March 11, 2008

Why Now?

If the real estate market has been suffering for close to two years, the questions revolve around..why now? Why are real estate prices falling so precipitously and why has job growth fallen into negative territory? Here is a memory test. Remember, the first year of the real estate slump? Sales were slow-but home prices were holding up quite nicely. This was because seller and builder concessions were not priced into the statistics. Now things are catching up. As a matter of fact, expect that prices will stay stagnant in the first stages of real estate recovery as well.

Job growth is also a lagging statistic. We have been losing jobs in the mortgage and real estate industries throughout the past eighteen months. But it takes months for these losses as well as losses in home equity to reach the general economy. Now the trickle down affect is upon us and it looks as though we will have net job losses as well as negative economic growth for the first quarter of the year. It looks as though another rate decrease from the Federal Reserve Board is a lock as well. The next question will be-will long-term rates come down in reaction to the next Fed move? Greenspan called it a conundrum when long-term rates did not rise significantly after the Fed raised rates over a two-year period. Will we see another conundrum on the way down? We do not see long-term rates moving down as far as short-rates have-but there is still room for some movement in this regard.

The Markets. Rates fell in the past week and these numbers were reported before the negative jobs report was released on Friday. Freddie Mac announced that for the week ending March 6, 30-year fixed rates averaged 6.03% down from 6.24% the week before. The average for 15-year fixed fell to 5.47%. The average for one-year adjustables decreased to 4.94% and five-year adjustables fell to 5.34%. A year ago 30-year fixed rates were at 6.14%. "Weak economic reports that indicated declines in the job market, slowing in manufacturing and low consumer confidence drove bond yields lower this week and mortgages followed," said Frank Nothaft, Freddie Mac vice president and chief economist. Interest rates for 30-year mortgages are now at the same levels as they were two weeks ago, erasing last week's upward jump. Meanwhile, the housing market continues to take a toll on the rest of the economy. Residential fixed investment shaved 1.25 percentage points off economic growth in the fourth quarter of 2007. More recently, the median sales price of new homes fell 15.1 percent in January, representing the largest annual drop on record. Residential construction fell 19.7 percent over the twelve-months ending January 2008, the largest decline since March 2007."

Current Indices For Adjustable Rate Mortgages
Updated March 7, 2008

The size of loans that can be guaranteed by Freddie Mac and Fannie Mae was raised last week by the Office of Federal Housing Enterprise Oversight. The new, higher loan limits will stay in effect through the end of the year, allowing the government sponsored enterprises (GSEs), to buy much higher-priced mortgages in some areas of the country. Also today, the size of the loans that the Federal Housing Authority (FHA) can insure was raised by Housing and Urban Development (HUD).Both moves will lower borrowing costs for buyers of higher priced homes, and aim to boost flagging real estate markets. Previously, Fannie and Freddie could only insure mortgages of up to $417,000, called conforming loans. The new loan limits for Fannie and Freddie vary by area based on local median home prices and go as high as $793,750 in Honolulu. Loan limits for FHA-insured loans were even lower; no more than $362,790. Now mortgages of up to $729,750 will qualify for FHA insurance. "Families in high-cost states have been priced out of FHA-backed loans," HUD Secretary Alphonso Jackson said in a speech before the Las Vegas Association of Realtors. "This has created a vacuum, filled by exotic subprime loans." Source: Associated Press

It may be the best time to buy a house in more than four years. According to a new report, home prices have dropped so quickly and so far that valuations - the difference between what a home should cost and its actual price - are the lowest they've been since 2004. The Cleveland-based bank National City Corp. together with financial analysis firm Global Insight, revealed Tuesday that more than 88% of the 330 housing markets surveyed showed price declines and improved affordability during the last three months of 2007. "Housing valuations are almost back to long-term norms," said National City's chief economist, Richard DeKaser. He called current affordability "the best in the past four years." But DeKaser cautioned that home prices could fall even further. "This isn't to say home price declines are over," he said. "We could move below historic norms. By the end of 2008, housing markets could be broadly under-valued." Source: CNN/Money