Sales of existing homes jumped up unexpectedly in February, according to the National Association of Realtors, while a separate report found that home prices in many areas across the country dropped to record lows.

The NAR reported last week that existing-home sales increased by 5.1 percent in February to a seasonally adjusted annual rate of 4.72 million units, up from 4.49 million in January.

First-time home buyers made up about half of all buyers last month, according to NAR chief accountant Lawrence Yun. “Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February,” he said. “Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.”

NAR President Charles McMillan added that the recent government amendments to the tax code were a big help in sales. “It appears most of the increase in buyer traffic occurred in the latter part of the month after the $8,000 first-time buyer tax credit was put in place,” McMillan said. “At the same time, mortgage purchase applications have risen, so we expect to see sales picking up around late spring.”

Mortgage interest rates have also been crucial to increasing sales. Mortgage giant Freddie Mac reported that the national interest rate on a 30-year fixed-rate mortgage averaged 5.13 percent in February, up slightly from the previous month, but still near record lows. And interest rates have continued to move downward in March, potentially signally more housing market activity.

Meanwhile, the home prices dropped by a great deal in January, according to a report Tuesday of the  Standard & Poor’s/Case-Shiller index. The index showed that home prices in 20 of the country’s major cities fell 19 percent from the previous year, the largest decrease in the index’s eight year history.

At least 14 cities posted double digit declines in home prices, but some areas started to show an easing in downward moving prices. These include Cleveland, Los Angeles, Las Vegas, and Washington D.C.

And while all the cities showed some sort of decline, those that had the smallest rates of decline were Dallas, Denver, and Cleveland, all showing a roughly 5 percent decrease in prices in the past year.

And while no one likes to see the value of their own home fall, these price declines may continue to help correct the housing market, making homes more affordable for newcomers and more attractive for investors.

After the Fed revealed plans to buy up more treasury securities, interest rates on long-term U.S. mortgage rates fell to their lowest average on record, according to mortgage giant Freddie Mac Thursday.

“The Federal Reserve’s announcement that it intends to purchase Treasury securities over the next six months caused bond yields to drop and mortgage rates followed,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Rates for 30-Yr FRMs peaked last year at 6.63 percent on July 24th. With this week’s 30-Yr FRM, the interest rate difference is almost 2 percentage points, which amounts to a savings of about $225 in monthly mortgage payments for a $200,000 loan.”

The average rate on a 30-year fixed rate mortgage (FRM) dropped to 4.85 percent, excluding fees, during the week ended March 26, 2009, from 4.98 percent the previous week. The rate has never been lower during the 38-year history of the weekly Freddie Mac survey. One year ago, the average rate was 5.85 percent.

Fifteen-year fixed rate loans carried an average rate of 4.58 percent, a decrease from 4.61 percent the week before. This is a new record low as well, the lowest on record since 1991 when Freddie Mac began collecting information on the 15-year FRM. Last year at the same time, the average rate was 5.34 percent.

Interest rates on one-year adjustable rate mortgages fell to 4.85 percent, down from 4.91 percent a week earlier. During the same week of 2008, the average rate was 5.24 percent.

The mortgage market is apparently responding well to the new, lower rates.“Potential homebuyers are taking notice of these historically low mortgage rates,” Nothaft commented. “Both new and existing home sales rose 5 percent in February. First-time homebuyers accounted for half of all existing home sales, according to the National Association of Realtors. In addition, mortgage applications for home purchases consecutively rose over the first three weeks in March, based on figures published by the Mortgage Bankers Association.”

The U.S stock market saw upward movement after Treasury Secretary Timothy Geithner revealed new details of the Department’s mortgage bailout plan.

The Dow Jones Industrial shot up 3.5 percent by mid-morning following the announcement, an incredible improvement over early February when Geithner initially introduced the plan with vague details and few specifics; that day the Dow Jones dropped 4.6 percent.

The revised plan basically gives private investors more incentive to buy up “toxic” mortgage-backed securities from their holders.  (The Treasury plan also tried to put a more positive spin on these bad mortgage loans by calling them not “toxic loans” as the entire financial sector has for the past year, but as “legacy assets.”)

The Treasury will use up to $100 billion of tax-payer Troubled Asset Relief Program (TARP) funds to subsidize private investment in these “legacy assets,”  in hopes of helping buyers snatch up $500 billion worth such assets, taking them out of play for the mortgage market and speeding up the correction.

“This approach is superior to the alternatives of either hoping for banks to gradually work these assets off their books or of the government purchasing the assets directly,” the Treasury said in a briefing paper. “Simply hoping for banks to work legacy assets off over time risks prolonging a financial crisis, as in the case of the Japanese experience. But if the government acts alone in directly purchasing legacy assets, taxpayers will take on all the risk of such purchases—along with the additional risk that taxpayers will overpay if government employees are setting the price for those assets.”

One of the new features of the plan that seems to have struck a good chord with the financial markets is that the price at which toxic assets will be bought up will be set through open auctions, creating a market-led price rather than an arbitrary government-set price.

