Part of the government's original $700 billion plan to purchase troubled mortgages and take them off banks' books is being shelved - primarily because of the long-time involvement to implement it effectively. Instead, the money will be used to quickly strengthen the capital position of financial institutions and support securitization for consumer financing. The goal is to get capital to lenders (banks, mortgage companies, other financial institutions) so that they can start issuing loans to consumers and companies. In one sense the plan is working; the LIBOR rates - the key rate measurement of liquidity flow in the financial system -- have begun to thaw after being essentially frozen. But in a greater respect the plan is not yet working: residential mortgage rates stubbornly carry a high spread above Treasury rates, commercial mortgage loans are non-existent and the banks are not still lending to small businesses.
The good news on the real estate front is that mortgages backed by Fannie Mae and Freddie Mac (now under the governance of the Federal Housing Finance Agency) have received stronger support. Treasury Secretary Henry Paulson recently said the following regarding the mortgage-backed securities of Fannie and Freddie: "The U.S. government honors its commitments and investors can bank on it." Let's all hope he's right on both counts. Still, there has been investor confusion about what "effective" vs. "explicit" guarantee of Fannie and Freddie debts actually means. That confusion has pushed up mortgage rates.
The Financial Crisis
Yes, we are in the midst of one of the worst financial crises in a generation. The confusion in the markets has also affected consumers -- some consumers mistakenly believe mortgage loans are not available. However, massive government efforts are being made to ensure mortgages flow to qualified consumers. There are loans out there.
Perhaps also a bit confusing for consumers, against this turmoil of financial and credit concerns: housing affordability has been improving consistently over the last few months. Affordability is as high as it's been since 2003. The latest NAR Housing Affordability Index stood at 135.2 for September - up from August's revised reading of 123.3 and a third consecutive monthly increase. That means that a family earning the median family income has 135 percent of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home.
A Few Bright Spots
That improved affordability has led to improved home sales. In September, existing-home sales rose more than five percent from the level in August. In Arizona, California and Nevada, sales rose 20 percent or more between the second and third quarters of 2008. In fact, 19 states experienced increased or no change in sales during that time.
Those home sales are helping to work off housing inventory. Shrinking inventory is another sign that the real estate market is stabilizing. Inventory of new homes has been falling since posting
a peak supply of 570,000 new homes in August 2006. As of September 2008, new-home inventory had fallen to 394,000. The inventory of existing homes has also declined - from an 11.2 month supply in April to a 9.9 month supply in September.
More Must Be Done - NAR's Role
While these signs are encouraging, more must be done, particularly given our economic contraction forecast of about two percent in the fourth quarter of this year, and a jobless rate that could easily surpass 7 percent in 2009. NAR research indicates that an interest-rate deduction of just 1 percentage point could result in as many as 840,000 additional home sales. That could further reduce the inventory of homes by as much as 20 percent.
To encourage more buyers into the housing market, NAR has proposed that the government buy-down mortgage interest rates to ensure fixed low rates for home buyers. NAR also presented a four-point plan to Congress last month recommending, in part, that the repayment feature be removed from the first-time home buyer tax credit, that the tax credit be extended to all buyers, and that higher FHA and conventional loan limits be made permanent - up to $729,000 in high-cost areas - to give buyers in these areas access to safer, more affordable mortgages. A meaningful shrinking of inventory can only occur with new set of buyers entering the market. Only then will home prices, Wall Street and the economy begin to turn toward a sustainable recovery.
Realtors® are Essential to Housing Recovery
While NAR will continue to press for additional housing stimulus, the housing recovery - and the subsequent economic recovery - also depends on restoring consumer confidence. REALTORS® are an essential part of that. Buying a home has been a path to long-term wealth accumulation for a vast number of homeowners. REALTORS® have the knowledge, experience and expertise to help their clients make informed, smart decisions in these difficult times.
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