You’re probably thinking: I thought the housing market had stabilized? Surely, this title can’t be accurate, not now. Maybe in 2008, when housing prices were in freefall and the bottom was faraway, maybe then would a prognosis like this make sense. But certainly not now.

Forecasts of any sort are fraught with inaccuracy, and predictions of housing prices are not exempt. But the fundamentals surrounding the housing market suggest that a return to permanent stability is still far away. As the market once again starts to slip, it looks like the recovery that began in the summer and accelerated into the fall was an aberration, most likely induced by government incentives that will soon expire.

The data would seem to support this view. This week saw the release of the December numbers, and most showed a decline of some kind. New home sales were down 7.6% on a monthly basis, bringing the total 2009 decline to 22.9%. Existing home sales were down 11.6%. The Case-Shiller Index registered an uptick of .2% in housing prices nationwide, but that was November data. One hesitates to guess what the (current) January data will look like when it is released two months from now. One expert explains:”The Case-Shiller indices are three-month moving averages, so November’s readings reflect transactions that took place in September, October and November, when demand was heating up…But will this trend continue? Probably not.”

At this point, the problem is largely related to the shadow inventory of foreclosures. While the media has been awash with reports of bidding wars at auctions for foreclosed homes, the vast majority of such homes have yet to reach the market. This is part of a deliberate strategic ploy on the part of the banks, the goals of which are to squeeze a little more cash out of homeowners before they are kicked out (via loan modifications, etc.) and to delay the sale of these homes until the market recovers.

Ironically, the market probably can’t and won’t recover until these foreclosures are released onto the market. This could take a while, as there is an estimated backlog of more than 2 million homes. Not to mention that the number of underwater mortgages is rapidly approaching 20 million, and a not insignificant proportion of such borrowers appear to be considering strategic default. In other words, the market has yet to clear itself. There is also the upcoming retirement boom – ignored lately due to other more pressing issues – which will put further pressure on the market as baby boomers look to downsize into smaller houses.

As a result, many mainstream economists are projecting that the next decade will be characterized by stagnating housing prices. According to Dean Baker, director of the Center for Economic Policy and Research, “If anything, I expect housing to be weaker than normal rather than stronger over the next decade. People who say this is a temporary story, there’s no real reason to believe anything like that.” He expects prices to fall another 15-20% nationwide, back to 1990’s levels. More “optimistic” economists believe that at best, home prices will increase at the rate of inflation.

It’s worth pointing out – as I have on many previous occasions – that the picture nationwide is far from homogenous. There are tremendous discrepancies between neighboring counties, let alone different states. Average statistics are being dragged down by areas were speculation was highest during the bubble years, and which are nowhere near the bottom. ” ‘In California, Florida, in the ground-zero zones, it could take 15 years to fully recover,’ said Lawrence Yun, chief economist for the National Association of Realtors.”

In short, you should be aware both that house prices appear likely to hover around current levels for the immediate future, but that the nature of an “average” is such that some regions will recover faster, while others will require more patience.

Ever since it was announced that the Federal Housing Administration (FHA) was dangerously close to insolvency, speculation has been building over what emergency steps the agency would take. The issue was/is particularly pertinent for anyone connected to the housing and mortgage markets, since the FHA now underwrites more than 30% of all new loans overall, and 50% in certain regions. In any event, the wait is now over, as the FHA has announced several changes to its underwriting standards.

I’ll continue to pontificate in a minute, but let me first report the actual changes. They are as follows:

• New borrowers will have to have a minimum credit score of 580 to qualify for a 3.5% down payment. Those with lower scores will have to make at least a 10% down payment. The average credit score of FHA-insured borrowers is 693.

• Allowable seller concessions will be reduced from 6% to 3% of the sale price. The change is intended to discourage inflated appraisals.

• Buyers will have to pay an upfront mortgage insurance premium of 2.25% of the total loan amount, up from 1.75% now. A $150,000 mortgage would require a payment of $3,375, or $750 more.