Private investors will be able to contribute as little as 6 percent of their own capital for those purchases, with the government subsidizing the remainder of the cost. Yet to make this more palatable to the average taxpayer, Geithner said Monday that the investors will be responsible for the risk first and foremost.

“Their entire capital will be at risk, that’s the important thing,” he said.  He also claimed that if things go well, the government and taxpayers will profit. “If there’s a return over time, which we expect there will be, taxpayers will share in that return.”

There are no guarantees that investors will take part in the new plan, but based on the markets’ reaction to the new details there are likely to be plenty of participants.

After the Federal Reserve committed to buy up even more toxic mortgages at its bi-monthly meeting, interest rates on long-term U.S. mortgages dipped back down under the 5 percent mark again, according to mortgage giant Freddie Mac Thursday.

“Following the March 18th Federal Reserve monetary policy statement, which announced further spending initiatives on financial assets, long-term bond yields plummeted,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Yields on 10-year Treasury bonds fell by about a half percentage point after the announcement, marking the largest one-day decline since October 20, 1987.”

The average rate on a 30-year fixed rate loan dropped to 4.98 percent, excluding fees, during the week ended March 19, 2009, down from 5.03 percent the previous week. The current rate is just slightly above the all-time low from the week of January 15, 2009 when it hit 4.96 percent. One year ago, the average rate was 5.87 percent.

“Long-term mortgages followed bond yields lower for the second week as reports of slower industrial production suggested that business spending might ease this year,” Nothaft also pointed out. “Output at factories declined for the fourth consecutive month by 1.4 percent in February driven by declines in computers and machinery and experienced the largest 12-month drop since June 1975. In addition, factory capacity utilization slumped to 70.9 percent, matching the lowest rate since records began in January 1967.

Rates on the 15-year fixed rate mortgage loan fell to 4.61 percent, from 4.64 one week earlier. According to Freddie Mac records, the current rate is an almost six year low. Last year at this time, the average rate was 5.27 percent.

Interest rates on one-year adjustable rate mortgages however, increased in the latest week, growing to 4.91 percent from 4.80 percent. During the same week of 2008, the average rate was 5.15 percent.

The U.S. economy and mortgage markets will most likely begin to recover by the beginning of next year, according to statements from Federal Reserve Chairman Ben Bernanke Sunday.

“We’ll see the recession coming to an end probably this year,” Bernanke said during an interview with on the CBS “60 Minutes” program. “We’ll see recovery beginning next year.”

He mentioned that the key to an economic bounce back will be revamping the financial markets.

“Until we get that stabilized and working normally, we’re not going to see recovery, but we do have a plan. We’re working on it,” he said.

The current year will be one of moderating decline, according to Bernanke, with the downward trends bottoming out before 2010. This means unemployment may continue to rise in 2009 but not by such dramatic figures as in the past several months.

Bernanke has been the Chairman of the Fed since 2006 when he took over the reigns from Alan Greenspan. Bernanke has taken a lot of flack in the past year for the Fed bailout actions on behalf of failing U.S. banksand lenders.

“There were many people who said, ‘Let them fail.’ You know, ‘It’s not a problem, the markets will take care of it.’ And I think I knew better than that,” Bernanke said, claiming that to let them fail would have caused system wide chaos.

And while he sympathizes with the many upset Americans over the bailout last year of insurance company American International Group (AIG), he defended the action as necessary.

“Of all the events and all of the things we’ve done in the last 18 months, the — the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG,” Bernanke said. “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, we had a situation where the failure of that company would have brought down the financial system.”

His interview did end on a positive note though. “I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain — the most powerful and dynamic economy in the world.”

Following reports of weak economic growth, rates on long-term mortgage loans fell in the latest week, according to mortgage financier Freddie Mac Thursday.

“Mortgage rates followed bond yields higher this week following reports of record continuing jobless claims and a downward revision in economic growth in the fourth quarter of 2008,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Real Gross Domestic Product was revised from a 3.8 percent decline to a 6.2 percent drop in the fourth quarter mostly led by a 4.3 percent fall in consumer spending, which was the largest decrease since the second quarter of 1980.”

The average rate on a 30-year fixed rate mortgage dropped to 5.03 percent, excluding fees, during the week ended March 12, 2009, down from 5.15 percent the previous week. One year ago, the average rate was 6.13 percent.

Rates on 15-year fixed rate home loans averaged 4.64 percent, a decrease from 4.72 percent the week before. Last year at this time, the average rate was 5.60 percent.

The average interest rate on a one-year adjustable rate mortgage fell to 4.80 percent, doen from 4.86 percent last week. During the same week of 2008, the average rate was 5.14 percent.

In addition to the reports of weak GDP figures, Nothaft commented that negative housing data also had a downward effect on rates this week.
“The housing market continues to slow as well,” he said. “New home sales fell 10.2 percent in January to the slowest pace since records began in January 1963 while pending existing home sales slowed by 7.7 percent, the weakest since the series began in January 2001. More recently the Federal Reserve noted in its March 4th regional economic report that residential real estate markets remained in the doldrums in most areas, with only scattered, very tentative signs of stabilization.”

