As suggested by the name, a Jumbo mortgage is generally a loan that exceeds the principal limits set forth by Fannie Mae and Freddie Mac, whose standards continue to dictate mortgage lending nationwide. The precise limit depends on the location – in order to account for regional differences in the housing market – but ranges from $417,000 to $729,750. Anything less than the Fannie limit is known as a conforming mortgage and anything greater is treated as a Jumbo. Some lenders have even created an overlapping category for mortgages that just exceed the limit known as conforming Jumbo.

Without delving too deeply into the history, suffice it to say that during the housing boom, obtaining a Jumbo mortgage wasn’t much more difficult than obtaining a conforming mortgage, which is to say that they weren’t hard to get. Interest rates were often slightly higher (.3% on average) than conforming loans, and standards were about the same. Of course, you needed to earn more income and/or have more assets, but the ratios that lenders used to determine one’s maximum’s loan size were about the same.

Fast forward to today, where lenders require a 20-25% down-payment for a Jumbo loan. And that is only in a stable housing market! If you need to mortgage a home in a “troubled” region, you can expect to put down even more. It’s not enough to have a documented high income and a stellar credit rating; you need to show that you have enough money in the bank to cushion against job loss and other financial hardship. As for rates, the spread between conforming and Jumbo loans is now 1.55% on average; whereas mortgage rates for conforming loans are now at record lows, jumbo rates are higher than they were during the boom. Basically, delinquency is plaguing jumbo mortgages that were issued during the mortgage boom, and lenders can’t afford the possibility of fresh loans defaulting a few years from now.

Of course, there are ways to get around this lender reluctance. One is to simply put down more money. Some experts testify that making a down-payment of as little as 40% can still result in a waiving of various documentation requirements. For those of you that can’t afford to make a higher down-payment out of pocket, you can consider dipping into your retirement account and/or obtaining a second mortgage that would cover the down payment. Otherwise, you may get stuck waiting for prices to fall further, to the extent that your jumbo loan would be reclassified as conforming, or would at least decline to the point of becoming affordable.

Given that many Jumbo borrowers are in the same boat, a further decline in prices for high-end homes might become self-fulfilling, and you might not have to wait long.

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.

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.

Of course, it’s impossible to know whether we can extrapolate from this onto a nationwide scale. Still, anecdotal evidence suggests that it’s the case. Bidding wars have become commonplace at foreclosure auctions, with investors competing to outbid other investors and homebuyers being largely shut out of the process. Stories abound of homebuyers excited to snatch up homes at bargain basement prices, only to be over-matched by investors, who tend to be more experienced and better capitalized.

Speculators tend to have the upper hand in this aspect, since foreclosure sales are often conducted with cash only. There aren’t many real homebuyers that can afford – nor are willing – to pay $500,000 cash for a house at auction. To echo the advice of Charlie Rose, then, “Don’t try this at home kids. It’s still a risky business.” Not only must the homes be purchased with cash, but the decision to purchase must be made immediately, often without first having the opportunity to survey the property. This is an awful drawback, not only because it makes it difficult to know how much to pay, but also because many of the homes have been deliberately vandalized by the evicted homeowners, sometimes requiring tens of thousands of Dollars in repairs. Not to mention that there might also be other liens on the homes which are assumed automatically by the new owner and must be repaid before the home can be sold.

It’s hard to say how who this phenomenon is benefiting. Some would argue that speculators are yet another (useless) layer separating homesellers from homebuyers, collecting a fee merely for finding the property and underpaying for it. Given that many of these properties are “flipped” in a matter of weeks, there is certainly a shred of truth to this argument. At the same time, the system appears to benefiting all parties involved. Lenders are happy because they get paid cash for properties that they can then clear off their balance sheets and stop worrying about. Homebuyers are happy, because the houses being sold by investors are necessarily in livable condition, whereas the same cannot be said for homes purchased at foreclosure auctions. Speculators are naturally happy because they can earn a tidy profit in the process. The previous (evicted) homeowner probably isn’t happy, but they can’t rightfully blame speculators for their plight.

I always try to conclude all of my posts by underscoring how readers will potentially be affected by whatever phenomenon is being examined. In this case, it’s hard to say definitively. If you are considering jumping into this business, it goes without saying that you need to have done your homework first. From the standpoint of the housing market, it makes me nervous that speculation is picking up just as housing prices appear to be stabilizing. The demand created by speculation is temporary/artificial/illusory, and isn’t consistent with a real housing recovery.

