Even JUMBO rates have fallen: “Just a year ago, the average rate on a 30-year jumbo mortgage—a loan of more than $729,750 not backed by government-sponsored agencies Fannie Mae or Freddie Mac—was 6.86%…Now it is 5.48%—a rate that rivals those available during the height of the credit bonanza.” With the exception of subprime mortgages (which are no longer widely available), virtually every other type of mortgage can be had for an impossibly low rate.

Just for the sake of perspective, consider that mortgage rates are now at their lowest level since Freddie Mac began tracking them in 1971, and according to some sources, they are probably at the lowest level of all time. Whereas last year, pundits were clamoring to predict when rates would begin rising, now they are trying to outdo each other with low-ball forecasts. To be sure, some analysts are clinging to their original forecasts – based on the notion that rates will rise when the Fed tightens its monetary policy and unloads its hoard of Mortgage-Backed Securities (MBS) – but such voices have increasingly come to represent the minority.

Of course, these record-low rates come with a few caveats. First of all, borrowers who wish to qualify for them will need stellar credit. In addition, they should expect to pay .7 points (on average) to their lender. As if that were not enough, it turns out that much of the savings from lower rates is being reaped by lenders, in the form of a “growing difference between the cost of a typical 30-year mortgage and yields on securities guaranteed by government-supported Fannie Mae into which the debt gets packaged.” This spread was originally a remnant of the credit crisis, but has also been exacerbated by consolidation among lenders.

On the one hand, there is evidence that borrowers are taking advantage of low rates, as refinancing applications continue to surge. At the same time, mortgage applications for new home purchases are falling at an annualized pace of 30%, and now represent only 20% of all mortgage applications. In short, low rates are only part of the picture: “The decline we’ve seen in recent weeks is marginal in the sense that mortgage rates were already low. If an $8,000 tax credit didn’t get you off the sidelines, another little dip in mortgage rates isn’t going to do it either,” summarized one analyst.

While lot rates certainly make home-buying more attractive, it doesn’t alter the down-payment, nor does it offset borrowers’ concerns that home prices will continue to fall. High unemployment is also preventing demand from returning to pre-crisis levels. That means that the housing market probably won’t recover until the economy and the labor market first recover. Until then, mortgage demand and mortgage rates will probably remain low.

In hindsight, it appears that the apparent stabilization of the housing market was due almost entirely to the government homebuyers tax credit, which has since expired (for the second time). The most recent figures suggest that the housing market is still not reached the point of self-sustainability, and is still dependent on government support in order to function. It is especially worrying that the housing credit technically won’t expire until June 30 (for those buyers that completed deals prior to April 30), and yet its expiration is already reflected in the numbers.

Throughout the rest of 2010, the market is expected to remain anemic: “If there’s truly a ‘double-dip‘ in store, that would mean drops of around 10-15%.” However, there will be important regional differences: “We are likely to see significant declines in sales in the South and the Midwest, and modest declines in the Northeast and West,” predicted one economist. In addition, lenders are still holding on to an enormous “shadow inventory” of actual and potential foreclosed properties, which will likely drive prices lower when they are ultimately released onto the market.

One has to wonder whether this isn’t a lost cause, not to mention a huge waste of taxpayer money. When you consider that housing prices are probably higher than they otherwise should be (and should have been during the last 6 months), the tax credit essentially amounts to a gift to sellers. Don’t tell that to Senate Majority Leader Harry Reid, who is working to extend the tax credit (to buyers that signed contracts prior to April 30 but haven’t yet closed) for an additional three months. To be fair, the Treasury Department noted that “180,000 transactions that are eligible for the tax credit may not close by June 30 because of delays ” ‘in the closing process.’ ”

For everyone else, it might make sense to simply bide your time and wait for the housing market to hit bottom (for real this time) before diving into the market. For those who are still determined to enter the market, there are a handful of private and local government homebuyer grants that you may qualify for.

According to researchers, this phenomenon is known as cognitive resource depletion. “Shopping for a home and choosing between alternative features ‘can deplete individuals’ cognitive resources, resulting in sub-optimal home-financing decisions. After the shopping experience, consumers may devote less attention to the mortgage-choice process…relying on faulty-decision shortcuts that ‘ultimately result in a higher propensity’ to select higher-risk mortgage products.” They advise that after selecting a home, one wait at least a week before beginning the process of obtaining a mortgage.