While the new rules are largely self-serving (i.e. to help the FHA mitigate against bankruptcy, and having to solicit funds from Congress), they should also help consumers. Those of you with credit scores in the low 500’s are probably rolling your eyes at this, given the higher down-payment requirements and insurance premiums. But bear with me.

As the housing crisis made painfully clear, there are some borrowers who simply shouldn’t be eligible for mortgages. While enabling every borrower to potentially obtain a mortgage and purchase a house seems altruistic, it is actually the opposite, since it threatens the viability of the entire system. This is not a political issue, but rather a practical issue. Given the high rates of default associated with FHA mortgages, the FHA has no choice but to tighten lending standards. Failure to do so would risk its very existence. Those that are depending on the FHA for their mortgage would certainly agree that more expensive government loans are better than no loans at all.

It seems that these new rules are also intended to punish lenders. (As if to make this point, the FHA revoked the licenses of a handful of lenders the day before it was scheduled to announce the tightening of lending standards). Even today, too many lenders abuse the FHA insurance system by underwriting loans to un-credit-worthy borrowers at no risk to themselves. Such borrowers, for better or worse, will now be barred from the process, and those that are still able to participate can expect to pay for that privilege.

It’s worth pointing out that this development represents a window into the future of the government’s role in the mortgage market. While it probably didn’t intend to do so, the FHA has signaled that this unprecedented era of government assistance for mortgage borrowers could be coming to an end. Going forward, some of these programs will apparently be expected to pay for themselves, rather than operate permanently in the red.

Speaking of which, what are Fannie and Freddie up to these days?

For anyone who has done some preliminary research into obtaining a mortgage, you have probably come across the “good faith estimate [GFE].” Anyone who has actually gone through the process of obtaining a mortgage, meanwhile, knows there isn’t a more ironic concept than GFE, and is probably chuckling right now.

The GFE was originally intended to help consumers shopping for mortgages, by giving them an upfront estimate of what they could expect to pay for a mortgage issues by a given lender. Over the years, however, the GFE has been abused by not a small number of lenders and turned into a deceptive marketing tool. While some lenders made a sincere effort to accurately estimate closing costs for potential borrowers, anecdotal evidence suggests that the majority realized that this would make them less competitive, since their peers were quoting ridiculously low fees, in the secure knowledge that there would be no recourse (legal or otherwise) for the borrower, if they raised the fees at closing time. Basically, the GFE became yet another variation on the “bait and switch” scheme.

Congress’s latest effort to rectify this contradiction will certainly make it much more difficult for lenders to operate in this way. As part of the Real Estate Settlement Procedures Act, which went into effect Jan. 1, lenders will now be contractually obligated to offer a good faith estimate within 72 hours of receiving the borrower’s application. In addition, the estimate must really be in good faith, and lenders are prohibited from tampering with certain fees later on. The table below, courtesy of USA Today, contains an excellent summary of these restrictions.

As part of the legislation, lenders will furnish the GFE using a standardized form, so that borrowers can easily shop around and compare loans from different lenders.

The first page states how long the information is valid for, along with a summary of the loan characteristics — such as the initial loan amount, the loan term, the initial interest rate, whether the rate can rise and if the loan has a prepayment penalty or a balloon payment. It also discloses whether an escrow account is required for the loan and an estimate of settlement charges. The second page breaks down origination costs and settlement charges. The third page explains which charges can and which can’t increase at the time of settlement, as well as which ones can only increase by a maximum 10%. The bottom of the third page serves as a worksheet for borrowers to compare options.

This table should make it easier for borrowers to compare different types of loans, as well as to determine if lenders are compensating for lower settlement costs with a higher interest rate, and vice versa.

Thanks to the amended Truth in Lending Act, which went into effect over the summer, borrowers must wait at least seven days after receiving this GFE before they can close on the loan. “Additionally, if the final APR rate is off by more than .125% from the good-faith estimate, then borrowers MUST wait another three days before closing.” Of course, if the borrower locks the rate with the lender, then a change in the final rate (unless previously warned by the lender in writing) would constitute fraud, and the borrower could petition for redress.

