Fed rate, T-bills and Mortgage rates… Oh My!!!

Around every water cooler in America we’ve all been discussing that the Federal Reserve has been steadily increasing rates from the historic lows we’ve seen for the past 10 years, and is currently hovering between 2 and 2.5% as of the writing of this post.

But what is the Federal Funds rate? (and honestly, why do I care?)

The Federal Funds Rate is the interest rate that banks extend short-term, overnight loans to eachother so that they meet minimum bank reserve requirements. As the Fed increases rates, banks must keep more funds on-hand at the bank or they must elect to pay more to borrow from another institution to meet these requirements. So, banks have to hold tighter to the money that they have. From a 10,000 foot perspective this restricts the overall availability of cash within the US economy and slows investment. This causes business to grow and hire workers more conservatively and keeps the US economy as a whole operating at a sustainable level. When the US economy weakens (i.e. high unemployment numbers, etc.) this process is reversed and Fed rates are decreased.

While the Fed rate does not have an immediate impact on things like mortgage interest rates, it does have an overarching impact on the economy, consumer and investor confidence, and investment decisions made based on the consumers’ and investors’ level of confidence.

A better indicator of mortgage rate changes is the treasury bill (T-bill rate) as investors compare all fixed-income investments against one another. In this comparison, T-bills are fixed income investments that are backed by the US government, meaning that their risk is very low, therefore, to be deemed as attractive to investors other fixed-income investments must offer a higher rate of return to counter-balance the additional risk that the investor must take on with things like mortgage-backed securities. Instead of being guaranteed by the US government these investments are supported by the value of the consumer home loans they contain. Relying on consumers to pay their mortgages and associated interest payments carries significantly more risk to an investor than the US government. Therefore, as treasury rates of return increase, the returns available to investors in mortgage-backed securities must also increase (i.e. mortgage interest paid by the consumer), otherwise these investors would switch into the less-risky government bonds.

While the Fed rate does not have a direct impact on mortgage rates for consumers, overall, an increase in the Fed rate and treasury bill rates of return cause pressure on consumer mortgage rates to keep the balance of risk and reward in the investment arena. So, without any signs of decreasing Fed rates, expect mortgage rates to continue to climb over the foreseeable future.

 

What happens after we’re under contract?

The time spent searching for your home can feel like an emotional and physical marathon, so once you have an offer accepted and have an executable contract it’s smooth sailing from there, right? Well… There’s more that goes into it than that.

Those who partake in the real estate close process often consider this to be where the real work beings! After both the buyer and the seller sign the contract to signify acceptance of the terms, two checks must immediately be written by the buyer: the due diligence fee and the earnest money deposit. Both of these amounts are agreed upon in the offer to purchase, and are credited against the purchase price of the property if and when the transaction closes. The due diligence amount is paid directly to the seller (usually as a personal check) and the earnest money deposit is sent to the closing attorney to be held in escrow until the day of closing.

Due Diligence period

Once a contract is accepted by both the buyer and the seller, the due diligence period begins. This is the amount of time you agree upon in the offer to purchase where the buyer has access to the property for inspections including: homeowners’ inspection, radon testing, termite inspection, appraisal, etc. This is also the period of time during which the buyer can elect to terminate the contract to purchase for any reason and lose only their due diligence fee. The amount of money that is held in escrow by the closing attorney will be released back to the buyer if termination of the contract occurs during this time.

After the end of Due Diligence

When the due diligence period ends there will still be time before the property closes and when the buyer takes ownership. During this time period the buyer is still able to terminate the contract, however they will lose their due diligence money and the earnest money deposit with the closing attorney. Both of these amounts will compensate the seller for the termination of the contract.

Prior to Closing Day

Once a transaction has been “cleared to close” by the lender and a closing date has been scheduled with the closing attorney, the last few preparation steps occur, which include: obtaining homeowners’ insurance and transferring all utilities into the buyer’s name, with the effective date listed as the date the property is scheduled to close.

Lastly, is the final walkthrough, which often occurs on the same day as closing. This is the time when the buyer and their agent walk through the property to ensure that there is no major damage to the home, that all of the seller’s belongings have been removed, and that all items that were agreed to convey along with the home are still present before the buyer closes on the home. Once the house is in satisfactory condition the buyer can become the new owner!

Hopefully this writeup helps to shed some light on the process after a home goes under contract. If you have any questions or know of anyone in the Charlotte, NC area that is ready to buy or sell real estate, please don’t hesitate to reach out.

 

What your homeowners insurance provider forgot to tell you

Now that we’re in the process of recovery from Hurricane Florence, whether that’s waiting for the water to recede, cleaning up the yard and streets, or simply finishing the hurricane snacks, this is the time to think about your insurance.

