Home Prices on the Rise While Mortgage Rates Remain Low

by Ed Ferrara

 

This past week, Freddie Mac released their U.S. Economic and Housing Market Outlook for the month of August, 2012 which revealed a much needed home price increase. The Freddie Mac House Price Index increased 4.8% from March to June, 2012 which was the largest quarterly increase in eight years.

Thirty-four states and the District of Columbia showed higher home values during the past 12 months through June, 2012. This is the largest number of states with positive appreciation on an annual basis since April, 2007. While home prices have increased, mortgage rates continue to remain at historic lows keeping affordability at high levels. FreeRateUpdate.com's survey of wholesale and direct lenders shows that mortgage rates remained stable this past week with 30 year fixed mortgage rates at 3.375%, 15 year fixed mortgage rates at 2.750% and 5/1 adjustable mortgage rates at 2.125%.

These are the lowest mortgage rates available with 0.7 to 1% origination fee for borrowers who have maintained a record of good credit. Home purchase loans and traditional mortgage refinances require borrowers to have steady employment and income, as well as, enough verifiable assets to cover the down payment and necessary reserves.

Today, many refinances are going through HARP 2.0, the Home Affordable Refinance Program, which increased to a 33% share of all Fannie Mae and Freddie Mac refinances in June. Since HARP was revised with no loan to value caps, the number of refinances through the program soared in June with the average number of refinance mortgages over 125% LTV accounting for 40% of volume, according to the Federal Housing Finance Agency. Some borrowers continue to have problems obtaining HARP as a number of lenders have overlays that are too difficult to overcome. There are still many other lenders who are eager to assist borrowers obtain a HARP 2.0 refinance and can be found by submitting a quick online form which is the easiest, quickest and most secure way to obtain the best HARP mortgage available.

According to FHA (Federal Housing Administration), refinances surged 198.3% during the month of June, 2012 with the streamline refinance accounting for 53.8%. The FHA streamline refinance with no cash out was expanded in June for mortgages that were endorsed prior to June 1, 2009 and offers these borrowers a reduced upfront mortgage insurance premium of .01% and annual mortgage insurance premium of .55%.

This is a cost saving measure together with low FHA mortgage rates that continue to remain stable. Current FHA 30 year fixed mortgage rates are at 3.125%, FHA 15 year fixed mortgage rates are at 2.625% and FHA 5/1 adjustable mortgage rates are at 2.625%. Prior to this offer of reduced insurance premiums that runs through the end of 2013, higher fees kept many borrowers away from refinancing. FHA loans normally have higher closing costs (APR) due to various FHA fees and the upfront mortgage insurance premium.
On a regular FHA purchase mortgage, these costs can be added to the mortgage amount in most cases or paid with seller concessions. Regardless of fees, FHA has several mortgage programs designed to help consumers become homeowners with a low down payment which continues to be popular with home buyers.

Remaining stable, jumbo 30 year fixed mortgage rates are at 4.125%, jumbo 15 year fixed mortgage rates are at 3.125% and jumbo 5/1 adjustable mortgage rates are at 2.250%. Having excellent credit is required in order for borrowers to obtain these lowest jumbo mortgage rates with 0.7 to 1% origination fee. Jumbo mortgage rates can be very competitive since these are mostly private loans held by the lender.

Even guidelines and approval conditions can differ from lender to lender. As more lenders re-enter the jumbo mortgage market, borrowers will have more options available to compare and should be shopping around for the lowest jumbo mortgage rates, as well as, flexible requirements. With rising home prices, jumbo mortgages will again become a popular and necessary non-conforming mortgage product.

MBS prices (mortgage backed securities) generally move mortgage rates in the opposite direction. There were no major changes in MBS prices that affected mortgage rates over the past week since a limited amount of U.S. economic data was released. Second quarter productivity increased at an annual rate of 1.6%. The trade deficit in the U.S. shrank during the month of June due to a decrease in imports and increase in exports. Import prices for July dropped 0.6% which was more than expected. China's exports rose only 1% and imports increased 4.7% from last July, both missing forecasts. The biggest news for the week was jobless claims which fell by 6,000 to 361,000 for the week ending August 4th according to the Labor department.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders’ rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.

NAR: Home Price Increase Has Downsides

Limited inventory may be boosting home prices, but buyer choices are stifled in an increasing number of markets, the National Association of Realtors (NAR) reported.






The association’s latest quarterly report showed that the median existing single-family home price increased during Q2 in 110 out of 147 metropolitan statistical areas (MSAs) compared to the same period in 2011. Of the remaining 37 MSAs, 34 posted price declines, and three remained unchanged.

The national median existing single-family home price was $181,500 in Q2, up 7.3 percent from the same time in 2011. This is the strongest year-over-year increase since the first quarter of 2006.

