Heading Into The New Year

It is that time again. The year is drawing to a close and the predictions regarding next year will start pouring in during the next few weeks. Predictions are a very tricky business. For example, very few predicted that real estate would start its long awaited recovery in 2012 with the many obstacles the economy was facing starting out the year. There were many doomsday predictions regarding real estate mainly because of the millions of homes which were part of the shadow inventory and awaiting foreclosure. Last year we indicated that the shadow inventory of homes that were ready to be foreclosed upon could be absorbed by a series of factors — if the economy kept expanding. Well, 2012 was a year of economic expansion. Of course, the rate of expansion was still excruciatingly slow.

When progress is slow it is very difficult to see it day-to-day. For example, a decrease in the unemployment rate from almost 10% at the beginning of 2011 to less than 8.0% today is significant. However, 8.0% is still much higher than what we would like to see. From 1948 to 2012, the unemployment rate averaged 5.8% according to the Bureau of Labor Statistics. If the economy keeps growing in 2013 and the real estate market continues to expand, the shadow inventory will continue to be absorbed. Last week it was announced that existing home sales rose 2.1% in October. What was really significant about this increase is that Hurricane Sandy was expected to have a dampening effect upon these numbers and sales usually drop off as we move closer to the Holidays. It is as if Americans realize that record low rates will not last forever and they are acting before the sale on America’s real estate ends. And if Americans keep buying real estate, we believe the unemployment rate will continue to fall in 2013.
The Markets. Rates hit another record low last week. Freddie Mac announced that for the week ending November 22, 30-year fixed rates fell from 3.34% to 3.31%. The average for 15-year loans decreased to 2.63%. Adjustable rates were stable with the average for one-year adjustables increasing slightly to 2.56% and five-year adjustables remaining at 2.74%. A year ago 30-year fixed rates were at 3.98%. Attributed to Frank Nothaft, Vice President and Chief Economist, Freddie Mac, “Fixed rates on home loans continued to ease somewhat this week to record lows and should help the ongoing housing recovery. Already, new construction on homes was up 3.6 percent in October to the strongest pace since July 2008. In November, homebuilder confidence rose for the sixth straight month to its highest reading since June 2006 according to the NAHB/Wells Fargo Housing Market Index. And existing home sales increased 2.1 percent in October to an annualized pace of 4.79 million, exceeding the market consensus forecast.” Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.

Current Indices For Adjustable Rate Mortgages
Updated November 23, 2012

  Daily   Value Monthly   Value
  Nov   21 October
6-month   Treasury Security 0.14%  0.15%
1-year   Treasury Security 0.17%  0.18%
3-year   Treasury Security 0.37%  0.37%
5-year   Treasury Security 0.69%  0.71%
10-year   Treasury Security 1.69% 1.75%
12-month   LIBOR    0.924%   (Oct)
12-month   MTA    0.166%   (Oct)
11th   District Cost of Funds    1.038%   (Sept)
Prime   Rate    3.25%

The Federal Housing Administration plans to raise its fees next year in order to help avoid a taxpayer bailout, the Obama administration announced. A report last week revealed the FHA, which insures home loans, faces a $16.3 billion deficit due to a rise in delinquencies over the last few years, particularly among loans that originated during the housing bubble from 2007 through 2009. FHA says it plans to raise its premiums on loans it guarantees by 10 basis points, which equates to about $13 per month extra to borrowers’ costs, Reuters reports. Also the FHA says it plans to increase short sales on loans it guarantees, in an effort to avoid more borrowers foreclosing on their properties. FHA is a big contributor to first-time home buyer funding. It insures about 1.2 million residential loans, which is about 15 percent of all U.S. home loans. The number of loans it insures has increased dramatically over the last few years. In 2006, FHA insured just 5 percent of the all U.S. home loans. FHA is federally mandated to maintain a 2 percent capital ratio—a target it has yet to reach in four years. Its current ratio is negative 1.44 percent, according to a recent audit of its finances. Source: Reuters Note: If you are thinking about purchasing or refinancing, you should move now while rates are still at record lows and before FHA raises their fees. Also, you should be made aware of alternatives to FHA financing.

While home prices are creeping higher across the country, low rates are helping to keep affordability conditions favorable in housing, according to the National Association of Home Builders/Wells Housing Opportunity Index. About 74 percent of all homes sold during the third quarter were affordable to median income families in the U.S. making $65,000, according to the HOI. In the second quarter, the percentage stood at 73.8 percent. “The latest housing affordability data is good news on two fronts, because it shows that the share of homes affordable to median-income earners has risen even as home prices have continued to gradually recover from their recession lows,” says NAHB Chairman Barry Rutenberg. “This is primarily due to the fact that rates are now lower than we’ve seen them since the HOI was initiated more than a decade ago.” The median price of all new and existing homes sold in the third quarter was $189,000, according to the HOI. A year ago, the median price was $176,000. Source: National Association of Home Builders

The excess of supply of homes built during the last housing boom has finally been reduced to a level where builders will have to ramp up construction next year, according to an economist at IHS Global Insight. The Census Bureau recently reported that the homeowner vacancy rate fell to 1.9% in the third quarter, down from a 2.9% peak in 2008. The drop in the vacancy rate shows “we have run out of this excess inventory,” economist Patrick Newport told Source Media. “It’s a great reason for feeling good about the housing market next year. The builders are going to have to start ramping up at a higher rate than they are now,” the Global Insight economist said. A 1.6% homeowner vacancy rate was considered the norm before 2005. But now the HVR norm will probably be in the range of 1.7% to 1.8%. Newport explained that some of the excess supply was built in places where people don’t want to buy homes now. “The fact the housing prices are going up is the strongest sign that the housing market has tightened and we need to build more homes,” Newport said. Unless there is a recession, “we could see a lot more home construction than most people are forecasting,” he added. A JPMorgan Chase Bank economist pointed out in a recent research report that household formation “accelerated” last year, sparking a 659,000 decline in the number of vacant units. But the majority of demand for housing was met by filling vacant housing units, not new construction, according to senior economist Robert Mellman. With vacancy rates coming down and home values rising, that should change to the benefit of builders. “So homebuilding can be expected to increase substantially over the next year as a larger share of the increase in demand for housing units is met by new construction,” Mellman said. Source: Source Media

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