Housing Market Insight - Week of August 16th

Looking back, last week offered the much awaited HAMP program re-default rate revisions, an update on interest rates, mortgage purchase activity, and a quick count of REO inventory over at Fannie, Freddie, and FHA. We finish up with some thoughts on the current deflation scare and what it means to you as an investor.

HAMP Re-default Rates Revised

The revised re-default rates are finally out. The administration originally reported that of the modifications completed in Q309, 7.8% of them fell behind after 6 months. The actual number was 14.8%. Of those, 9.7% fell behind 90 days, far more than the 2.3% reported in July. After 9 months 19.6% of those loans were 60 days or more behind, much more than the 7.7% previously reported. Bank of America Merrill Lynch Global Research compiled the new analysis according to an article on Housing Wire.

I tend to agree with the Housing Wire article, that while the numbers came in worse than previously reported, the program isn’t a total failure. It’s fallen far short of helping the 3 to 4 million homeowners it was intended to but did slow down the foreclosure pipeline. Of course, doesn’t slowing down the foreclosures slow down the housing recovery?

Interest Rate Alert: Another Record Low

In Freddie Mac’s most recent interest rate survey, the 30-year fixed rate fell to 4.44%. This mark a new record low as interest rates continue to slide. In most recent week, rates slid .05%. The 15-year rate fell to 3.92% also a record low. Freddie Mac’s chief economist Frank Nothaft, was quoted saying; “Low rates are helping to heal many battered local housing markets by increasing home-purchase activity.

While interest rates continue to retreat, they’re doing little to spur significant home purchases. Though up 4 weeks in a row, the minor increase in mortgage purchase applications isn’t going to impact the market in a big way. I feel that Nothaft’s quote should be directed more towards the home buyer credit rather than rates.

Mortgage Purchase Applications Advance for 4th Straight Week

The Mortgage Bankers Association reported that mortgage purchase applications rose 0.3% from 1 week earlier. While this is now the 4^th consecutive rise in the purchase application index, the index is down over 34% over 1 year ago. The refinance index also increased 0.6% from the prior week.

The rise in mortgage purchase applications is too minor celebrate but I do think it is a positive sign, despite obviously weak confidence. The purchase application index rise may translate to better pending and existing home sales in the near future. The last 4-week rise should impact September and October existing home sales. New home sales would see the effect in August.

REO Inventory Surge for FHA, Fannie Mae, and Freddie Mac

The combined REO inventory for Fannie, Freddie, and FHA at end of Q2 2010 stands at over 236,000, up sharply from 135,000 in Q2 2009. Both Fannie and Freddie are now standing at record REO inventory. The increase from Q1 2010 to Q2 was 13% as the trend is pointing to further increases.

Many of the people that I know in the industry are steering away from Freddie and Fannie deals that have deed restrictions, prohibiting flipping of properties for more than a certain amount in the first 90 days. I wonder if they could reduce their REO inventory by removing the deed restrictions that are keeping investors out. It certainly couldn’t hurt. This is currently causing some non-Freddie/Fannie REOs to be bid up in price with few bidders on the properties with deed restrictions. Something this simple can severely affect appraisal values in a neighborhood.

Deflation Threat?

With nearly 2/3 of economists more worried about deflation than inflation, should investors be concerned? The threat of deflation is real. And if deflation takes hold that could mean long term sustained low real estate prices and declining rents, leaving the housing market in a depressed state. Owning a levered asset like real estate plays well in inflationary times as fixed rates allow the value of the debt decline when rents and home prices rise. So what are you to do as a real estate investor? Fortunately real estate is highly localized. Focus on the areas of tight supply in your market. Find what price points are selling, who’s buying them, and how the transactions are being structured. Personally my firm is focused on the areas where owner occupant transactions are still happening. These buyers create a solid bond floor and minimize your deflationary risk.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.