The second quarter’s results illustrated a marked improvement over the first quarter, which showed year-over-year price gains in only 74 MSAs.

Lawrence Yun, chief economist for NAR, said the organization expects prices to continue to rise in the future.

“It’s most encouraging to see a growing number of metro areas with rising median prices, which is improving the equity position of existing homeowners,” Yun said. “Inventory has been trending down, and home builders are still under-producing in relation to growing demand.”

Yun pointed out that price increases can also be attributed partially to a decreasing share of sales in low price ranges, where inventory tightened.

Distressed homes accounted for 26 percent of Q2 sales, down from 33 percent in Q2 2011. Drastic discounts from distressed sales usually work to bring the median home price down.

Since the summer of 2007, inventories have been trending downward steadily. The end of the second quarter saw 2.39 existing homes available for sale, a 24.4 percent drop from the same time in 2011.

NAR president Moe Veissi said that mortgage rates and historically low prices have increased buying power dramatically. The inventory in the lower price ranges needs to keep up with demand, he said.

“What we need now is additional inventory in the lower price ranges, so we hope banks will be releasing more foreclosure inventory into the market. With gains apparent in all of the price measures, banks also should have more confidence in expanding mortgage credit to home buyers using safe but sensible standards,” Veissi said.

The national median family income in the second quarter was $61,000. To purchase a home at the national median price, a buyer making a 5 percent down payment would only need an income of $39,000.

“Because the income required to buy to a typical home is very manageable by historical standards, any further decline in mortgage interest rates will have little effect. Changes in underwriting guidelines would have a far greater impact,” Yun said.

Existing-home sales varied from region to region, rising 1.3 percent in the Midwest and South but slipping 0.6 percent in the Northeast. In the West, tight inventory brought existing-home sales down 5.3 percent as the median home price jumped up 13.4 percent.

“Inventory is pretty tight in all price ranges in most of the West except for the upper end, which accounts for the sharp price gain,” Yun said.

Investing

By John Waggoner

It's pretty easy to see both sides of an investment argument. But it's hard to argue against buying a house now, assuming you can get a loan.

The housing cycle is a long one, in part because buying a house moves at a glacial pace, at least compared with the time it takes to buy a stock or bond. If you're not pre-approved for a mortgage, you have to submit to a credit check, which, these days, is only slightly less intrusive than a CIA background check. You have to get the home inspected. You have to figure out the various fees your bank charges, including the one marked "Just because we can."

• STORY: Mortgage rates top 3.5% for a second week

• COLUMN: Timber could be growth industry if housing soars

   

How long is a housing cycle? Pretty long. A relatively modest housing bubble, by today's standards, occurred in Boston in the late 1980s. Average home prices, adjusted for inflation, hit $310,000 in October 1987. Home prices didn't hit that level again until May of 2000. Someone who bought at the high had a long wait to get even — particularly in light of the standard broker's commission of 6%.

Home prices bottomed, however, in March 1993 — roughly six years after the top. History doesn't repeat itself precisely, but it's interesting to note that the top of the last housing bubble was six years ago, in 2006.

Why be bullish on housing?

•Prices. You can always buy low and watch prices go lower. But by many measures, home prices are still cheap. The median single-family home price — half higher, half lower — hit its nadir in January, dropping to $154,600, the lowest since October 2001, according to the National Association of Realtors. That's down from a high of $230,900 in July 2006.

Existing-home prices rose in June to a median $190,100, up 8% from June 2011. Those are still 2003 levels.
 

•Supply. The good news is that the enormous supply on the market is shrinking. It takes a wearisome amount of time for supply to shrink, in part because there are people who have been wanting to sell their homes for many years, but haven't been able to get the price they want. As prices rise, more homes come on the market.

Nevertheless, Ned Davis Research, a respected institutional research firm, estimates that excess supply of houses on the market should be eliminated by the end of 2013. When excess supply dries up, people start building more new houses, which has the virtuous effect of reducing the unemployment rate and increasing the economy generally.

•Mortgage rates. The average 30-year fixed-rate mortgage rate is 3.59%, according to mortgage giant Freddie Mac. That's above the all-time low of 3.49% the week of July 26, but close enough. It's conceivable that at some point in the next 30 years, your interest rate would be less than the rate of inflation.

Assuming you financed 80% of the median single-family home, or $152,080, your mortgage payment would be about $691, excluding taxes and other irritations. About $5,589 of your first year's payments would be tax-deductible mortgage interest.

Thanks mainly to low home prices and interest rates, the NAR's housing affordability index rose to its highest level on record. (The higher the index, the more affordable the average home. The index also takes into account average family income, which has been falling since 2008.)

