During the first two weeks of September 2009, mortgage interest rates have trended downward and are considerably lower than August’s averages. According to mortgage company Freddie Mac, the average rate on a 30-year fixed rate loan last week, excluding points, was 5.07 percent, down from the average for all of August which was 5.19 percent.

Is the lower trend likely to stick around for the rest of the month? It’s always hard to say, especially because there are two big factors this month that might try to pull rates in opposite directions. First, the Federal Reserve recently announced that the amount of consumer credit across the nation dropped by $21.6 billion in July, and credit availability dropped even more than reported in June. The Fed said that after six straight months of decreasing consumer credit figures, this is the largest decline since the Fed started its survey in 1943. What this means for interest rates is that when consumer credit shrinks fewer people are borrowing money, and there are fewer mortgage backed securities (MBS) for investors to buy. As the price for those increases because of a shriveled supply, it could push mortgage rates down as lenders try to attract more borrowers back to the mortgage table.

The second factor, however, is that the Fed has also announced its plans to stop purchasing U.S. Treasury bonds. It has been buying these up throughout the year to pump more liquidity into the markets, but as the economy has started to show signs of life again, the Fed has decided to back off in hopes that the market is beginning to correct itself. Some predict that this move will cause bond yields to rise and bring mortgage rates with them.

So far, rates have moved lower this month, so maybe the consumer credit issue is the more influential factor right now. Rates are near historic lows right now - so in the long run, they really only have one direction to go and that is up. For those who can qualify for funding, now is a great time for a mortgage loan.

To say that the current state of the US housing market is a little shaky would be an understatement. The waves of recent mortgage statistics are at best conflicting and in many cases misleading as to the true nature of the property economy. Some experts are clinging to the fact that a recent boom in first time buyers being accepted for mortgages (in light of the $8000 tax credit) is a sign that the industry has turned a corner. Others, meanwhile, see the glimmer of hope as more of a mirage in a still arid housing landscape. Indeed, recent reports show that the Philadelphia Housing Market Index has fallen to its major support level of 225; Toll Brothers (a major US luxury home builder) has seen a 33% drop in order during the second quarter and mortgage lender Ameriquest is downsizing and laying off 3500 workers.

Wealthy Housing Opportunities

In the wake of this uncertain housing climate there has risen a sharp contrast between the poorest and the wealthiest people in the country. The current situation has provided a stark reminder of the money gap between the haves and the have-nots in America. Moreover, where one demographic sees opportunity the other sees long-term financial uncertainty. The old saying “one man’s trash is another man’s treasure” is particularly pertinent at the moment as the rich are seeing the drop in house prices as a chance to increase their portfolios. One of America’s most exclusive housing markets, the Hamptons, felt the bite of the recession more than most with the uptake on many multimillion dollar Long Island properties being extremely low. In recent months though, high-end real estate developers have seen a sharp rise in sales as the price of housing has fallen. Alan Schurman, a real estate developer, points out that those that can afford the million dollar price tags “made a decision that the market hit a point and was forming a bottom. Now they want to get in on the values that are out there.”

Luxury property prices have been slashed by around 20% in the area and this has attracted a glut of buyers back to the area keen to snap up a bargain ready for when the market begins to rejuvenate itself. This flood of multimillion dollar spending provides a striking juxtaposition to the financial difficulties facing many “average income” homes. Across the country the rate of foreclosures has risen and more and more homes are seeking the help of programs like the one in operation in Louisville, designed to be the final lifeline for those facing foreclosure. The number of people struggling to make their mortgage repayments has risen to over 13% and more than 4% of all borrowers are in foreclosure. The rising jobless figures are the major contributing factor to the situation, and while government incentives such as the $8000 tax refund are aiming to help the average buy, the problem is continuing to escalate.

The Great Divide

In times of financial crisis the wealth divide is always more prevalent, and while Middle America struggles to retain possession of its homes; the wealthy can’t wait to expand theirs. Nobody is clear just how much longer the current economic climate will last and for the average American the future isn’t looking like a bed of roses. Recent reports over whether the situation is improving or not is much like the discrepancy between those at the top and bottom of the housing chain; on the one hand someone is a winner but on the other, someone always ends up a loser.

The Federal Housing Administration (FHA) once considered one of the safest agencies backing mortgage loans now has many worried that its reserves may have dipped below the Congressionally-required level.