A survey conducted by the Atlanta Federal Reserve Bank, meanwhile, found that people who aren’t as adept at math are naturally bad at budgeting for mortgage payments. “Even accounting for a host of differences between people—including attitudes to risk, income levels and credit scores—those who fell behind on their mortgages were noticeably less numerate than those who kept up with their payments in the same overall circumstances.” It’s unclear what implications this has for borrowers; should those bad at math avoid taking out mortgages in the first place?

This probably isn’t practical, and instead, borrowers should budget carefully, regardless of mathematical ability. That means prior to obtaining a mortgage, you should analyze your spending patterns and compare it to your after-tax income in order to determine what size mortgage you are eligible for. Many borrowers simply plug in wishful figures into Mortgage Calculators, in order to inflate the size of the loan that they think they can afford. In this case, it’s truly “Garbage In, Garbage Out,” which means the calculations are only as good as the inputted numbers. Do yourself a favor and take this exercise seriously. Also, be advised that, “Qualifying for a loan amount doesn’t mean that it is in your best financial interest to take on that much debt.”

Finally, there are a handful of financial considerations that don’t involve obtaining a mortgage, and are instead connected to the purchase price for a property. When negotiating such a price, remember that the transaction consists of more than simply assigning a value to the property. Even after agreeing on what the property is theoretically worth, you might still to extract savings by persuading the borrower to pay for certain repairs and housing fixtures, pay for your closing costs, pay you to delay your move-in date, and/or leave over some large appliances. In short, “Everything in a real-estate deal is open to negotiation, and sometimes price isn’t the most important factor.”

It could be argued that this is a welcome sign of recovery in the housing market. After all, given that a foreclosure crisis appears to be raging, shouldn’t we be happy about the bidding wars that have broken out over recently foreclosed properties? Along similar lines, isn’t the return of investors a manifestation of optimism towards housing prices and hence, a positive development?

Alas, the re-emergence of speculation is also associated with less benign developments. In Las Vegas, where home prices are down 60% from their peak, and tens of thousands of homes sit empty, investors are licking their lips. ” ‘The chance to make money on the next housing boom “is like it’s never been,’ said…a real estate promoter. ‘We’re going to come back like you’ve never seen us before..’ ” Meanwhile, “Analysts have calculated that it could take as long as a decade for inventories to return to their precrash levels and for demand to once again exceed supply.” The concern, then, is both that a new bubble could be ignited and that such a bubble would quickly explode, bankrupting and necessitating bailouts for another batch of homeowners.

Meanwhile, personal finance columnists have taken to advising their readers on trying to time the market when buying/selling a home: “There just doesn’t seem to be any upside to your listing your home now. You’ll be better off if you use the time before your husband’s retirement for de-cluttering, landscaping and prettying-up your home so that it draws top dollar next spring,” suggested a columnist for the Wall Street Journal. There’s nothing wrong with being optimistic, but it worries me that homeowners are getting caught up in the same mindset which produced this crisis, and setting themselves up for disappointment, in the process.

A blogger for TIME magazine astutely pointed out that this mentality can be toxic: “The development of a market-timing mindset in housing is worrisome. That’s because it’s not clear to me at what point metrics like price-to-rent ratios go from being tools used by homebuyers to stand-alone reasons people decide to buy.” Given the large sums of money involved, it’s understandable that financial considerations are also going to preponderate in the mind of the buyer. However, the decision to buy/sell a home should be made from the standpoint of utility, and based on the specific circumstances of the borrower.

Homeowners ultimately need to recognize that over the long-term, home prices will appreciate nearly at the rate of inflation, with any discrepancy explicable from changes in supply and demand. Thus, if the investment/speculation motive continues to carry weight, then another boom/bust will be self-fulfilling.

Unsurprisingly, the relationship between rent rates and housing prices is highly regional. According to an analysis by the New York Times, “In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis. But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began.” The author concludes that while the former cities offer some great bargains, buying property in these latter markets makes zero financial sense.

Without listing every market and which way the corresponding calculation is currently tilting, it probably makes sense for you to run the numbers yourself. Generally speaking, there are a handful of factors that need to be taken into account. In terms of buying, the purchasing costs, annual costs, lost opportunity costs, and selling costs, need to be weighed against the expected home-price appreciation. In terms of renting, these same costs should likewise be weighed against the expected rent price appreciation. Then, the economy of renting should be compared against the economy of buying.

