Friday, October 29, 2010

Rock Bottom Mortgage Rates Increase Sales

Financial FAQs

It seems that the lowest mortgage rates since the 1950s are making a difference. New-home sales rose 6 percent and existing-home sales increased 10 percent in September, “affirming that a sales recovery has begun”, said the National Association of Realtors. This can mean interest rates have finally come down to levels that match consumers’ diminished incomes—a vindication of the Fed’s efforts to lower interest rates in their fight against deflation.

Housing starts and construction spending are also beginning to rise, which means housing prices are in the affordable range, in line with lower reduced personal incomes.

One measure of housing prices not usually reported is the housing price-to-rent ratio that we have discussed in past columns. It is a good measure because rents are more closely tied to actual incomes—and so what households can actually afford—whereas housing prices can fluctuate wildly based on irrational expectations, as we know. So its ratio is a measure of how much prices rise or fall in relation to rents. Today, that ratio has almost declined to historical levels, indicating that housing prices are bottoming out.


Mortgage purchase applications increased in the latest week, according to the Mortgage Bankers Association, another sign that record low interest rates are spurring purchases. Conforming 30-yr fixed rates are at 4 percent with a 1 point origination fee. The Refinance Index increased 3.0 percent; the seasonally adjusted Purchase Index increased 3.9 percent from one week earlier.


And construction outlays rebounded 0.4 percent, mostly in the public sector, following a revised 1.4 percent decrease in July. The August number was much better than the consensus forecast for a 0.4 percent decrease.


The comeback in August was led by a 2.5 percent boost in public outlays. Meanwhile, private residential spending dipped another 0.3 percent in August, though this number should improve with the uptick in housing starts. On a year-ago basis, overall construction outlays improved to minus 10.0 percent in August from down minus 10.3 percent in July, which means we will probably have to wait until next year’s selling season before construction spending actually turns positive.


Calculated Risk gives us a reason for the decline in construction spending. The tremendous oversupply of existing homes on the market, including bank-owned foreclosures, are depressing prices and undercutting new home sales.

The existing-home overhang increased 8.9 percent in the month, even though months of supply dropped to 11 percent, due to the higher sales rate. “The year-over-year increase in inventory is very bad news because the reported inventory is already historically very high (around 4 million)”, said Calculated Risk, “and the 10.7 months of supply in September is far above normal.”

“Vacant homes and homes where mortgages have not been paid for an extended number of months need to be cleared from the market as quickly as possible, with a new set of buyers helping the recovery along a healthy path,” said NAR chief economist Lawrence Yun. “Inventory remains elevated and continues to favor buyers over sellers. A normal seasonal decline in inventory is expected through the upcoming months.”


And housing affordability conditions today are 60 percentage points higher than during the housing boom, so it has become a very strong buyers’ market, especially for families with long-term plans. “The savings today’s buyers are receiving are not a one-time benefit. Buyers with fixed-rate mortgages will save money every year they are living in their home – this is truly an example of how homeownership builds wealth over the long term,” said NAR President Vicki Cox Golder.

The latest Federal Housing Finance Authority same-home prices for Government agency financed homes—confirm that prices are firming at the lower price levels. The FHFA purchase index actually rose 0.4 percent, after a long string of declines.


The Mortgage Bankers Association asserted that fixed mortgage rates wouldn’t go lower at its annual conference, and in fact predicted they would rise above 5 percent next year, mainly because the MBA sees sales rising—with new-homes sales up 20 percent in 2011 and 40 percent in 2012 to make up for the current lack of new-home inventory.

But this will only happen if the Fed keeps downward pressure on interest rates, such as with their proposed QE2 purchase of more Treasury securities, to keep mortgage rates at such low levels that they conform with consumers’ reduced buying power.

Harlan Green © 2010

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