The FHA was designed to help first-time homebuyers and those with less-than-perfect credit. During the housing boom, the popularity of FHA loans waned as the standards and documentation requirements remained high and many other loans required few hoops to jump through. In 2006, FHA loans made less than 3 percent of the all U.S. Mortgage loans. As of the second quarter of 2009, the market share has skyrocketed to 23 percent.

This is largely because the FHA did not suffer the same losses as many other lenders and agencies during the housing bust and became one of the last remaining options for new and lower-income buyers.

Yet as its market share has grown, so has its loan delinquency rates. In June 7.8 percent of FHA-backed loans were 90 days late or more, up from 5.4 percent last year at the same time. And because the FHA requires only a 3.5 percent down payment on its loans, as home values have plunged in the past few years, many FHA borrowers are now underwater in their loans. This situation often leads people to walk away from their monthly payments and give in to foreclosure.

The FHA is required to have reserves that are equal to 2 percent of all the loans it insures. As of last year, the reserves were down to 3 percent, a huge drop from the 6.4 percent it had in 2007.

While FHA officials maintain that the agency will not need a government bailout, that doesn’t keep people from worrying about it based on the numbers. The current value of the FHA’s reserves will be made public on September 30 in the agency’s annual review.

Home prices continue to fall in the U.S. market and that is a good thing for those looking for homes. Here are five things that you should know when buying a house in today’s economy:

1. Mortgage rates are low - In case you haven’t been paying attention, mortgage rates are still very low which makes your payments low. In a survey on August 19, 2009 completed by the Mortgage Bankers Association, today’s mortgage rates are averaging just 5.67%. Use this to your advantage along with a strategy of taking out a 15-year mortgage so that you build up equity sooner in your new house. This will help even if you do not plan to keep the house for 15 years because you will have paid down more of the principle which makes selling easier (gives you more room to negotiate on price).

2. Avoid buying more than you can afford - People who are looking for houses to buy right now are looking for bargains. That is not a bad thing, but it can cause you to over-stretch and buy more than you can afford. Instead, make a wise choice of purchasing a house that offers you more at the price you can afford.

3. Mortgaging more than 80% - One of the reasons that too many people got in over their heads on their mortgages was because of the ability to finance 100% of the cost of the house. Going into the mortgage, they had no equity and no room to breathe should something happen (like a lost job). Make it a part of your strategy to make a down payment of 20%. If this is not possible, at least put down 10% and then take out a 15-year mortgage.

4. Look everywhere for good buys - There are great prices on good homes almost everywhere you look. Avoid jumping on the first house that comes along. Play the field and see what better deals are out there than the previous one that you have found. Purchasing a home is largely an emotional decision and keeping this in mind can help you fight your urge to buy something now and miss a better house later on.

5. Think long term, not short - Buy your next house and plan on staying a long time. This will help you decide which houses will fit your needs. With economic conditions as they are, a ten-year plan to stay is smart. And even better, staying 15 years on a 15-year mortgage will have you in a pretty position when it comes time to sell.

Since the inventory of homes on the market varies by location, patience is needed to help you find the best deal for you and your family, but if you take your time, you will be amazed at the results.

Since the housing market went belly-up and took Wall Street down with it, the Federal Reserve has been doing all it can to bail out the industry and provide liquidity in the system. The buying up of U.S. Treasuries and government-backed mortgage backed securities (MBS) has been the Fed’s focus.

But as the housing market has started to show signs of life again, the Fed has announced plans to slow down its purchases of Treasuries. It seems to be considering a similar plan with mortgage debt.

“I think something similar might be possible for MBS, but no decision has been made,” said St. Louis Federal Reserve Bank President James Bullard in Little Rock, Arkansas on Thursday. “I think we agreed that on the Treasuries we’d do the tapering thing and see how it works. We can decide some time during the fall how we want to do the MBS.”

And Richmond Fed President Jeffrey Lacker said Thursday in Danville, Virginia:

“I will be evaluating carefully whether we need or want the additional stimulus that purchasing the full amount authorized under our agency mortgage-backed securities purchase program would provide.”

