California Mortgage Rates Still High: Examining Actual Mortgage Products in Today’s Market and the Family Budget Impact.

As the housing market continues to slump forward, there are many unintended consequences cropping up all over the country. For one, the intent of the Federal Reserve to inject liquidity into the markets was to bring back confidence in an environment that is cautious about credit. As we are approaching another 1 percent interest rate policy ala Alan Greenspan, the only difference this time is that mortgage rates are not responding like they did during the earlier easing during the Greenspan tenure. There is a couple of reasons for this including the secondary market which was buying up all kinds of new and creative mortgage products that have now turned on the market. Yet your bread and butter 30 year fixed products are still high priced even after the Fed is attempting to induce lenders to be more willing to lend.

The reason that rates are going up across the board on credit is because there is a legitimate reason to be concerned. For one, all indicators are pointing to a recession. In years past, housing has always fallen during these times. Next, we need to explore the nuanced fact that much of our economy this past decade was built on real estate and all things surround the housing market. Let us take a quick look at some rates for a $500,000 home here in California with a 5 percent downpayment from one of the larger lenders:

Incredibly, the menu is still full of loans that got us into this mess in the first place. The pricing range is anywhere from $3,018 for a 5/1 ARM to $4,170 30 year (10/20) mortgage. Our mainstay 30 year fixed will come in at $3,618 for principal and interest only. Keep in mind that the taxes and insurance on a $500,000 place will run you anywhere from $500 to $650 per month. If we are to assume that a person buying in today’s market will go with a 30 year fixed, the monthly payments work out as follows:

PITI: $4,118

Now how does this factor into the budget of an overall family? First, let us look at some key monthly expenses with national averages:

Healthcare: $500

Gas/fuel: $300

Auto Payments: $400

Food: $500

Utilities: $200

Now the subtotal including the above items is $6,018 or $72,216 per year. Keep in mind that $500,000 does not buy you as much as you think in California although prices are falling drastically across the board. Now you see why such a rapid market correction is occurring. In the above, for essentially basic necessities and a starter home the average family will spend $72,000 per year; which is much higher than the median gross pay for the entire state of California. That is why when prices reached a peak of $550,000 in Los Angeles County it simply was not sustainable. For those of you who don’t think fuel is expensive simply look at this chart:

Regular gas in the United States since November of 2006, less than two years ago is now up by a whopping 58 percent. With oil staying over $100 a barrel and the summer driving season coming up, the only place fuel can go is up. Now why is this a bigger factor in California? For one, many people live driving distances away from their work. One need only look at the congested freeways for this data point. Also, fuel cost in California are higher than national averages. So it is a double hit here. We also did not factor in automobile insurance in the above budget which can cost anywhere from $150 to $300 a month depending on the cars one may have.

As we discussed in the previous article that the current system is setup to punish savers, we are also seeing a system that understates inflation and forces consumers into debt. After all, the elasticity of your driving to work is nearly vertical. You have to get to work. California is notoriously bad in the public transportation market. And just to show you that the previous rate sheet from a large bank isn’t unique, take a look at another rate sheet:

The reason rates are holding steady and not moving downward in the same fashion as when Alan Greenspan took rates to 1 percent historical lows is that many of these products are simply reflecting the actual risk inherent in the market. What is now out, is the teaser intro rates of 1 to 2 percent. Also, we are not seeing the 5 percent mortgages either. Yet we may be seeing more of those 40 year fixed products but they do very little in really denting the monthly payment. I’ve also noticed a trend in some of the auto commercials that when you read the fine print at the bottom of the screen, they are now offering 84 month terms. Absolutely insane and financially imprudent. You’ll be paying a loan for years after the asset is no longer worth much. And how do you think that higher fuel cost is impacting auto sales? Everything is interconnected and nothing is contained. When credit is ubiquitous a contraction in this market hurts everything. When you spend more than you earn, you eventually have to pay the bill and it is coming due quickly.

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