What could go wrong? All sorts of things. You may not be able get a loan. Bankers are insisting on checking things that seemed far too troublesome during the housing bubble, like whether you have a decent credit rating, a down payment, or a job.

The other problem is that houses are leveraged investments — that is, you borrow money to buy them. Let's consider the example above, where someone buys a $190,100 house and finances $152,080. Your investment is $38,020. Let's say that the worst happens: home prices fall, and you have to sell the house for $175,000.

Unfortunately, the bank won't split the loss with you. You'll get back $22,920 from the sale, and wave goodbye to $15,100 of your down payment. That's a 40% loss, even though your house has fallen 8% in value.

There are other risks with home ownership, ranging from termites to ghosts in the hall closet. But if you're planning to live in your home for a long time, you have the money, and you can get financing, it's a fine time to buy.

Homebuilder Confidence in U.S. Increase

Confidence among U.S. homebuilders climbed in August to the highest level in more than five years, affirming the improvement in residential construction.
The National Association of Home Builders/Wells Fargo builder confidence index rose to 37, higher than projected and the best showing since February 2007, according to figures from the Washington-based group released today. The median forecast in a Bloomberg survey of economists called for no change from July’s 35. Readings below 50 mean more respondents said conditions were poor.

Enlarge image

Confidence improved among builders in two of the four U.S. regions, led by the Midwest, where it rose to 42, the highest level since October 2005, from 33 the prior month. Photographer: Daniel Acker/Bloomberg

 

6:54

Aug. 14 (Bloomberg) -- Mark Kiesel, portfolio manager at Pacific Investment Management Co., and Robert Shiller, an economics professor at Yale University and co-creator of the S&P/Case-Shiller index of property values in 20 cities, talk about the U.S. housing market. They speak with Trish Regan and Adam Johnson on Bloomberg Television's "Street Smart." (Source: Bloomberg)

 

11:17

Aug. 15 (Bloomberg) -- Byron Wien, vice chairman of Blackstone Group LP’s advisory services unit, talks about the outlook for the Standard & Poor’s 500 Index and investment strategy. Wien, talking with Deirdre Bolton on Bloomberg Television's "In the Loop," also discusses the U.S. presidential election and European debt crisis. (Source: Bloomberg)

Builders such as PulteGroup Inc. (PHM) are benefiting as less- expensive properties and record-low mortgage rates entice buyers. At the same time, faster hiring and fewer foreclosures are needed to bring about bigger gains for the industry that precipitated the worst recession in the post-World War II era.
“The outlook appears to be brightening,” Barry Rutenberg, chairman of the NAHB and a builder from Gainesville, Florida, said in a statement. At the same time, “there is still much room for improvement.”
Other reports today showed production at factories, mines and utilities climbed more than forecast in July, and consumer prices were unexpectedly little changed.

Stocks Climb

Shares rose as the figures showed the world’s largest economy was sustaining the recovery that began in June 2009. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,406.14 at 10:08 a.m. in New York. The S&P Supercomposite Homebuilding Index advanced 0.8 percent.
Estimates for the builder sentiment index of 46 economists in the Bloomberg survey ranged from 31 to 38. The gauge, which was first published in January 1985, averaged 54 in the five years leading to the recession that started in December 2007. It reached a record low of 8 in January 2009.
The builders group’s index of present single-family home sales climbed to 39 this month from 36 in July and a measure of sales expectations for the next six months rose to 44 from 43. Both gauges reached the highest level since 2007. The index of buyer traffic increased to 31, the highest since May 2006, from the prior month’s 28.
The survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to gauge the outlook for the next six months.

Regional Breakdown

Confidence improved among builders in two of the four U.S. regions, led by the Midwest, where it rose to 42, the highest level since October 2005, from 33 the prior month. The South reported an increase to 35 from 33. The sentiment index fell to 25 from 34 in the North, and declined to 40 from 43 in the West.
The report “provides further evidence of the gradual strengthening that’s occurring in many housing markets,” David Crowe, the association’s chief economist, said in a statement.
PulteGroup, the largest U.S. homebuilder by revenue, posted a better-than-estimated profit and a 32 percent jump in orders in the second quarter, the company said July 26.
With cheaper mortgage rates and homes, “we are very optimistic about housing demand,” Richard Dugas, Pulte’s chairman and chief executive officer, said on a July 26 conference call with analysts. “That being said, we are keeping a watchful eye on the macro trends, which ultimately need to turn more positive for the recovery to expand further.”
Home-improvement retailer Home Depot Inc. (HD) is also benefiting. The Atlanta-based company yesterday reported second- quarter profit that topped analysts’ estimates and raised its forecast for profit this year as customers spent more on remodeling projects.