At the same time, there are still gaps in the process that aren’t addressed by other law. First of all, the GFE still doesn’t make it clear to lenders that they can shop around for the best deals on specific line items, such as title insurance, home inspection, etc. Many borrowers will probably still be tempted to simply compare the overall costs when choosing between two lenders, rather than such individual line items. In addition, the GFE forms don’t include an estimate of the borrower’s expected monthly payment under the parameters of the loan, potentially introducing a loophole for lenders to tinker with the numbers. Finally, it doesn’t specify what funds borrowers will need at closing.

Overall, though, it represents a vast improvement over the old system, and borrowers can now rest assured that the final costs won’t differ much from the initial estimates.

Perhaps the majority of borrowers obtain mortgages with a partner, or co-signer. Despite this, there is a tremendous amount of uncertainty regarding rights, responsibilities, etc. when more than one borrower is involved.  Allow me to offer some clarity.

First, let’s review the terminology. Co-borrowing refers to the issuance of a mortgage loan to two (or more) borrowers, both of whom share equal (legal) responsibility for fulfilling the terms of the loan. If they are not relatives, co-borrowers must cohabit the property that is being mortgaged. If related/married, it doesn’t matter whether they live together. Co-signing, meanwhile, refers to a situation in which a third-party “vouches” for the primary borrower(s); while it is understood that the co-signer does not bear primary financial responsibility for repaying the loan, he still will be held legally liable in the event of default. Anyone – relative, friend, etc. – can co-sign a loan for someone else.

In most cases of co-borrowing, the lender will use the lower credit score to determine the terms of the loan. This can become awkward, if one of the borrower’s scores is vastly higher than the other. While one might be tempted to simply drop the borrower from the loan application altogether (to prevent the bad credit score from affecting the loan terms), this will also reduce the amount of income that the borrowers can claim, and hence lower the amount of funds that they can borrow. The only solutions to this problem are to either go ahead and drop the borrower’s name (if you can afford to do so), or to petition your lender to use the credit score associated with the higher-income borrower (this assumes that the higher-income borrower also boasts the higher credit score).

The main pitfall of co-borrowing is a separation/divorce prior to the maturity of the loan. Again, this can become awkward, especially if such a contingency agreement wasn’t drawn up in advance. For that reason, all co-borrowers are encouraged at the time of obtaining the mortgage to draw up plans for resolving such a situation. It should account for both the possibility of a sale, as well as the alternative possibility that one borrower will continue to reside in the property. Under a sale, borrowers should determine how proceeds will be distributed. Without a sale, it must be determined (ideally in advance) whose responsibility it will be to repay the mortgage and how the borrower who continues to live in the house will compensate the borrower that no longer does.

Co-signing is also fairly straightforward when everything goes as planned. Bringing in a co-signer with a better credit score can not only boost one’s chances of being approved for a mortgage, but can also lead to better terms and a lower rate. The pitfall, of course, is the possibility that the borrower will not be able to fulfill the obligations associated with the loan, in which case the co-signer will be liable. The best way to guard against this possibility is to insist on the creation of a reserve fund (funded by the borrower and to be drawn from in a time of distress), and simply to only co-sign a loan for someone who you believe can repay the loan and/or you don’t mind assuming responsibility for if he can’t.

According to an astute article published recently in the New York Times, stories of record low interest rates are being vastly exaggerated by journalists and bloggers (guilty as charged…). The problem is not that the rates being propagated are erroneous, but rather that they are only available to a small segment of potential borrowers- those whose credit scores reside in the upper echelons.

