The first full week of August gives us a glimpse of how the housing market is responding to the end of the tax credit. Also we’ll take our weekly look at interest rates, mortgage purchase application trends (being a leading indicator), and a new government program that aims to reduce mortgage balances on underwater borrowers.
Pending Home Sales Fall
The National Association of Realtors announced its Pending Home Sales Index results this week, showing a continued decline in the wake of the home buyer credit expiring. The index was down 2.6% in June over May and 18% lower than June 2009 showing that without government intervention, the market has much room to improve. Regionally, the Midwest and Northeast were down 9.5% and 12.2% respectively, while the West was only slightly down (.2%). The South meanwhile was the only region showing a gain, up 3.7%.
While the index dropping further is no surprise, I think many were caught off guard on how much the index would drop year-over-year. This drop is large when compared to summer of last year, which many considered to be the bottom of the market. This is primarily because the credit vacuumed sales out of forward months, leaving the market to report dismal numbers during peak buying season 2010. Look for a continued downward or flattening trend for the next month or two, with slight increases following upon the expiration of the September 30th deadline to close.
Interest Rates Drop Below 4.5%
Incredibly, interest rates continued their decline, this time dropping below 4.5% for the first time. Even more amazing was the 15-year dropping below 4% to 3.95%. Most of this is due to GDP revisions, showing cumulative growth in GDP was reduced to half through second quarter 2010 from 1.4% to .6%.
Seeing interest rates continue to decline should spur more than just refinances. People will likely purchase because they simply can’t pass up both the prices and the rates. Because unemployment is the real issue, we likely won’t see anything in the way of major purchasing activity. Too many households are still stressed for the low rates to create a big impact.
Mortgage Purchase Applications Continue Rise
The Mortgage Bankers Association reported a 3rd consecutive rise in mortgage purchase applications this week, primarily due to the decreased interest rates. Purchase applications were up 1.5% over the prior week, marking only a slight increase. The index is up 7.1% over just 4 weeks ago.
While interest rates are making the thought of buying a home too good to pass up for many, the larger systemic issue exists of home ownership rates sinking. The slight rises we’re having here should be a leading indicator of an improved Pending Home Sales Index coming when the August numbers are reported in September. Only then will we start seeing the true picture of the housing market, which I suspect won’t be pretty.
FHA Introduces Short Refi for Underwater Homeowners
The US Department of Housing and Urban Development (HUD), introduced a short refinance opportunity for underwater homeowners. The program is outlined as an “effort to help responsible homeowners who owe more on their mortgage than the value of the their property”. Essentially the program aims to help 3 to 4 million homeowners by getting lenders to agree to write off 10% of the unpaid balance on their loan, reducing combined loan-to-values to no greater than 115%. Also the loan must not be an FHA insured loans. A letter has been published as a guidance letter to lenders on how to implement this new enhancement.
Ultimately this could help stabilize the market to some extent as home prices are expected to drift down due to employment stagnation. People who are severely underwater on their homes are more likely to default even if they’re able to keep up with payments. Many people are in this situation because of forced relocation for jobs and life changes. We’ll see if this program has the desired effect. I’m pessimistic on the fact that lenders are going to waive balances for people current on their mortgages. What about assistance for investors or are underwater? Want to prevent 10 or more foreclosures at a time?
The Difference Between Patience and Waiting
There’s a large contingent of people who are waiting to purchase investment property until the market declines further. Others are simply ready to make moves in real estate but are waiting for the “fat pitch” which seems to be coming around pretty often. The crowd that’s waiting for prices to fall is contributing to the price declines as deflationary pressures are creeping into the overall economy. This has the dangerous recipe of reverting the US into a Japan-esque decade. I anticipate while many wait on the sideline, smart money is already in the game particularly on the 1-4 unit side. The commercial crisis may still be coming.