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  • Home Prices Improve, Rates Drive Market

    By Ted Ahern, Guaranteed Rate CFO
    April 24, 2009

    Historically low mortgage rates continue to drive refinance activity and help support a moderating housing market. Home sale and price data in the last two months point towards a definite easing of the housing freefall that began three years ago. Final home sale prices improved slightly in February and March, posting the first two month increase since December 2006. Low rates and a stabilizing economy have drawn in new buyers, making the spring selling market better than many had hoped. Short sales and foreclosures are estimated to make up 30-40% of all purchase transactions currently with outstanding values and financing to be had by astute buyers. Inventory is also slowly moving down but remains historically high as new foreclosures flood the market every month.

    The Federal Reserve continues to purchase FNMA, FHLMC, and GNMA mortgage backed securities in the open market. In November of 2008, the Fed committed to buying $500 billion of mortgage backed securities, which in turn brought mortgage rates down to their current low levels. The program has been very successful in achieving its goals with many analysts predicting even further declines in mortgage rates over the next several months as the Fed continues to buy mortgage supply off the market.

    The $275 billion housing package directed at limiting foreclosures and the freefall in housing prices introduced by the Obama Administration in early March is also beginning to show positive results. The package includes $75 billion to reduce at-risk homeowners from going into foreclosure by reducing their monthly payments and outstanding principal. This piece of the plan is expected to help between seven and nine million homeowners. The plan is also targeting refinancing ‘under-water’ and high LTV loans which could potentially help an additional four to five million homeowners. The U.S. Treasury will also double the FNMA/FHLMC preferred stock backstop agreements to $200 billion each. All elements of the plan are currently active and are showing early signs of stabilizing housing prices, limiting foreclosures, and lowering mortgage rates.

    Over the last three years, the amount of equity Americans have in their homes has fallen from $12.5 trillion to $8.5 trillion. While over 10 million households have negative equity (homeowners owe more than their house is worth), most American households still retain significant equity. Nationally, home prices are currently priced at their early 2004 levels. Most households who purchased their homes before 2004 and have not made significant equity withdrawals will still likely have positive gains on their purchases. Households, who have purchased since 2004, tapped home equity for consumer purchases, and/or taken out risky loans, are likely feeling various amounts of distress in the current environment.

    Home sales are currently running at an annual rate of 4.2M units which is actually lower than where the rate was 10 years ago. However, during the last decade, the population of the United States has grown by almost 10%, seven million new jobs have been created, and we have seen an increase of 3.2 million homeowners. Prices, interest rates, inventory, and motivated sellers make the current market one of the best in a generation to purchase a home.

    ted ahern
    Ted holds an MBA in Finance from the University of Chicago and is also an Adjunct Professor of Economics at Lake Forest College.
    Apr 24 2009