Apparently borrowers are learning the hard way that quoted rates can be obtained only with a credit score of above 740 and with a down payment of above 20%. Those who don’t meet these rigorous requirements are often still approved for mortgages, but at much higher rates and/or an additional upfront payment. “Borrowers with credit scores of 700 to 740 typically face additional charges of one-quarter to three-quarters of a percentage point of the loan amount…But for borrowers with credit scores of 680 to 700, the charge is 1.5 percentage points, and for those between 660 and 680, the charge is 2.5 percentage points.” Those who can’t afford a 20-25% down-payment face similar “discrimination.”

Borrowers, then, face a certain dilemma. Should they take advantage of rates which are still quite low even after tacking on these additional points, or should they wait until they have enough money saved up to make the required down-payment and/or their credit score have improved? This is not an easy question to answer, and largely depends on circumstances unique to each borrower. However, given that many experts expect mortgage rates to rise soon, it might make sense to simply pay the additional fees, as long as they are not unreasonable.

The rationale for these higher standards is simple enough; previously, they were too low. It is now common knowledge that when the housing bubble was still inflating, anyone could obtain a mortgage, at a low-rate and with very little money down, regardless of credit history. Many of these borrowers have since defaulted, and lenders have responded by dramatically tightening lending standards and raising mortgage rates for those that still qualify but whose credit isn’t perfect. Simply stated, mortgage pricing is now more closely correlated with risk.

That’s not to say that the average rates are erroneous. On the contrary, they are probably quite accurate, since anyone who wants to obtain a mortgage today needs very strong credit. In other words, if your credit is perfect, you can score a mortgage with a 4.75% fixed interest rate. Those with very-good-but-less-than-perfect credit can expect to pay 5.25%, perhaps. Everyone else is shut out completely from the process. Thus, the average rate is calculated at 5%, since it isn’t dragged down by the higher rates associated with sub-prime loans, which have virtually disappeared from the mortgage scene.

This might also explain the baffling phenomenon of low rates AND low demand for mortgages. One would expect that record low mortgage rates would be accompanied by high demand for mortgages. However, given that lenders’ standards remain so high, it’s not surprising that loans are so hard to get. In other words, while a healthy “supply” of mortgage financing has kept rates low, this supply is only being offered to a targeted demographic of borrowers, rather than all potential borrowers.

Well, you heard it here. If you don’t have perfect credit, don’t be surprised when you call up your lender, and he quotes you a rate higher than what-you-expected. While such “bait-and-switch” has always been common, now it’s become legitimate.

Forbes Magazine recently published a commentary piece on the direction of interest rates (”The Top 10 Items Shaping Interest Rates in 2010“), which I want to adapt to mortgage rates. Here goes:

1. The Economy: According to Forbes, mediocre economic growth and low inflation will allow the Fed to hold short-term rates at 0% for most of 2010. Personally, I think these predictions (both that GDP growth will remain lackluster and that the Fed will hold rates) are accurate. The variable, as I see it, is inflation, which is due to rise in line with the explosion in the money supply (70% in 2009). If inflation takes off before the economy, the Fed will face a very serious dilemma, and could be forced to hike rates prematurely.

2. Fed Portfolio – At the moment, this is probably the single most important factor underlying mortgage rates. The Fed spent $1+ Trillion in 2009 buying mortgage-backed securities, sending rates down below 5%. Not only is the Fed no longer adding to its portfolio, but it could soon even begin unwinding some of these securities, in order to guard against inflation. This, alone, would place enormous upward pressure on mortgage rates. While doves think the Fed may resume its purchases, this seems unlikely.

3. The Banks – Forbes predict that banks will “forsake credit risk and become big takers of interest-rate risk instead.” The implication is that if/when the Fed begins to offload its portfolio of mortgage securities, banks will step in to buy them. What this means for mortgage borrowers is that on the one hand, it will remain difficult to obtain mortgages, but that on the other hand, those that are lucky enough to get approved could be offered very attractive rates.

4. Foreign Investors – A recovery in the economic fortunes of foreign governments could lead to a proportional rise in the size of their investment portfolios and foreign exchange reserves. If a significant amount of such capital finds its way into the US, it will likely be invested in US Treasury Securities. That would send Treasury yields downward, and exert strong downward pressure on mortgage rates, which usually trade at a consistent premium to Treasury rates.