Let’s begin with the mortgage rates story. According to the most recent Freddie Mac Primary Mortgage Market Survey, the average 30-year Fixed Rate Mortgage can be had for the jaw-droppingly low rate of 4.71%. The average rate for a 15-year fixed rate mortgage, meanwhile, is now only 4.27%. Both of these represent record lows. While the Fed has basically stopped buying housing securities, this slack has been picked up by private investors, that are buying Treasury securities (for reasons basically unrelated to the housing market), and sending mortgages rates lower in the process.

One would thing that rates would have fallen enough to entice a fresh group of borrowers to enter the market, but apparently this just isn’t the case. Perhaps, this is due to tighter lending standards, such that the problem is not a lack of potential borrowers, but rather a lack of eligible borrowers. “Credit standards are ‘definitely tighter than they were’ in previous years, said a [real estate agent]. “At least two years of job history, low debt and a good credit score are essential to securing a loan. ‘You have to have all three, you can’t be missing one,’ he said.” In any event, “Mortgage applications for home purchases in the U.S. have fallen to the lowest level in 12 years,” according to the Mortgage Bankers Association.

Despite lower demand for mortgages, demand for homes is generally picking up. This is supported by the data: “Sales of new homes rose more than 6 percent in October…Home prices rose in 11 major metro areas in September.” There has been a “24% gain in existing home sales since January…[and] 22% increase in new-home purchases…[and] 40% rise in single-family housing starts.” Meanwhile, inventory is sinking, and “It would take 7.5 months to sell their inventory at the September sales rate, down from a peak of 12.4 months in January.”

On the other hand, all of the indicators remain down on a year-over-year basis, and there remain significant discrepencies in the data that are skewing the results. For example, prices are still falling in a handful of cities (9 at last count), while some regions (the south and midwest) are stronger than others, and lower-end home prices are rising faster than their higher-end counterparts. In other words, the data remains muddled. The best that can be said is that the US housing market has stabilized on an aggregate basis; unfortunately, this isn’t very meaningful.

Going forward, the picture is even more unclear. The National Association of Realtors (which has a vested interest in rising prices…) is “forecasting 5.69 million existing home sales in 2010, up from an anticipated 5.01 million this year….’The fear factor will no longer be at play in 2010.’ ” said the association’s Chief Economist. There are certainly reasons to be optimistic, considering that supply is shrinking and the economy (and jobs situation) is improving.

On the other side of the debate are those analysts that have used expressions such as “rocky rebound” and “double dip” to describe their forecasts, with one prominent economist declaring pointedly that “The housing crash is not over.” Such analysts have argued that a combination of sustained high unemployment and a release of the so-called shadow inventory will cripple the market over the next couple years, before it ultimately recovers.

This shadow inventory consists of homeowners that want to sell but will instead wait until prices rise before attempting to do so, as well as foreclosed properties that are being held off the market by lenders, and properties that have not yet been foreclosed upon but probably will be in the next couple years. For example, “7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.” In addition, government efforts aimed (separately) at limiting foreclosure and stimulating demand continue to distort the market. When they expire in 2010, it seems that a correction will have to take place.

In short, it’s impossible to say whether this is the time to enter the market. Prices are rising, but could fall. Rates are low, and could rise. The government will give you $8,000 to buy a house, but perhaps houses will fall by more than $8,000 after this artificial support structure is removed. Still, if you forget about the future and concentrate solely on the present, being a buyer has rarely been so sweet!

Meanwhile, the average rate on a 15-year fixed-rate mortgage rose to 4.43 percent, from 4.37 percent last week, according to Freddie Mac. Rates on five-year, adjustable-rate mortgages averaged 4.4 percent, up from 4.38 percent a week earlier. Rates on one-year, adjustable-rate mortgages inched down to 4.54 percent from 4.6 percent. Points across all four categories of mortgages have remained constant at around .6.

Regardless of which survey you prefer, they all indicate that rates are rising. The consensus among analysts and industry insiders, meanwhile, is that they will continue to rise. “At a congressional hearing on Tuesday, MBA Chief Economist Jay Brinkmann said that the ‘most benign estimates are for increases in the range of 20 to 30 basis points’ but that some estimates of potential increases ‘are several times those amounts.’ ” The main reason for the projected increase has nothing to do with changes in the balance between the supply and demand for mortgages. Rather, it is grounded in the expectation that the Fed is planning to turn off the spigot of cash that has already spewed more than $1 Trillion into the market.

