Home prices continue to erode
The real estate market continues to struggle as home foreclosures and bank owned properties have brought home values down to ten year lows. The January home price report released from Case Schiller today indicated that home prices in the nations twenty largest markets have dropped by almost twenty percent is January of 2009. The continued erosion of home value is not a good sign for the struggling housing market. The main culprit with home price deterioration is banks and mortgage lenders who are overwhelmed with foreclosed properties. The bank owned homes are now selling for twenty to fifty percent of their appraised values from as recent as 2006. Declining home values will continue to haunt the U.S. economy as the housing market is a key component in the overall GDP and more importantly the confidence of the average consumer.
The recent rebound with U.S. stocks could be the first indication that the U.S. economy may be starting to turn the corner after finding a bottom in early March. Their are a number of incentives to help bring home buyers into the market (government rebates, low prices) none of which may be as important as the historically low mortgage rates available. The low rates have spurred a mini refinance boom for the mortgage industry as home owners have moved quickly to lock in rates in the low five percent range. The low rates could help to bring new home buyers off of the fence who have tried to time the market to find a potential bottom. As lenders ramp up efforts to slow down home foreclosures, the inventory of houses on the market should begin to rebalance and a price bottom could easily be reached. This shift is all but certain to happen in 2009 and could very well be taking place today. Investors have been the largest group to jump into the bank owned property market and are purchasing large inventories of homes to remodel and flip or hold for investment as they rent the properties out and wait for values to rebouond.
Refinance rates likely to stay low thanks to Bernanke
Ben Bernanke helped boost the stock market this week with news out of the latest FOMC meeting that the Fed would be adding over one trillion dollars into the secondary market and would be purchasing treasuries and mortgage backed loan securities. This move should be a great boost to the beleagured mortgage and housing industry as it all but guarantees that fixed rate mortgage loans are likely to remain near historic low levels for the near future. The average rate on a 30 year fixed rate mortgage loan according to Freddie Mac, one of the nations largest agency lenders was near 5% with a little over half of a point to fix in this interest rate. Most economists and mortgage experts believe that the Fed move could help to drop this rate even lower and this could turn into a significant boost for the housing market as it would help to lower rates and payments for home owners who are able to refinance as well as help to provide the home buying industry with a boost by keeping house payments extremely low.
The Feds bold move was their second attempt to help and jump start mortgage lending. In late 2008 the Fed made a similar move and agreed to purchase up to $500 billion of mortgage securities from Fannie Mae and Freddie Mac. This news helped to immediately lower fixed mortgage rates by almost one full point and led to an immediate refinance boon for the banking industry. The Feds actions this time around should help to keep the momentum for the banks through refinance applications, but also could help to ensure that the summer housing market has the best chance to reverse the downward housing cycle. This summer could be a pivotal period for the restabalization of the housing market. The opportunity to lock in a fixed rate mortgage loan at historically low rates, government rebates and a tremendous surplous of housing could become the catalyst to bring home buyers back into the market place at an improved pace.
Home affordable refinance
The government finally revealed the details behind their 75 billion dollar aid package aimed at providing stability to the housing market. The government program is aimed at two areas of concern, home owners who may be facing the possibility of home foreclosure and home owners who owe more than the value of their home and would like to refinance their home mortgage.
The programs offer two different avenues to help these targets, refinancing and loan modification. Home owners who are behind on their home mortgage are likely to pursue the loan modification path. These home owners can attempt to modify their home loan with their existing mortgage servicer. Their are a number of requirements on these loan modifications including:
- The property must be a primary residence
- Loan must be guaranteed by Fannie Mae or Freddie Mac
- Borrower must be able to document their income
- New payment is based on a debt to income housing ratio of 31%
- The mortgage must be under $729,000
- The mortgage must have been originated prior to 2009
The program is not required to have lenders and servicers participate, as this is an elective procedure. Lenders are allowed to charge fees to restructure these home loans. The effective interest rate could be as low as 2% and would be fixed in for the next five years. There is the potential of a reduction in the principal balance owed on the home loan to borrowers who make payments on time.
Consumers who are not eligible to refinance their homes because the home value is higher than the value they owe on their home may look at refinancing their mortgage under the proposed program. The program will allow home owners whose loan to value is under 105% to refinance their mortgage. This part of the proposal is less clear as to how beneficial the results may be as in most of the hard hit areas with large drops in home values the loan to value ratios are above 125% in most situations. The overall benefit of the program is being met with mixed reviews at best as most economists don’t believe that this will be aggressive enough to put a bottom to the foreclosure issues as their is no direct move to lower principal loan balances.