If this kind of calculation sounds daunting, don’t worry! The New York Times Rent/Buy calculator has done all of the hard work for you, with 7 basic inputs (and 16 additional advanced inputs). After crunching the numbers, it will determine whether buying is more economical than renting, and if so, how many years you will have to remain in your home before this is the case. It will also compute your cumulative savings, and display this in graphical form against the number of years that you expect to live in your home after buying it.

In the end, the biggest variables are home price and rental price inflation, and unfortunately, no one can accurately predict how these will change. Thus, it’s probably wise to be conservative when estimating these variables, and assuming that they will be somewhat similar. As for most of the other inputs, setting them should be within your control or fairly easy to predict.

If you’re feeling lazy and/or don’t place a lot of stock in overly complex complications, you can do a back-of-the-envelope rent ratio calculation, by dividing the purchase price for a house that you are looking at by the annual cost of renting a similar one. According to experts, “When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.”

Frankly, this is pretty amazing, considering the current state of the housing market. To be fair, these figures have declined steadily over the last five years, because homeowners have been chastened by the housing crisis. Still, 70% of respondents believe that housing is a “safe” investment, and that a comparable percentage believes that home prices will either remain flat or appreciate this year. This is a real testament to the optimism (some might be inclined to call it naivete) of Americans, who remain committed to home ownership in spite of the simultaneous realization that homes are becoming less and less affordable.

At first glance, one (myself included) might be inclined to dismiss this kind of mindset as ignorant. According to a recent academic paper [Can Owning a Home Hedge the Risk of Moving], however, buying a home now is still financially beneficial, because it enables home owners to hedge against price increases that can potentially occur if they wait until the future to buy.

The rationale here is actually quite sophisticated, and is based on the notion that housing prices in comparable regions tend to be highly correlated. In other words, home prices in Philadelphia and Boston tend to rise and fall in relative unison, and the same goes for prices in rural Alabama and Arkansas. To be sure, there is (probably) only a weak correlation between housing prices  in Philadelphia and Alabama, but this isn’t important, because the majority of homeowners in Philadelphia will never contemplate moving to Alabama, and vice versa. For the majority of homeowners, which tend to move within the same region and to comparable regions, they can effectively hedge against changes in housing prices by already owning a home:  “If a new house in a new city has…gone up in price by $10,000, a homeowner can cover that higher price with the capital gain. A renter would be out of luck.” If prices in both regions fall (as a result of the current housing crisis, for example), current homeowners would be equally unaffected, since any loss in equity on their current home would presumably be offset by paying a lower price for a new home.

The authors also point out that housing is different from other types of hedging instruments, in that it has real utility, since the owner gets to live in the house in addition to owning out. Finally, “Homeownership seems to induce saving on the part of households because they will pay down the mortgage, and by the time they are in their 70s they have no housing debt anymore. People are willing to put equity into a house, but wouldn’t be disciplined to put it into the stock markets.”

On the other hand, the authors concede that this notion is not as cut-and-dried when the home was purchased with borrowed funds (aka a mortgage): “The real cost of house price declines come from leverage. That’s the real risk of owning a house.” This is especially true when home prices decline precipitously to the point that the borrower owes more on the mortgage than his home is worth, a condition known as being “underwater” and that currently applies to about 25% of borrowers. In such cases, “The homeowner cannot afford to move because there is no equity left to form a down payment on another home.”

This is a crucial oversight on the part of the authors, since the vast majority of homes were financed, rather than bought outright. In fact, according to the latest American Housing Survey, which was last published in 2008 by the US Census, the average homeowner owes $100,904 in mortgage debt, which on average, represents 55% of the value of the mortgage property. When you consider that since then, housing prices have fallen 20-30%, that means the average borrower lost close to half of their equity, or $50,000. You can see from the chart below that as home prices have risen over the last couple decades, so did the amount of mortgage debt, which means the home price gains weren’t necessarily captured by the homeowners.

When you factor in the mortgage, then, the financial benefits of home ownership are much hazier.

Since bottoming in May 2009, housing prices have unequivocally stabilized, and are even rising in many areas. (As I pointed out in the last post, there are even several regions which never experienced a bust, and, thus,where housing prices have never stopped rising). This is even true for some of the epicenters of the housing crash. For example, “The median price paid for new and previously occupied houses and condominiums in Southern California jumped 14% in March to $285,000 from the same month a year earlier.” In addition, housing starts have reached one of the lowest levels on record, which combined with demographic trends, suggests that a recovery is inevitable.