Typically, an inverse relationship exists between mortgage rates and home prices, such that when rates rise, prices fall. This is primarily due to the fact that borrowers work backwards when buying a home by first determining the highest monthly payment they can afford. With higher rates, the interest portion of the payment rises at the expense of the equity payment, which translates into a decline in the price of a home one can afford.

It is not clear whether that relationship will hold this time around, if/when mortgage rates finally rise. Home prices have actually ticked up over the last two quarters, and it’s possible that this momentum will be sustained. Unfortunately, this is not the view espoused by the majority of analysts. Robert Shiller, of the eponymous Case-Shiller Index, has discerned through a recent survey that a bubble-mentality has gripped many of the buyers wading back into the market. Anecdotal evidence also suggests that speculators have returned to the markets, en masse.

First-time buyers make up the other large contingent. When the tax rebate underlying such sales expires this month, chances are that this class of buyers will disappear completely. Even if Congress extends the deadline of the program, it’s likely that it won’t have much of an effect, since most of the determined buyers have already entered the market. Investors have already come to understand this notion, which explains why housing stocks are down nearly 20% from the summer highs.

“I’m a firm prophet of the ‘W’ shaped recovery. Housing is going to go down again in the first quarter of 2010. The real healing won’t begin until all these nonperforming loans start trading in earnest, until we get these borrowers back on their feet,” expounded one analyst. In other words, housing prices can’t recover until the economy recovers. Put another way, the housing market won’t return to normalcy until the financial situations of long-term, non-speculative borrowers have likewise returned to normal.

The implication is clear: it’s still a buyer’s market. “Many potential sellers have a desperately weak hand. And many potential buyers lack enough equity in their current home to trade up.” In other words, sellers don’t have any leverage (in the figurative sense), and competition among buyers is limited, to non-existent. In fact, the decline means that many homeowners now have negative equity in their homes, and they are bound to be the most desperate from considering offers.

Some analysts are using these trends as a basis for encouraging investors/buyers to get back into the market. “If a real estate investor can pick up a property for 55 cents on the dollar, fix it up for another 15 cents on the dollar and sell it to a first time buyer for 80-85 cents on the dollar, everybody is happy. The investor perceives this is a good profit margin.” And some investors are doing just that. For several months now, there have been growing reports of bidding wars, featuring above-list price, all-cash offers for distressed properties.

In a recent article, one columnist even invoked the cliche about how real estate is a more sound investment than stocks/bonds because it is tangible. “Not all investments are the same. You can’t live in a stock certificate or gaze wistfully at a bond (at least most of us can’t). In what is still a time of tumult, there’s something deep inside us that finds the solidity of a home soothing. I think that explains why people moving out on the risk scale are focused more on real estate than on stocks or bonds.” Wasn’t this the attitude that led to the housing crisis in the first place?

It’s arguable a good time to by real estate, given the record decline in prices and mortgage rates that remain temptingly low. But the main rationale for buying should ultimately be based on utility, rather than capital appreciation.

Professor Linneman makes an important distinction in his predictions between single-family homes and multi-family homes: “Single-family housing starts have bottomed and will slowly pick up, [and] single-family housing prices in almost every market have bottomed….The multi-family side has fallen off a cliff. Multi-family starts are about a quarter of their historic norm.” In this regard, his analysis is firmly supported by the most recent data: “The Commerce Department said on Tuesday construction starts for single-family dwellings, the worst-hit part of the housing market, rose 1.7 percent from June to an annual rate of 490,000 units — the highest since October. But a 13.3 percent drop in new multifamily home projects pushed overall housing starts down 1 percent last month to an annual rate of 581,000 units after two months of gains.”

By Linneman’s own estimation, the national data is still pockmarked by significant regional discrepancies. The west – California, Nevada, and Arizona – remain battered, and “Construction of new housing in the Western states, including Arizona, fell 1.6 percent in July from the previous month, the second straight monthly decline, and was off 31.9 percent from a year earlier.”  In other words, it’s probably more useful to look at specific regional markets rather than focusing too much on the big picture.

Linneman is especially critical of the government, both for stoking the crisis and for its counterproductive efforts aimed at alleviating it: “We’ve had a government that for the last year has — under both the Bush administration with Paulson and the Obama administration with Geithner — leaped, then looked.” For better or worse, it looks like the government is going to remain active. Already, the government has moved to stimulate home ownershi, increase the stock of rental housing, limit foreclosures, and regulate the appraisal process. Good news for the housing market, even if Professor Linneman isn’t smiling.

