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Sliding Home Prices, Higher Interest Rates, and Slow Mortgage Activity: The Week in Housing

Ryan Hinricher
3 min read

This week housing market news was largely bearish with declining home prices being the top story.  Also are interest rates closing in on last year’s rates?  Mortgage activity is reversing to the negative as well.  But a sliver lining in new home sales keeps analysts optimistic.

Case-Shiller: Home Prices Continue 2nd Slide

Home prices continue to decline as reported in the November Case-Shiller Home Price Index. The 10-City Composite declined 0.4% in November, while the 20-City Composite reported a decline of 1.6%(month-over-month).  On the 20-City Composite, 19 of the 20 markets reported a number lower in November from October.  In the last year the best performing markets are Washington, DC (3.5%), Los Angeles(2.1%), San Diego(2.6%), and San Francisco(0.4%) posted year-over-year gains.  At the bottom were Atlanta(-7.9%), Chicago(-7.6%), and Detroit(-7.1%).

With the recent data, we’ll likely be seeing a continued decline in home prices.  The question is, will this accelerate? Also it’s important to keep in mind we’re just now seeing November’s numbers.  This means reality today is probably a bit worse than we’re seeing reported. Prices are still 3-4% away from a technical double-dip.  We may see homes reach this juncture by mid-2011.  As an investor, the potential declines shouldn’t affect you if you’re investing for income. The values should only impact you if you’re selling or when you’re getting appraisals done for financing purposes. Expect further price declines in the near term.

Interest Rates Move Slightly Higher

Freddie Mac reported a slight increase in mortgage rates this week. The 30-year fixed rate rose from 4.74% to 4.80%.  The 15-year fixed rate rose from 4.05% to 4.09%.  Rates are still below last year at this time when they were 4.98% and 4.39% respectively.

Rates were higher primarily due to improvement in economic activity. Frank Nothaft, chief economist of Freddie Mac was quoted as saying, “Mortgage rates followed bond yields a little higher this week amid positive economic data reports from The Conference Board that suggest the economy is strengthening.” Interest rates are still relatively low though the 30-year is 0.63% higher than the cyclical low in November.  This coupled with great affordability conditions means excellent terms are available for home-buyers and investors.

Mortgage Activity Declines

The Mortgage Bankers Association reported a large drop in mortgage activity.  The Market Composite declined 12.9% from the prior week.  This decline was led by the Refinance Index which dropped 15.3%, while the Purchase Index dropped 8.7%.  The Purchase Index has been in decline over the last few weeks with the 4-week moving average is down 3.7%.

The deceleration in mortgage activity in January is concerning, particularly that of purchase activity.  Rates have been somewhat steady over the last few weeks following the steep rise in December, but I think people are reacting to the severe winter weather in many areas and holding off on purchasing.  What’s concerning is that the current weather pattern could lead to some areas of the US reporting a step pull back in economic activity.  We just saw this happen in the form of an economic decline in the UK during Q4.

New Home Sales Boom in December
The Census Bureau reported that sales of new homes rose in December to a seasonally-adjusted annual rate of 329,000.  This is 17.5% higher than November but still 7.6% below December 2009.

First a state-sponsored tax credit was due to expire in California so a rush to sign contracts there contributed to the spike in activity.  This provided an immediate impact to the numbers as new home sales are booked at time of contract.  Whether or not this was in part due to government intervention, the positive report is good for the market.  New home sales are expected to improve in 2011 as they come off cyclical lows.  New homes may rebound slower than the rest of the market because of the lack of building, and builder access to credit.

Parting Thoughts

This week we’ll see the quarterly report on homeownership rates and vacancy. We’ll continue to see the homeownership rate decline and the shift towards renter nation.  As the homeownership rate declines more housing will shift towards investor-owned.  Another 2% decline will get us in the 65% range which will be nearly 4% below peak of 69.7%.  Be mindful of this.  Aside from that this year stands to look a lot like last year for housing only with improving fundamentals.  Expect prices to remain low. Expect rates to be relatively low.  Expect yields to be high on investment property.  The remainder of the news surrounding the housing market will be negative.  Don’t let this affect YOUR investment goals if you’re long on real estate.

Photo credit: Wikimedia Commons

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