At this point, the main issue is whether this stabilization is a temporary aberration or the beginning of a long-term trend. Unfortunately, the data (as well as common sense) seems to imply that this trend is only temporary. The most recent S&P/Case-Shiller Index, considered to be the most accurate indicator for housing prices nationwide, “reported that the non-seasonally adjusted Composite-10 price index declined slightly since December…The 10-city composite index declined 0.04% as compared to January 2009 while the 20-city composite declined 0.70% over the same period.”

Yale economist Robert Shiller (after whom the index is named) also has serious doubts about whether this recovery will continue. Mr. Shiller argued in a recent New York Times Op-ed piece that housing prices are strongly connected with the national conversation (dictated in part by the media and housing forecasters), and that in this particular case, there’s no evidence “that the fundamental thinking about housing has shifted in an optimistic direction.”

As further support for his case, he cites The National Association of Home Builders index of traffic of prospective home buyers, which accurately predicted the boom, bust, and subsequent (modest) recovery. He points out that, “The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.”

Meanwhile, the Fed has stopped buying mortgage securities, and mortgage rates could soon begin rising. An enormous shadow inventory of foreclosed properties has yet to hit the market, and in fact foreclosures are still rising. As The Atlantic pointed out,”The Obama administration’s mortgage modification program has slowed foreclosures, but has failed to permanently prevent most.” Finally, the expiration (for the second time) of the homebuyer tax credit on May 1 is expected to have a significant dampening effect on demand.

In short, the national picture is pretty unambiguous. Still, if anything can be said definitively about the national housing market, it’s that there is no national housing market, but rather a collection of very distinct, regional housing markets. Unless you are planning to buy a house in all 50 states, then, it’s the regional forecasts that are ultimately more useful.

The first claim is not wholly surprising. It has already been established that the areas characterized by the wildest booms also saw the most violent busts: California, Florida, Arizona, and Nevada. You can see from one of the report’s excellent pictorial graphs that New Jersey, Massachusetts, Connecticut, and New Jersey also fall into this category. On the other hand, most of the non-coastal US experienced neither boom nor bust, while the Pacific Northwest, and much of the east coast (excluding the aforementioned states) boomed and didn’t bust. Michigan, Ohio, as well as parts of Indiana and Illinois inhabit the worst of both worlds, having experienced the bust without the boom.

There are a few prima facie conclusions that can be quickly drawn from this. First, the majority of big boom / big bust regions are in tropical/arid areas, and are commonly associated with retired people. The two main exceptions to this rule were Honolulu and Virginia Beach. In addition, most of the country’s largest and most populous cities experienced at least at least a mild boom and bust. On the other hand, areas where land is inexpensive and wildly available (as in much of non-coastal experience) have experienced neither boom nor bust, since increased demand can be easily be met with affordable, increased supply. This is also true of the handful of states that experienced bust without boom, as housing supply has been consistently plentiful, but demand has been hit by the economic recession. The absence of major recession in some ares, meanwhile, perhaps explains why they have continued to boom in spite of what’s been happening in the rest of the country.

These conclusions are largely intuitive, and without the report’s careful analysis, that’s all that we would have. Fortunately, the authors didn’t stop here. Their next step was to map the “penetration” of non-prime loans, along with the corresponding rates of delinquency and foreclosure. Unsurprisingly, delinquency and foreclosure appear to be somewhat correlated with the penetration of non-prime lending. However, this correlation is weaker than one would expect, due to the superseding effect of economic recession.

What is more interesting, is the very strong correlation (64%) between non-prime loan penetration and boom & bust. In other words, the regions where housing prices rose quickly and fell steeply were the very same regions that experimented with unconventional types of mortgages and were most able to provide financing for all borrowers. “Metropolitan areas with a higher penetration of these loans by 2006—when activity peaked—experienced faster home price appreciation, but also saw a relatively rapid decline in values once the reversal began. Accordingly, a larger number of the nonprime loans that originated in these areas have entered delinquency or foreclosure.” Still the authors point out that these two trends were self-reinforcing: non-prime lending activity fueled housing price appreciation, which in turn fueled more non-prime loans.

From a practical standpoint, there are two take-aways from this report. The first is that there is no free lunch: if housing prices are rising due to speculation (rather than economic fundamentals and demographic drivers), there is a high probability that a correction will follow. Second, if ever it is too easy to obtain a mortgage (in a particular region), again, there is a high likelihood of boom & bust.

