New Home Sales Surge, with Boost from Tax Credit

A newsletter arrived in my in-box, today, with these manic pronouncements:

The week ended on the most dramatically impressive new home sales numbers in 47 years. March’s 26.9% increase was the biggest monthly sales gain since 1963, taking us to a 411,000 annual rate! Supply dropped to 6.7 months, inventories fell to 228,000 and the median price went to $214,000, up 4.3% versus last year. Some put the sales surge to the soon-to-expire tax credit, but the facts remain that the economy IS recovering and homes ARE substantially more affordable!

The day before, March existing home sales came in UP 6.8% at a 5.35 million annual rate, UP 16.1% from a year ago, with all regions showing gains! The existing home median price went to $170,700, UP 0.4% from a year ago. These good numbers reversed a three-month slide and sent the supply of existing homes down to 8.0 months.
The new home sales thus reported were from the Commerce Department, and the existing sales from the National Association of Realtors (NAR).

It’s true, the impressive returns were due in no small part to an improving economy. But more sober heads were quick to remind us that these numbers masked ongoing weakness in the housing market. In fact, they owed much to the $8000 tax credit, expiring in a few days, and mortgage rates held artificially low for five quarters — near 5.0% — by the Fed.

New homes are selling too slowly, facing as they do bargain prices for existing homes, while existing homes must compete with a huge overhang of foreclosures. In the Boston metro area, at least, pickings are slim for buyers, as prospective sellers bide their time. The housing market is not out of the woods yet, by any means, the grayheads warn.

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Will Rising Mortgage Rates Further Dampen Home Prices?

The question has been raised by some bloggers as to whether rising mortgage rates, widely predicted, could further dampen home prices. The argument is that rising rates would shrink the pool of eligible buyers, thus weakening demand for homes. If such a linkage comes to pass, it would surely pose a conundrum for buyers: should they wait for prices to go down, or act now before rates go up? It could keep a body sleepless at night.

Tim Ellis over at Seattle Bubble has thoughtfully graphed both rates and prices since 1950, highlighting in yellow two extended periods when rising interest rates preceded falling home prices (see the chart). Over the past 20 years, of course, there has been no such correspondence. I’m not an economist, but I have to wonder if these two historical examples are relevant for us today: every era is different.

I continue to be optmistic that in a few years time, home prices will once again start going up, albeit more slowly, and will do so for the same reason that interest rates will go up: increased economic activity, more people working, more wanting to buy homes. The increased demand for money, and for homes, will put upward pressure on the cost of both.

Given the depth of the recession, we should not be surpised, however, if progress comes slowly, by fits and starts, and with some backsliding along the way, some further, moderate drop in home prices. There will also be different outcomes in different parts of the country, reflecting local conditions.

Tim wrote his piece in response to a reader who reports feeling pressured to buy before rates go up. I’ve always believed, and I’ve always advised buyer clients to this effect, that noone should feel pressured to meet a deadline, be it for the tax credit, or to get a jump on rising interest rates. At the same time, it would be feckless to ignore such issues altogether. The key is to keep these externalties in perspective, and include them with all the other factors — personal and financial — that must go into making such an important decision.

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Is This A Good Time to Buy a House? Part 2: Mortgage Rates

The housing market is not yet fully restored to health, and may be backsliding a little. That is the view of many analysts based on recent sales and price data. Year-to-year, sales and prices continue broadly upward, but for each of the last several months they have declined in many markets, leading to that pessimistic assessment.

Such unneven progress should come as no surprise, considering the depth of the recession. As with the economy as a whole, we can expect the housing recovery will be slow and halting.

The good news is that the National Association of Realtors Pending Sales Index was up in February, suggesting another surge sparked by the second home buyer tax credit. And the Fed’s purchase of Fannie and Freddie mortgage securities ended in March with no uptick in interest rates, as the private market filled the gap.

Most analysts believe, however, that mortgage rates will gradually increase in the months ahead, due to improving economic activity, and could end the year as high as 6.0% for a 30-year, fixed-rate mortgage. Some put that number even higher, with further increases in 2011.

Is this a good time to buy? Prices are beginning to stabilize (that’s the best we can say, for now), and interest rates are as low as we can expect them, perhaps, for years to come. Over the life of the mortgage, a one-point increase in the rate could add as much as 19 percent to the cost of your home. Using any mortgage calculator, you can also see what it would do for your monthly payments. That should convince you — if nothing else will — that this may indeed be a good time to buy, if your personal circumstances favor it.

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Is This A Good Time to Buy a House? Part 1: Home Prices

Left:  Recent Home Price Trends – as Index % Change from Year Ago
Right:  Historical Home Price Trends – as Index Monthly Levels (Jan. 2000 = 100)

The Mortgage Bankers Association released data this week suggesting that the national tide of foreclosures may be turning. On the same day, The New York Times reported other data to the effect that foreclosures already in the pipeline will lead to further increases before we finally see any real improvment.