Originally the Fed was prepared to buy up to $1.25 trillion of MBS, but has spent just over $792 billion so far of securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

Some people are excited about the possibility of an early exit strategy for the Fed, saying it will open the door for private investors to take over again. Others are not sure the markets are ready for the pullout.
For example Larry Doyle, on the Wall Street Pit blog says:

While Fed governor Lacker would maintain that the Fed may slow its purchasing of MBS because the economy has improved and continues to improve, I would beg to differ. Home sales are rebounding, but delinquencies and foreclosures are running at record pace. Those statistics, in my opinion, continue to cast dark clouds on our housing landscape.

He also predicts that mortgage rates will move higher as a result, probably in the range of 0.50 percent to 0.75 percent, a move that could put a serious damper on the recent flow of home purchase activity.

With the summer sun slowly setting in the distance, the US housing market is preparing itself for a potentially rough winter. The warm weather of summer typically causes a flurry of frenetic activity in the property industry and despite the current economic climate there have been some encouraging signs during the summer months. This positive momentum has led some experts to predict that a period of stabilization might not be too far away. Indeed, Professor Jeffrey Fisher of Indiana University Kelley School of Business is optimistic about the immediate future of the housing market, stating that he believes, “the worst is behind us.” Professor Fisher’s optimism isn’t shared by everyone, though, and many see the recent boom in activity as the calm before another impending storm.

With the Recovery and Reinvestment Act 2009 due to end in November, many are predicting a drop-off in the number of first-time home buyers and the lack of new capital in the market could cause another mini-slump. With only three months left until the tax credit expires, the race is on for first-time purchasers to get a much needed leg-up into the housing market. If you’re considering making your first purchase, here’s what you need to know before applying:

• The tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
• The tax credit does not have to be repaid.
• The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
• The credit is available for homes purchased on or after January 1, 2009 and before December 1, 2009.
• Single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit.

(Source - FederalHousingTaxCredit.com)

The tax credit may have provided a much need shot in the arm for the housing market but the scheme isn’t enough to provide a lasting cure for the industry. Late mortgage payments reached a record high in the second quarter of this year and with a steady rise in the number of foreclosures it seems the road to recovery will continue to be slow. Some predict the slump to last until mid-2010: “A rise in foreclosures will keep the housing recovery slow and weak, and will continue to place downward pressure on house prices until mid-2010, but at least the end is in sight.” (Celia Chen, senior director of housing at MoodysEconomy.com)

The bottom line for prospective home buyers is to tread carefully over the next few months. While the recent boom has had some positive impact on the market, the overall affect is marginal and with the tax credit soon to end the winter looks to be an unsettled period. Buying a home in the current climate is risky business but if current predictions are accurate the forecast for 2010 should be a lot more pleasant for those wanting to take their first steps on the property ladder.

Well last week we had good news – this week it looks like more bad news. A new study conducted by Fitch Ratings Ltd. and reported in the Wall Street Journal found that home owners who start to miss mortgage payments are not that likely to get caught up again.

The report looked at the “cure rate,” or the percentage of delinquent home loans that are brought current each month (The study did not include government-backed loans and loans not bundled into securities. This means only about 16 percent of all U.S. mortgages are represented in the report).

The numbers are bleak when compared on a historical scale, an indication that those predicting millions more foreclosures in the next couple years may be right. In July of this year the cure rate for delinquent prime loans fell to 6.6 percent. Compare that with an average of 45 percent during the period of 2000 to 2006. Yikes!  Subprime loans had a cure rate of 5.3 percent in July, a major decrease from the average of 19.4 percent in the six-year time frame.

Fitch blamed job loss as a major contributing factor to the collapsed rates. Yet one of the main differences in borrowers now as opposed to those in the past is that even many who can afford to make their payments are simply choosing not to, feeling that their underwater mortgages are not worth saving.

Unfortunately, in some cases they may be right. As the bloated housing markets of former real estate hot spots continue to correct themselves, home prices are often still moving downward, making a $500,000 mortgage on a home now worth roughly half that amount seem like a hopeless cause. Some homeowners make think, “Why keep paying this impossibly high mortgage, when I can go into foreclosure, rent and repair my credit for several years and then buy at reasonable market prices?”

And for those of us living in those places like California and Florida waiting to buy homes, as sad as foreclosure can be, each one helps to bring the home prices back down into an affordable range. Sorry to those unlucky enough to have bought or done cash-out refis during the housing bubble, but the rate of growth was never sustainable and a painful recovery was always going to be the end product.