“Most homeowners’ insurance policies only cover damage caused by threats such as fire, windstorms, hail, lightning, and theft or vandalism.Though there are other policies that cover additional risks,floods and earthquakes are usually discounted from general homeowners’policies. Therefore, a separate flood insurance policy is required to cover damage caused by flooding.” – North Carolina Flood Insurance

Most homeowners don’t realize that flood damage isn’t covered under their regular  policy, and if you’re not in a flood zone, you’re likely not required by your lender to carry this insurance on your home. However, as we’ve seen with Hurricane Flo, just because you aren’t in a flood zone doesn’t mean that you won’t find yourself praying that the water stays out during a weather event.

According to FEMA, just one inch of flood water can cost $27,000 or more in damage. So, as you look around at your Charlotte neighborhood, how many people do you think are in sudden financial distress because of the hurricane? But won’t government disaster assistance help? Unfortunately, disaster assistance doesn’t help in the way you might think. Disaster assistance is often in the form of low-interest loans for homeowners, not usually outright payments that cover the full loss of property and any damage sustained.

The National Flood Insurance Program, a program backed by the federal government, allows homeowners to cover the insurance gap in homeowners policies, with flood coverage maxing out at $250,000 for around $700 per year.

While the addition of flood insurance will increase my homeowners insurance costs by roughly 50%, after seeing the effects of Hurricane Florence… Maybe this is money well-spent to mitigate the risk of costly flood repairs should another tropical depression/tropical storm/category hurricane find its way to inland North Carolina.

A Yankee meets hurricane preparedness

With the pending doom (too much?) of hurricane Florence scheduled to wreak havoc on North Carolina in the next few days, I’ve called into question my level of preparedness as a Yankee who has only lived in the south for about a year. I’m used to preparing for snow storms that cancel school days, not widespread power outages, flooding, evacuations and the possibility of windows getting blown out.

Welcome to life as a Yankee living in the South… As a new homeowner. Lord help me.

Listening to the news reports I’ve had trouble discerning between what is hype and what is helpful, so for the rest of your confused newbies/homeowners/northerners-moved-south here’s a list of actually important things to think about as you prepare for Florence to make landfall to our east.

prepare yourself: Food/water/medications for 3 days for you and your pets, protect your important documents in waterproof boxes and/or scan to an online server,ensure your homeowners insurance is paid.

prepare your house: clean out storm drains/gutters, cut back trees and limbs that may fall onto homes or property, clear off your patio/deck and secure any loose items. Make ice to use to keep food cold if the power goes out. Fill a few extra water bottles with water.

prepare your car: make sure you have a full tank of gas, and pack some food/clothing/medication in-case you need to leave quickly.

prepare as the storm gets closer: charge your cell phone and any portable charging devices that you may have. Set your refrigerator and freezer to the coldest setting to help keep food for a longer period of time if the power goes out.

Most-importantly… Stay safe, stay informed, and comply with any mandatory evacuation orders.

Stay safe this weekend!

 

 

 

Needs, wants and knowing when it’s THE ONE

While the Charlotte market may be primed for a shift towards additional inventory and longer days on market… the market is cooling, but it is by no means cold!

Calls for “highest and best” offers due to multiple parties bidding to win a home are still common-place, so it’s important for a buyer to be prepared and to have a full understanding of what it is that they’re looking for. We can look at every 3 bedroom, 2 bathroom home in the city, however there’s going to be one that speaks to you and only you will know that. Too many times I have seen a client miss out on a home that they’ve later decided was their dream home because they wanted to take a few days to think about it, or maybe they just wanted to see a few more homes. While you may want to set up a few showings to make SURE you don’t want anything else, what happens when seeing these additional homes allows you to stand in your conviction and make an offer on the home you loved, but then you learned it went under contract?

Watching clients lose out on what they believe is their perfect match hurts for the Realtor and the client. So, sit down and make a few declarations before starting your search:

decide what you absolutely need in a home – these are the non-negotiable items and includes things like: location and the number of bedrooms a home has. A family with two kids who also needs a home office should not be looking at anything with less than four bedrooms unless a serious discussion is had about what daily life will feel like for the family if the decide to forego the additional bedroom space.

create your wants list – this list can be as long or as short as you’d like. There’s no guarantee that you’ll find a property with every upgrade that you desire, so the home that checks off the largest, most-important priorities should take precedence.

When you find a home that has ALL of your needs and that certain mix of your wanted amenities… Go for it! Know that if you decide to wait until the next day to “sleep on it” that you’re risking having the sellers select another offer. For a house that is only so-so, that is a fine option to take. However, for the home that you know you’ll cry if you call your Realtor tomorrow and they tell you that the seller is under contract with another buyer… Please don’t risk it.