5. Budget Deficits – The US government is expected to run record deficits for as long as the eye can see. While demand for new Treasury issuance will likely remain strong, the fact that supply will be just as strong could tax (no pun intended) the capacity of investors to continue funding them. If the US doesn’t get its fiscal house in order, it could face increased borrowing costs, in the form of higher rates.

6. New Regulation – Forbes argues that an imminent enhancement of financial sector regulation will result in “wider interest-rate differences between liquid markets and everything else.” Fortunately, the market for mortgage-backed securities remains among the most liquid, although less so for subprime issues. In other words, while rates for AAA borrowers could remain low, subprime borrowers will likely see higher rates.

7. Fannie Mae, Freddie Mac – The government recently pledged its undying support for these two mortgage behemoths. While this is bad news for taxpayers (they have already absorbed more than $100 Billion in government funding, together), it is good news for borrowers, especially because the overwhelming majority of new mortgages these days ultimately find their way to Fannie or Freddie.

8. U.S politics – The legislative branch is currently mooting a curtailing of the Fed’s powers and subjecting it to greater scrutiny. Some experts have speculated that this would make the Fed more dovish in conducting monetary policy, since it would have to answer to Congress if the economy suffered. Thus, if the “Audit-the-Fed” bill is passed, don’t expect short-term rates to rise anytime soon.

9. International politics – Forbes writes that a steady stream of international “conflict” will ensure that risk aversion remains at the fore of investors’ minds. As a result, they expect demand for US Treasury securities to remain high. Given the iron-clad guarantee that the government has extended to Fannie and Freddie, demand for mortgage backed-securities should also remain strong among the risk-averse set.

10. Everything Else – There are a handful of minor factors that Forbes list, but I won’t bother repeating because they pale in comparison to what’s listed above.

So, how can we make sense of all of this? In short, the economy is growing, and so may inflation. The Fed will start to sell some of its mortgage debt, but banks and foreign investors will step in to buy it. My prediction is that all mortgage rates will creep up, but long-term (fixed) rates will rise faster than short-term (variable) rates, and sub-prime rates will rise faster than rates for prime borrowers.\

Today we bring you an interview with Steve Waldman of Interfluidity. Following up on a post I wrote last Monday (Short Sale or Strategic Default: What’s the Best Choice?), I decided to focus the interview around strategic default and the ever-expanding role of the government in the housing market.

Read the rest of this entry »

Not the most stimulating headline, I admit, but it’s a topic that deserves some bandwith. Let’s be honest: who out there even knows what a HUD 203(k) Mortgage is? Who’s first instinct (I’m guilty) was that it is an abstruse program that brings together 401K retirement accounts with mortgage financing? That’s what I thought.

Let’s get serious for a moment. A 203(k) is a HUD program that provides mortgage loans for the purchase of so-called “fixer-upper” properties. According to HUD,  203(k) mortgages serve a very important function because, “The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.”

Towards that end, the 203(k) allows the borrower to roll all of the costs of renovation into the mortgage. While these costs are theoretically uncapped, they must be estimated ahead of time. Further, it must be confirmed by an appraiser that the value of the home will increase at lease by these costs upon the work’s completion. In this way, those that might have otherwise been discouraged from buying dilapidated properties have an inexpensive source of financing (only 3.5% down, consistent with the FHA’s other mortgages).

There is also a new Streamlined 203(k) “Limited Repair Program, that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.”

The costs of these repairs, along with a “contingency reserve” of 10-20%, origination fees, and of course the purchase price of the property, are all rolled into the mortgage. Since it’s assumed that many of these properties won’t be of inhabitable condition until after the repairs are completed, the borrower also has the option of rolling 6 months of pre-payments (PITI) into the mortgage as well. Upon closing of the mortgage, the repair costs are deposited into an escrow. Withdrawing these funds can be tricky, however.

