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The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Now that home prices have cooled in key markets across the country, many young people who thought they were priced out of the market are now eager to buy. But they may need a little help from the bank of mom and dad.

Parents can give children money towards the down payment on their first home. But to make sure you do not run afoul of federal gift tax rules, parents should know that each parent can give a child up to $12,000 per year without incurring a gift tax.

The lender is usually okay with the money being put down by the parents, so long as they don't feel the money is actually a loan "in disguise." In order to prove this, each lender will have specific requirements for documentation.

One easy form of documentation is simply a written letter, stating that the money is indeed a gift, and not a loan that needs to be re-paid. This, in essence, frees the child from obligation to pay it back, so it will not impinge on their ability to pay the lender back.

The lender may also require proof of the transfer of funds. This may include a bank deposit slip, or if you deposit the funds on your child's behalf, lenders may want to see documentation of the child's bank statements since the transaction.

Be aware though, that in this tough credit market, lenders may not be satisfied with parents being the sole contributors to a down payment. Children may still need to ante up some of the money themselves, as a form of good faith, in hopes of assuring lenders that the children will not simply walk away from the mortgage and default in the future.

WASHINGTON - With mortgage defaults surging and politicians urging the industry to do more, six lenders agreed to widen their effort to help borrowers of all loans — not just subprime.

The plan, called Project Lifeline, is to be announced Tuesday by the Treasury Department and the Department of Housing and Urban Development, a person familiar with the plan said Monday evening, confirming earlier news reports and speaking on condition of anonymity because it had not yet been made public.

The plan will allow seriously overdue homeowners to suspend foreclosures for 30 days while lenders try to work out more affordable loans are worked out.

On a pilot basis, the plan will involve six of the largest mortgage lenders, in hopes that more lenders will sign on. The participants are Bank of America Corp., Citigroup Inc., Countrywide Financial Corp., JPMorgan Chase & Co., Washington Mutual Inc. and Wells Fargo & Co.

All six are involved in Hope Now, a Bush administration organized effort to freeze rates on some high-cost subprime mortgages for five years to aid borrowers whose teaser rates are jumping sharply higher. Since then, Treasury Secretary Henry Paulson has urged lenders to expand that effort to cover struggling homeowners with conventional mortgages.

The new plan applies to seriously delinquent homeowners, those whose mortgages are 90 days or more past due.

The Hope Now alliance, which includes lenders, investors and nonprofit groups, said last week that it helped nearly 8 percent of subprime borrowers in the second half of 2007 — more than its original estimate.

The group said it helped 545,000 subprime borrowers with spotty credit in the second half of last year, compared with its January estimate of 370,000. That works out to 7.7 percent of 7.1 million subprime loans outstanding as of September 2007.

Among the subprime borrowers aided, 150,000 were helped through permanent-loan modifications, such as lower interest rates, while 395,000 negotiated repayment plans, which often involve a borrower getting back on track even after missing a few payments.

Consumer groups, however, point out that many borrowers still can’t keep up, even after loan workouts. They say many of the borrowers in the Hope Now effort have negotiated short-term loan modifications or repayment plans, which often involve a borrower getting back on track after missing a few payments. A full-fledged refinancing at a lower rate is preferable, they say.

Near record low interest rates are making homes much more affordable.

According to the Mortgage Bankers Association, interest rates fell last week which boosted mortgage applications to a seasonally-adjusted 32.2 percent. In real terms, total mortgage applications shot up an astounding 8.7 percent compared to the same week a year ago.

Rates on 30-year fixed mortgages averaged 5.73 percent, down from 6.05% only the week before.

For every 1/8th point on a conforming loan, you pay about $25 per month in interest. If you refinanced, you improved your position by $50 a month just for refinancing last week instead of the week before.

That could explain why financings were 57.7 percent of mortgage applications last week up from 50.9 percent the week before.

The typical homeowner plans to stay in their home about 10 years. That could explain why more people were interested in refinancing their mortgages last week than putting their houses on the market.

Housing prices are flat and predicted to remain so, so homeowners can afford to sit tight.

Now some market timers might think they should wait for lower rates to accompany lower housing prices, but they risk missing out on the choicest properties.

They want low rates, low housing prices, and the right home to wait. What are the odds all three will be there? Right now, the greatest risk is that the home the buyer wants will be snapped up by someone else who's not willing to play chicken with $25 to $50 a month. And that's when housing markets trend upward.

The mortgage bond market anticipates the news, like employment data. Unemployment was 4.5 percent in November. Today it's 5 percent. Inflation data and other economic data has already been calculated to assess long-term lending risks.

Mortgage rates might improve a fraction or two, but it's far more likely they'll go up, based on the latest inflation data.

That's not a bet smart homebuyers should be willing to take.


Written by Blanche Evans
January 10, 2008 

Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year

McLEAN, VA -- Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey (PMMS) in which the 30-year fixed-rate mortgage (FRM) averaged 6.14 percent with an average 0.4 point for the week ending December 20, 2007, up from last week when it averaged 6.11 percent as well. Last year at this time, the 30-year FRM averaged 6.13 percent.

The 15-year FRM this week averaged 5.79 percent with an average 0.4 point, up from last week when it averaged 5.78 percent. A year ago at this time, the 15-year FRM averaged 5.89 percent.

Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.90 percent this week, with an average 0.5 point, up from last week when it averaged 5.89 percent. A year ago, the 5-year ARM averaged 5.96 percent.

One-year Treasury-indexed ARMs averaged 5.51 percent this week with an average 0.6 point, up from last week when it was 5.50 percent. At this time last year, the 1-year ARM averaged 5.44 percent.

"Stronger-than-expected inflation reports and retail sales for November put upward pressure on long-term interest rates late last week," said Frank Nothaft, Freddie Mac vice president and chief economist. "However, ensuing data releases suggested further weakness in the housing market over November and December and allowed interest rates to drift back down. The net effect left mortgage rates little changed this week."

"Both the producer and consumer price indexes jumped for the month of November, implying inflation may still be a threat to the economy while retail sales increased twice as much as market forecasts, reflecting healthy consumer spending. At roughly the same time, single-family housing starts fell 5.4 percent in November to 829,000, the slowest pace since April 1991, and homebuilder confidence in December held for the third consecutive month at the lowest level since records began in January 1985."
Copyright © 2007 Realty Times. All Rights Reserved.

Ok, We all have been waiting for our cool down and here it is. I know that when my pool is to cold to swim in!  This is why we live here. The unemployment rate is still low just over 3%. Our housing market has dropped like every other place in the nation, but that market of 2005-2006 was way over inflated, so we really are just settling back down to a more normal and reasonable market. We still have a lot of people moving to the great sunshine state, why you ask, because we have sunshine and jobs.

If you want a free relocation package or just talk about the Arizona market, please respond to my blog or call me at 623-680-2511.  Tami Ellsworth RE/MAX Integrity Realtors, Glendale, AZ