Monday, December 27, 2010

The 2011 Mortgage Mess

The Mortgage Corner

Will real estate finally show a sustained recovery in 2011? Much depends not only on a general economic recovery, but bringing back the mortgage markets. Right now, there’s a tug of war in Washington, over whether more aid should be given to borrowers with underwater mortgages under the various loan modification programs.

So the question is in part, just how many homeowners are ‘underwater’ these days, and when will housing values begin to rise again—is it 3 million or 8 million homes? The underwater statistic is somewhat misleading, as it is still cheaper for most homeowners to pay their mortgage with the record low interest rates rather than rent, even when the mortgage amount is more than current value. Rents have not fallen substantially, mainly because of the record number of homeowners who have become renters due to the loss of their homes.

Right now, a popular mortgage program is the ‘Refi Plus’ offered by both Fannie Mae and Freddie Mac, in which those with good credit and incomes can refinance at a market interest rate up to 105 percent of the loan to value of their home.

The latest FHFA (Federal Housing Finance Authority) price index, the regulator in charge of both Fannie and Freddie, shows some improvement. House prices for homes sold under government agency financing surprisingly rebounded in October. The FHFA purchase only house price index rebounded 0.7 percent in October, following a 1.2 percent decrease in September.


On a year-on-year basis, the FHFA HPI is down 3.4 percent, compared to down 3.8 percent in September. This index is based on resale prices for homes financed or bundled by Fannie/Freddie, VA/FHA, or the FmHA.

Sales of existing homes are slow but improving, up 5.6 percent in November to 4.68 million, an annual rate that's a little slower than expected. Details show gains across all regions along with a strong 6.7 percent rise in sales of single-family homes, the report's key component. Another plus is that prices didn't soften, up slightly to a median $170,600 to end a nearly six-month run of declines. Supply on the market fell for a third straight month yet at 9.5 months is still very heavy.


Another housing boost comes from third quarter GDP growth being revised up for the second month in a row, this time to 2.6 percent annualized from the prior estimate of 2.5 percent. And Q4 growth is looking to be even higher.


All of these indicators point to slow but steady growth in 2011. NAR chief economist Lawrence Yun is hopeful for 2011. “Continuing gains in home sales are encouraging, and the positive impact of steady job creation will more than trump some negative impact from a modest rise in mortgage interest rates, which remain historically favorable,” he said.

Yun added that home buyers are responding to improved affordability conditions. “The relationship recently between mortgage interest rates, home prices and family income has been the most favorable on record for buying a home since we started measuring in 1970,” he said. “Therefore, the market is recovering and we should trend up to a healthy, sustainable level in 2011.”

But any real estate recovery is still depending on whether interest rates stay below 5 percent. They have been rising of late, so that the 30-year conforming fixed rate is about 4.625 percent for a 1 pt. origination fee, up from 3.75 percent at its record low point. And so the Mortgage Bankers Association reported mortgage applications have trended down over the past 2 weeks, in line with the latest increases.


The four-week moving average of the purchase index is still at about the levels of 1997 - and about 17 percent below the levels of April this year before expiration of the homebuyer tax credits - suggesting weak existing home sales through January 2011, at least.

The bottom line is that housing values—and so sales—will only continue to improve substantially with improving employment. And this means improved wages and salaries that qualify more home buyers. There is no question that the economy will continue to improve in 2011. Let us hope that also improves the jobs market

Harlan Green © 2010

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