid 8% range, one of the factors I would discuss with my clients was the index. As a reminder, an adjustable rate mortgage consists of the index, the margin and the lifetime cap. That is, the baseline index to which the adjustments are tied to; the margin of profit or spread between the index and the rate; and the highest rate the loan can adjust to, which is also tied to the index. The margin and the cap are predetermined at the time the loan is taken. A typical margin might be 2.25% and the cap 5%. In other words, say the index was at 5% the lifetime cap would be 10% (5% + 5%) and the “fully indexed margin” would be 7.225% or 5% + 2.25%, as distinguished from the low start rate or “Teaser Rate”. The margin was only component that could be adjusted with the purchase of loan points. The smaller the margin, the lower the rate; simple right? Where shopping a rate became interesting was in choosing an index the loan would be based on or “tied to”.
There were/are typically 3 indexes used in adjustable rate mortgages. The 1 year Treasury Bond, the LIBOR and the 11th District Cost of Funds Index or COFI. The 1 year Treasury is just that, the rate of the 1 year Treasury bond or T-Bill. LIBOR stands for the London Inter-Bank Offered Rate – the rate banks in England lend each other money on an overnight rate, and the 11th District Cost of Funds was based on the 3 Western States’ average rate of lending to themselves.
So was/is there any real difference in the index rate? Sure. There are differences because the 3 indexes move or change at different rates of speed, thus affecting the interest on the mortgage. When these programs were popular I would caution my clients that the LIBOR is very volatile and can change rapidly. Since their loan program would adjust and change incrementally each month, if the LIBOR changes rapidly, which it was inclined to do, the monthly interest rate on the home loan could change quickly too. Thus in a time of declining rates, borrowers would come out ahead because their loan would adjust downward. But in the 1990’s rates were rising and so the low starter rate would begin a very rapid upward move. Similarly, if the Fed raised the rates they charge banks, which was happening back then, the adjustable loan would go up whenever the Fed made a move. But the 11th District COFI was slow moving. It lagged behind the market. So in times of declining rates a borrower wouldn’t feel the effects as quickly. Conversely, when rates were rising, the slow moving COFI meant your rate stayed down. This was the desired index for an adjustable loan at that time because rates were rising and the lag time of posting those changes was beneficial to a borrower with that kind of loan.
So what has all this to do with Case-Shiller? Like the 11th District Cost of Funds Index, Case-Shiller lags. The data is old and since it reflects closed transactions of a month prior, which means homes that went under contract 2-3 months ago and even longer for short sales, make up the data Case-Shiller is looking at. During price declines and slowdowns their data is significant because it portends of things to come. However, during times of improvement, that information becomes old and confusing. For you who read my blog regularly, you know I have been arguing that had the Congress not paralyzed us over the summer with the whole debt ceiling debate, our economy would have been where we are today, back in August and September. Because we are just now getting back to where we would have been and due to the lag in closed sales reporting, Case-Shiller is behind the curve. In other words, ho-hum to Case-Shiller, your news is old. The market is showing signs of improvement as is the economy in general, albeit slowly.
David Blitzer, the S & P spokesman said of this month’s Case-Shiller report: “In the October data, the… good news is some improvement in the annual rates of change in home prices, with 14 of 20 cities and both Composites seeing their annual rates of change improve.” He went on to say, “Home sales rose in November… (and) Single family housing starts also rose.” These words of encouraging data were buried deep in the Case-Shiller report, neither making the headline nor influencing the interpretation they put forth.
Hey, it’s almost New Year’s and it’s the time of resolutions and predictions, so here’s mine: 2012 should be the beginning of a stabilization of prices, as home sales continue to increase in numbers along with the overall improving health of the economy; a continued brightening of the jobs picture and if true, the first strong spring home buying season since the housing credit of 2010.