While FHA loans are effectively guaranteed by the government, they are originated and administered by private lenders. As one couple’s story illustrates, dealing with one’s lender is not always straightforward when it comes to the 203(k):

“As the contractors were hungry for work, we got started improving the property right away,” she said. “We had been told by our mortgage broker that we could expect the first draw against our $35,000 escrow 15 days after closing.”

As time passed, however, “we heard nothing from Bank of America, other then where to send our first mortgage payment,” she said.

For three months, the couple paid their mortgage, yet received no check for the work done so the contractors could be paid.

To pay for the work, “we have had to empty our savings and run up our credit cards,” she said. “We finally asked them to stop until we can find resolution with Bank of America.”

Unfortunately, borrowers who get the run-around from their lenders unfortunately don’t have much recourse, and can’t expect any help from the government. The best advice, then, is to make sure that the escrow is available to you start shelling out money for repairs. In fact, the raison d’etre of the 203(k) is to prevent the borrower from having to pay for repairs out of his own pocket. In hindsight, this couple would have been wise to heed this advice.

You’re mortgage is underwater. What do you do?

A few years ago, this would have been a fringe question for a fringe audience. Nowadays, though, 25% of all residential mortgages are underwater. In states like Nevada and Florida – two of the epicenters of the housing bubble and subsequent bust – more than half of borrowers owe more on their mortgages than their homes are worth. In other words, for a growing portion of homeowners, this question is of foremost importance.

For argument’s sake, let’s assume that you have already discussed a loan modification with your lender, and you have been either rejected or presented with an inadequate offer. As a result, you have made the decision to part with your home. [Admittedly, this is a weighty decision]. Should you sell your home at a loss, or simply walk away from your mortgage and allow your lender to deal with the fallout?

The first option is known as a “short-sale,” since the proceeds from the sale of your home wouldn’t be enough to cover the balance of your underwater mortgage. Accordingly, a short sale (or its first cousin, the deed in lieu of foreclosure) first requires the approval of the lender, because it is tantamount to writing off part of the mortgage as a loss. Still, many lenders are amenable to this possibility, because it is often less complicated – and hence, less expensive – than outright foreclosure. You will also need to confer with any junior-lien lenders as well as the mortgage insurance company, if applicable. After receiving an offer on your home, this must then be submitted to the lender (via its loss mitigation department) for final approval.

Here are a few additional things to keep in mind: Minimizing the transaction costs of the sale (by hiring an expensive real estate agent, for example) will go a long way towards convincing the lender that the deal is worthwhile. Next, while a short-sale is less painful than a foreclosure, there will still be some inevitable damage to your credit. In addition, you might be expected to pay taxes on the portion of your mortgage that was forgiven by the bank. Finally, be advised that short sales typically take longer to complete than normal sales, as lenders will often spend a long time deliberating over whether to approve the deal.

If your house has depreciated too much in value, and/or your lender is not willing to approve a short-sale, then a strategic default might be your last option. So-called as to distinguish it from a “conventional” foreclosure, a strategic default is a voluntary decision to stop making mortgage payments despite the capacity to do so. While choosing foreclosure might strike some as oxymoronic, it turns out that for many, it is actually a perfectly rational choice. Simply, the negative impact on one’s credit score and the possibility of a deficiency judgment, pales for some when weighed against the prospect of spending the rest of one’s lifetime paying off a mortgage that is well underwater.

That’s because while foreclosure technically remains on one’s credit report for 7-10 years, it can become functionally irrelevant in the eyes of lenders in half that time. In addition, deficiency judgments (in which the lender sues to collect the difference between the value of the property at the time of foreclosure and the amount owed under the mortgage) are illegal in many states, and rare in the rest. That being the case, the only remaining consideration is the moral one- deliberately breaking a contract that you have the ability to honor. While there are strong arguments to be made for both sides, I don’t think this is an appropriate forum to explore that dimension, however. Let your conscience be your guide.