Some experts believe that the backlog of foreclosures will continue to depress housing values for several more years. Others argue that prices have already stabilized. The closely watched S&P/Case-Shiller Home Price Index, appears to support the latter conclusion. It’s latest report shows prices improving, albeit slowly and unevenly, across the country.

The top chart shows the annual percent change in the composite S&P/Case-Shiller Home Price Indices, and in the index for Metro Boston. (The numbers are not seasonally adjusted.) As you can see, Metro Boston has finally broken through into positive territory. That means prices are growing again, on a year-to-year basis, for the first time since May 2006. Of course, Metro Boston is a large area and market conditions will vary from town to town. Five other metro areas now share the distinction of appreciating home prices.

The bottom chart compares the history, by month of a key S&P/Case-Shiller Home Price Index, and of that for Metro Boston. (The numbers are not adjusted for inflation. 100 equals Jan. 2000. Metro Boston’s high was May 2006; its low was March 2009; the latest is at the level of July 2003, for a 14% net decline from the peak.)

S&P/Case-Shiller Home Price Indices are based on repeat sales of single-family homes. They are backward-looking, released with a two-month lag. Each monthly report comprises a three-month rolling average. So, for example, the latest report — that for December 2009 — comprises data for October, November and December.

Some analysts worry about drawing any conclusions from such “old” data. Others point to the massive government intervention in the housing market, that makes predictions even more difficult than usual — some say, impossible. Nevertheless, when the indices are graphed, the recent home price trends become readily apparent.

In some metro markets, the rate of price improvement over the summer of 2009 has not been sustained, causing concern among analysts. In the present, fragile stage of the recovery, any negative numbers feed speculation about a second “dip” in the recession. Some fall-off in home prices was to be expected, however, after expiration of the first homebuyer tax credit. We’ll likely see the same after expiration of the second.

To be continued…

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Fannie Mae Offers New Incentives for Homebuyers

FannieMaeFannie Mae is offering a 3.5% incentive* for buyers who purchase and close on a Fannie Mae-owned home between January 28 and April 30, 2010. Buyers purchasing properties listed on HomePath.com that are closed within this period may receive up to 3.5% of the final sales price for closing costs; the purchase of new Whirlpool® appliances by Fannie Mae; or a mix of closing costs and appliances, at the buyer’s discretion, up to the maximum 3.5%.

For a buyer to be eligible for this incentive, his/her offer must be accepted on or after January 28, 2010; the sale must close before May 1, 2010; and the buyer must be an owner-occupant; investors are excluded.
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*Lenders may impose their own limitations on the use of the 3.5% incentive, so buyers should consult their lenders for guidance.

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FHA Toughens Down Payment Rules

Federal Housing Administration

The Federal Housing Administration will raise the minimum down payment for its least credit-worthy borrowers, the agency announced on January 19.

Borrowers with credit-rating scores below 580 will be required to put down at least 10 percent. Those with a credit score of 580 or better will still be eligible for down a payment of only 3.5 percent.

The FHA will also increase its upfront mortgage insurance premium from 1.75 percent to 2.25 percent. In addition, the agency is expected to seek congressional approval for raising annual mortgage insurance premiums — the premiums paid by borrowers over the life of the loan — above the current 0.55 percent maximum. The new limit it will seek has yet to be announced.

These changes are among a number the FHA is making to ensure its own long-term financial soundness. By modestly tightening some program requirements, the FHA is trying to strike a balance between stabilizing the market with qualified buyers and overwhelming it with unqualified borrowers.

For more information on the FHA changes, see a summary of all changes at REALTOR.org.

Source: Reuters News, Corbett B. Daly (01/19/2010)

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Tax Credits to Expire June 30: Why So Early?

Sold!

Under the newly revised terms for tax credit eligibility, a home buyer must enter into a binding sales contract by April 30, and close on the sale no later than June 30, 2010. These deadlines apply to both first-time and repeat buyers. Congress has made it clear these time limits will not again be extended.  Read more»

Why, you might ask, are the deadlines so early? Practically speaking, it means home buyers may be looking for a house while there’s still snow is on the ground. Well, that’s the idea! Concerned about cost, Congress is trying to gain some leverage. The plan is to spur early sales, in order to build momentum going into the spring market. Only time and home buyers will tell if that is a vain or inspired hope.

Meanwhile, home prices are beginning to inch up, not only in metro Boston, but in many other parts of the country as well, according to the closely watched S&P/Case-Shiller Home Price Index. Read more»

And the Fed is scheduled to end its program of buying Fannie and Freddie mortgage-backed securities on March 31, which will almost certainly usher in a new period of higher mortgage interest rates.  Read more»

So, the coming months present both a window of opportunity and a challenge for home buyers. Historically low interest rates, low home prices, and a tempting tax-credit must be weighed against a slowly improving, but still uncertain economy.

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