But seriously, what special considerations should you take into account when hiring an agent, in light of the housing crisis? You should begin by scrutinizing your agent’s level of experience. During the bubble years, this was often a non-issue. Now, however, it’s vitally important that you make sure your agent is experienced in selling homes that are similar to yours. For example, has he/she sold properties in the same zip code and the same price bracket? If so, she should understand how and to whom to market your home.

One expert writes that quality homes aren’t being sold because, “Your agent isn’t getting the word out, either because the property isn’t listed properly on the multiple listing service or because he or she hasn’t posted it on Craigslist, Zillow or other online search engines that don’t feed directly from her MLS posting.” This also extends to understanding how best to present a home. “Having your home look picture-perfect online makes home buyers want to see how good it looks in person.” In terms of pricing, many sellers mistakenly assume that it’s better to price a home too high, but this could deter potential buyers. Your agent should be knowledgeable about prices for comparable homes, so that the price for your home can be set accordingly: “If your home looks great and is priced right, you’ll get traffic through the front door.”

Your agent should also understand the various financing strategies available to you. This applies especially to short-sales, lease purchase options, and wraparound mortgages. It may not be your agent that is ultimately responsible for structuring such a contract, but you should still prefer one who understands fluently how they work. From the buyer’s standpoint, you want an agent that can tell you what financing options are available to you, and if certain properties are excluded. For example, you may need to be reminded that if a property is too expensive, it won’t qualify for a conventional mortgage. Adds another expert, “If you are interviewing a real estate agent and he or she isn’t familiar with down payment assistance programs, you shouldn’t hire their services.”

Last but not least, you need to carefully negotiate the fees with your agent. An agent that charges too little may not be qualified, but then again the same could be said for an agent that charges too much. In order to attract the most buyers, “You need to make sure your agent is splitting the commission equally with whoever brings the buyer. Some listing agents will take 60 percent of the commission instead of sharing it 50-50, which won’t help you.”

Let’s zoom in on some specific data points: “The Standard & Poor’s/Case-Shiller price index, a closely watched gauge, showed that single-family-home prices rose 0.5 percent from April to May, the first monthly increase since 2006…The federal government reported an 11 percent rise in new-home sales from May to June, the largest monthly gain in nine years. Sales of previously owned homes jumped for the third straight month, up 3.6 percent in June.” Meanwhile, “The median sales price was $206,200, down from $234,300 a year and $219,000 from May.”

At face value, these statistics seem to portray a market that has entered the recovery stage, but they should be interpreted in context. First of all, “Home sales quite often jump in June, the height of the spring selling season.” This June was particularly bountiful because of the federal government, which is offering an $8,000 tax credit for first time buyers, and implemented a de facto moratorium on foreclosures.

However, given the seasonality of the housing market and the fact that both of these government programs are slated to expire soon, “It makes more sense to compare them [home sales] with the same month a year ago. That comparison is less kind — sales were down 21.3% from June of 2008. Seasonally unadjusted data show a total of 36,000 new homes were sold last month, the lowest June total since 1982.” It should also be pointed out that the data is derived from a survey – rather than from actual numbers- and carries a margin of error, such that the true figure could very well be negative.

There are also significant regional disparities contained in these numbers. “Sales were strongest in the Midwest, where they jumped 43 percent from May’s total. Sales climbed 29 percent in the Northeast and 23 percent in the West. They declined slightly in the South.” In California, Florida, Nevada, and Arizona, prices continue to fall, and foreclosure rates are rising.

The high-end market, meanwhile, continues to tank, due mainly to a delayed bursting of the bubble and changes in lending standards. “The supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.”

It’s quite obvious that from an historical standpoint, then, the housing market remains quite depressed. But what about the future? “ ‘The freefall is over,’ says Dean Baker of the Center for Economic and Policy Research.” Warren Buffet agrees: “Most of the problems in the housing market will be over in 18 months or something like that.” Alan Greenspan, however, thinks that “Home prices had stabilized only temporarily. ‘It is possible that could get a second wave down.’ ” Other analysts point out that for as long as the overall economy – specifically the employment situation – remains weak, the housing market will fail to recover. In addition, should interest rates rise suddenly and/or another wave of foreclosed properties hit the market, the market could certainly trend downward.