Interest rates are down from last week, up from last month, and about even with last year. According to the most recent Freddie Mac Primary Market Survey, the average 30-year fixed-rate mortgage can be had for 5.09% (with fees and points equal to .7), down from 5.14% last week. The average 15-year fixed rate fell proportionately, from 4.54% to 4.5%. Both averages conceal slight regional discrepancies, since rates in the west are currently about .15% lower than corresponding rates in the Northeast.

On the one hand, the fact that rates are lower than last week serves as a caveat to those who insist that rates are headed higher in the long-term. On the other hand, the fact that rates are already well above their lows in December shows that it’s unlikely that a 30-year fixed-rate mortgage can be obtained with a below-5% interest rate any time soon. One commentator dismissed this possibility as “Certainly not in my lifetime, and I doubt it will happen in my kids’ lifetimes.”

The reason for this pessimistic forecast is due to the activities of the Fed, which had pushed rates down dramatically through its year-long purchases of mortgage-backed securities, totaling more than $1 trillion! This buying spree is slowly coming to an end, and some analysts speculate that the Fed could even start to unwind this program later in the year. “Amy Crews Cutts, deputy chief economist at Freddie Mac, told the newspaper [Washington Post] that interest rates were bound to rise to 6 percent by the end of 2010 because private buyers would demand a higher rate of return on the securities than did the Federal Reserve…’Anything we get at or below 5 percent is a gift at this point.’ ”

The Fed is admittedly concerned about this possibility. The president of the Federal Reserve Bank of St. Louis, James Bullard told reporters, “I have advocated to keep the asset-purchase program open but at a very low level, and wait and see what happens.” For now, he remains in the minority, and the program is slated to expire formally in March. That long-term rates are already inching upward indicates that investors believe this date is relatively fixed.

The theme in housing (as opposed to mortgage financing) is similar: the declining role of the government is causing prices (rising interest rates also correspond to lower prices, from the standpoint of mortgage bonds) to decline. According to the most recent iteration of the Case-Shiller Index, “Year-over-year housing price declines [are] at 7.3% year-over-year and only seven cities posted month-to-month gains compared with 19 in September,” as the market transitions from the heyday of summer to the doldrums of the winter.

Home sales data is more ambiguous, with a “cratering” of new home sales offset by a “surge” in sales of existing homes. “While the sales numbers went in opposite directions, they each got pulled by what was supposed to have been the expiration of the $8,000 first-time home-buyer credit. New-home sales…tanked in November because buyers figured they couldn’t close in time to meet the deadline. Existing-home sales…leaped because folks scrambled to finish their deals before the Nov. 30 expiration.” In the end, we know that Congress voted to extent the home-buyer tax credit for an additional six months. Nonetheless, the November data is probably an accurate harbinger of what we can expect as the new May 1 deadline approaches.

The concern is that the stabilization (and modest rally) in home prices that was observed over the summer was strictly the product of government intervention. I already mentioned the Fed’s purchases of mortgage-backed securities and the federal government’s home-buyer tax credit. There is also the loan modification program (which is delaying the inevitable release of foreclosed properties onto the market), the de facto takeover of Fannie and Freddie (to facilitate mortgage financing), and an expansion of the FHA, which now accounts for 30% of all new mortgages, the majority of which are paid for with only 3% up-front equity.

If/when these programs expire, a flood of foreclosed properties could hit the market, first-time home-buyers will disappear, interest rates will rise, credit standards will tighten, etc. Any way you look at it, this would be bad news for housing prices. The problem is that the market has basically become “addicted” to this support, which makes the government reluctant to end it.

The implication is that conditions for buying a house probably won’t be as attractive in the future as they are now. I’m not going to offer specific forecasts and timetables; suffice it to say that the current climate for home-buying is unique in modern American history, and it’s uncertain how long it will last. Whether that means you should go out tomorrow and buy a house is not for me to say. If you are considering it, however, the window to get in could close soon.