A majority of the nations’ states saw an increase in their existing home sales during the second quarter of this year. Those sales jumps came at the cost of median home price decreases in 129 out of the 155 metropolitan areas monitored by the National Association of Realtors.

Still, this news is very encouraging for the overall housing market, according to Lawrence Yun, NAR chief economist.

“With low interest rates, lower home prices and a first-time buyer tax credit, we’ve been seeing healthy increases in home sales, which are a hopeful sign for the economy,” he said.  “There have been sustained sales gains in Arizona, Nevada and Florida, as well as diverse areas such as Maryland, the District of Columbia and Nebraska.  More recently, we’ve seen strong double-digit gains in Idaho, Utah, New Mexico, Washington, Hawaii, New York, New Jersey, Maine, Vermont, Wisconsin, Indiana, South Dakota and Montana.”

This can only mean good things for the economy as well, Yun said.  “Given the need for related goods and services, each home sale pumps an additional $63,000 into the economy – that’s how the housing engine traditionally pulls us out of recession.  In addition, sales are drawing down inventory and that will help stabilize home values, which in turn will lessen foreclosure pressure and boost credit availability for other sectors of the economy.”

Existing home sales on average were up 3.8 percent during the second quarter to 4.76 million units from 4.58 million homes during the first three months of the year. The national median home price fell to $174,100, a 15.6 percent drop from the second quarter of 2008.

So home prices continue to fall but inventory is down and there is much more movement in the market. A report is due out within the next few weeks about home sales from July and an increase would mean four straight months of sales growth. It’s hard not to feel hopeful after such improvement.

What are we to make of two new reports, one saying existing home sales were up again in June, the other saying foreclosure filings are continuing to pour in?

The National Association of Realtors reported today that sales of existing homes rose 3.6 percent to a seasonally adjusted annual rate of 4.89 million in June, up from 4.72 million in May. Sales were off only 0.2 percent from the June 2008 figures. Housing inventory fell 0.7 percent so that now there is a 9.4-month supply of homes on the market. The national median home price rose from May’s $173,000, to $181,800 in June, but the most recent price is still down 15.4 percent from last year.

And as Jon C. Ogg writes on the 24/7 Wall St blog

When you see the drop in prices, it is hard to get excited in general.  But there is hope as the level of distressed selling is getting to manageable levels.

Now we just have to hope that the shadow supply of houses that will come on the market or that have been foreclosed by banks that are not yet on the market (or being held off the market) is not as high as many fear.  There is also the notion to contend with that the gains are off of levels so low with such low prices that this good news just represents a scolding rather than a lashing.

The Wall Street Journal reported that according to foreclosure data tracker RealtyTrac, foreclosure filings rose again in June to 336,000. During the first half of this year there was one foreclosure filing for every 84 homes in the nation. Some estimates put the total number of foreclosures for this year as high as 3.0 million. Once all these homes get put out on the market, prices are sure to fall more as banks offer deep discounts on these unwanted properties.

According to the Wall Street Journal, the Obama administration is redefining who can qualify for government assisted refinance programs. Apparently the original guidelines were not broad enough to help those most struggling with their loans.

After all, the first rules limited homeowners to having a 105 percent loan to value ration on their homes, yet according to Moody’s Economy.com, almost 30 percent of homeowners are underwater in their mortgages and many by much more than 5 percent. The new limit has been raised to 125 percent.

The revised rules come after only 20,000 borrowers received help under the program from March to June. The administration claimed it would be able to save up to 5 million homes from foreclosure at the outset of the initiative, a figure that was never likely to be achieved with the initial restrictions.

Meanwhile, interest rates are dropping and so are applications for mortgage loans. Freddie Mac announced Thursday that the average rate on a 30-year fixed rate loan fell to 5.32 percent, excluding fees, from 5.42 percent the previous week. Freddie had no explanation for the drop in rates this week, but they were likely due to falling yields on Treasury notes as investors worry that excessive government debt may result in inflation.

And mortgage application volume plummeted 18.9 percent in the latest week, according to the Mortgage Bankers Association on Wednesday. Home purchase applications fell by 4.5 percent, but refinance requests plunged down by 30 percent, as mortgage interest rates have risen in recent weeks, much higher than their record lows from the spring.

Not a particularly good week in the mortgage markets, but good things could be just around the corner, right?