Mortgage Rates Down, Home Sales Up….But for How Long?

These are exciting times to be a mortgage blogger; rarely is there so much fodder for posts! For example, in the last couple weeks, mortgage rates dropped to record lows across-the-board, and housing data indicated that the housing market is still in recovery mode. With both of these developments, one has to wonder whether they are sustainable?

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!