Yet there may be a silver lining to the gloomy economic news. “Given the recent historically low mortgage rates, homeowners have a strong incentive to try and refinance,” Nothaft said.

The number of U.S. home mortgages that are delinquent or in foreclosure has climbed to a record high of 11 percent, according to a report Thursday from the Mortgage Bankers Association.

The MBA’s National Delinquency Report found that delinquencies alone, measured by borrowers behing at least one month behind in their mortgage payments, increased by 8 percent in the last quarter of 2008.

“Subprime ARM loans and prime ARM loans, which include Alt-A and pay-option ARMs, continue to dominate the delinquency numbers,” Jay Brinkmann, chief economist for the MBA, said in a prepared statement. “Nationwide, 48% of subprime ARMs were at least one payment past due, and in Florida over 60% of subprime ARMs were at least one payment past due.”

While the current numbers represent record highs in the 36-year history of the MBA survey, they may not paint a complete picture of today’s housing market. The percentage of Americans who are homeowners grew dramatically during the recent housing boom when financing was cheap and readily available. Many entered the ranks of homeowning, who were obviously not financially able to take on that responsibility, as evidenced by all the sub-prime, or poor credit loans that were in initiated in the last five years and that are now in delinquency or foreclosure.

When the unsustainable housing bubble burst, those who were never truly able to afford the homes they  bought defaulted on their loans, a glut of foreclosed homes entered the market, investors got nervous, the stock market plummeted and the general economy hit the breaks, leading to job loss and foreclosure among even those traditional, good credit borrowers who entered the housing market with proper precautions. 

Many see this latest report as a further call to action for Washington politicians, but based on the circumstances of the situation, it is questionable whether saving homeowners from foreclosure will truly correct the housing market and the economy. An unsustainable situation has begun the natural process of rebalancing itself. And while some on Capitol Hill are horrified at the possibility, true equilibrium for the housing market may mean that many American homeowners may have to give up that title until they are actually able to afford it on their own.

For the third straight week, long-term U.S. mortgage interest rates continued to climb, spurred by higher bond yields and reports of a slowing economy, according to mortgage company Freddie Mac Thursday.

The average rate on a 30-year fixed rate home loan grew to 5.15 percent, excluding fees, during the week ended March 5, 2009, up from 5.07 percent the previous week. The current rate is still very low by historical standards though. One year ago, the average rate was almost an entire percentage point higher at 6.03 percent.

“Mortgage rates followed bond yields higher this week following reports of record continuing jobless claims and a downward revision in economic growth in the fourth quarter of 2008,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Real Gross Domestic Product was revised from a 3.8 percent decline to a 6.2 percent drop in the fourth quarter mostly led by a 4.3 percent fall in consumer spending, which was the largest decrease since the second quarter of 1980.”

“The housing market continues to slow as well,” Nothaft added. “New home sales fell 10.2 percent in January to the slowest pace since records began in January 1963 while pending existing home sales slowed by 7.7 percent, the weakest since the series began in January 2001. More recently the Federal Reserve noted in its March 4th regional economic report that residential real estate markets remained in the doldrums in most areas, with only scattered, very tentative signs of stabilization.”

Rates on other common mortgage loans also rose in the latest week, with the average interest rate on a 15-year fixed rate loan increasing to 4.72 percent, up from 4.68 percent one week earlier. Last year at this time, the average rate was 5.47 percent.

On-year adjustable rate mortgages (ARMs) rose to 4.86 percent from 4.81 percent. During the same week of March 2008, the average rate was 4.94 percent.

Speaking to the National Association for Business Economics on Monday, the President of the Richmond Federal Reserve Bank expressed his fears about the Fed’s recent and current emergency financial aid actions. Specifically, President Jeffrey Lacker mentioned how the Fed may have opened its doors to unwanted political pressures by stepping in last year to provide private corporations with capital to keep the markets moving.

“Using the Fed’s balance sheet is at times the path of least resistance, because it allows government lending to circumvent the congressional approval process,” Lacker said.

“This risks entangling the Fed in attempts to influence credit allocation, thereby exposing monetary policy to political pressure,” he told the Association.

Lacker also underscored the risks associated with the inevitability of cutting the funding to these struggling banks and lenders.

“At some point in the future, the Fed will need to withdraw monetary stimulus to prevent a resurgence of inflation when the economy begins to recover,” he said.

“That time could arrive before credit markets are deemed to be fully enough ‘healed’… If monetary policy and credit programs remain tied together, as they currently are, we risk having to terminate a credit program abruptly, or else compromise on our inflation objective,” Lacker said.

At the past meeting of the Federal Open Market Committee, Lacker, a voting member of the board this year, dissented against the Fed’s decision to continue to spend billions of government money on propping up failing financial institutions. His solution was to provide more market liquidity through the purchase of more U.S. Treasury securities.

In his Monday speech, Lacker called on the Fed to let the U.S. Treasury Department take on the lending role, as it is always required to have official approval from Congress. Letting the Treasury take over would, according to Lacker, allow the Federal Reserve to maintain its long-time held and treasured independence from legislation.