During the boom, very little attention was paid to this critical issue because housing financing was so easy to obtain. It didn’t matter whether the underlying housing could still be considered affordable, because it could be financed. Never mind that many borrowers clearly couldn’t afford to make mortgage payments, since innovations in lending allowed them to roll the interest and principal they owed back into the mortgage.

The housing bust and mortgage crisis has exposed the hollowness of this system, as millions of homeowners default on mortgages that they couldn’t afford from Day 1. The government’s response to this has been predictable: help existing borrowers refinance or modify existing mortgages, and help new borrowers secure cheap and easy credit. As the crisis subsides, however, the government will have to shed itself of this crisis-mentality and focus on making housing affordable over the long-term.

In fact, there is already evidence that this is happening, as state and local agencies move to increase the stock of affordable housing, which is typically defined as housing that consumes no more than 30% of borrowers’ income. While jurisprudence varies, most localities have statutes that stipulate a fixed proportion (~10%) of the housing stock meet certain affordability tests. Until this ratio is breached, developers that incorporate affordable housing are supposed to receive priority. Sometimes, these new developments will consist entirely of cheap housing units, while others will include a mixture of subsidized (public or private funds) and market-rate units. As a recent case in Connecticut showed, localities that try to block affordable housing can face legal action.

The federal Department of Housing and Urban Development (HUD)is also expanding its efforts to fund more affordable housing through its three staple programs: “The HOME Program…provides grants to States and local governments…which use their HOME grants to fund housing programs that meet local needs and priorities….SHOP [Self-Help Ownership Program] provides funds for non-profit organizations to purchase home sites and develop or improve the infrastructure needed to set the stage for sweat equity and volunteer-based homeownership programs for low-income families…The Homeownership Zone program allows communities to reclaim vacant and blighted properties, increase homeownership, and promote economic revitalization by creating entire neighborhoods of new, single-family homes, called Homeownership Zones.” The latter program hasn’t been funded since 1997, but could be resurrected in the wake of the housing crisis.

If you want to apply for one of these grants, you should contact the nearest HUD office. If you think you might be eligible for private affordable housing, you must contact developers of specific projects, since they may have varying requirements and application procedures. You can start by doing a Google search for affordable housing.

Government intervention programs in the housing market are numerous. Mr. Shiller mentioned the first time homebuyer tax credit and the $1.25 Billion in Fed MBS purchases. Acronyms abound, with the HAMP modification program and the HREF refinancing program. There was TARP, which directed cash to struggling banks so that they might step up mortgage lending. There is an ongoing initiative aimed at encouraging principal reductions and deeds-in-lieu of foreclosure, where appropriate. There is the government conservatorship that still encases Fannie and Freddie. There is the FHA, which now now insures more than 1/3 of new mortgages. There are the discretionary funds awarded to states to fund experimental relief efforts. And of course there is the mortgage interest tax deduction, which was in place well before the housing crisis, but is worth pointing out nonetheless.

There are a few key threats to all of these programs. The first is one of financing: they are expensive to operate, and it’s unlikely that they will pay for themselves, despite the government’s insistence. The second issue is efficacy. The modification program, for example, has helped only a handful of eligible borrowers, and hurt many more by simply delaying foreclosure. Meanwhile, new evidence suggests that the interest tax deduction does nothing to spur home ownership. Finally, there is the issue of whether these programs are even producing outcomes which are desirable. “I don’t see anything being gained by holding housing prices higher than the market rate. It is difficult to see why the government would want to pursue policies that would encourage people to pay too much for homes,” Dean Baker recently told reporters. In short, it looks like time is running out.

The Fed has essentially stopped purchasing MBS, although it is currently debating whether to resume doing so. The homebuyers tax credit was renewed once, but is unlikely to be renewed again when it expires in May. The modification program is still alive, though generally acknowledged as a failure, and it could be completely closed soon. High default rates already threaten the solvency of the FHA, and despite premium increases, it may have no choice but to cut back on lending. Fannie and Freddie are safe until 2011 (according to Treasury Secretary Tim Geithner) although Congress has already indicated that they will be abolished. As for the mortgage interest tax deduction, the housing crisis revealed how counter-productive it was, and it could be one of the first things to go when the federal government gets serious about fiscal responsibility

So there you have it. The government clearly wants you to buy a house now! It will subsidize the purchase, facilitate the financing process, keep borrowing costs reasonable, and help you make payments if you get into trouble. Why wait, right? On the other hand, when the government pulls the plug, the bottom could fall out of the housing market. In which case, that FHA loan and $8.000 tax credit might start to look like a booby prize.