Positive mortgage market factors emerging

Things are looking up for consumers who are looking for a mortgage loan to either finance the purchase of a home or refinance an existing loan. Recent developments in the mortgage industry will make home loans more affordable and accessible for many consumers in coming months, according to a report from the National Association of Realtors. This should help release some of the current pent-up demand by early next year, the report predicted.

“Conforming loans (those under $417,000) are abundantly available today at historically favorable mortgage rates,” said Lawrence Yun, NAR's senior economist. “Pricing has steadily improved on jumbo mortgages (over $417,000) since the August credit crunch, and FHA loans are replacing subprime mortgages.” He noted that it's important to place the current housing market in proper perspective. This year will probably be the fifth highest year on record for existing-home sales.

“Although sales are off from the unsustainable peak of 2005, there is a historically high level of home sales taking place this year. A lot of people are, in fact, buying homes. One out of 16 American households is buying a home this year. The speculative excesses have been removed from the market and home sales are returning to fundamentally healthy levels, while prices remain near record highs, reflecting favorable mortgage rates,” Yun said.

Existing-home sales are expected to total 5.78 million this year, then rise to 6.12 million next year. New-home sales are forecast at 804,000 this year and 752,000 next year, NAR projects. “A cutback in housing construction is a positive sign for the market because it will help lower inventory and firm up home prices,” Yun said.

General housing market to start recovery in early `08

Home sales should bottom out by the end of the first quarter of this coming year, according to a recent study and report from the National Association of Home Builders.

Despite current market sluggishness, the housing market will start to turn around next year for a number of reasons: the overall economy and job growth will continue to move ahead at a decent pace, core inflation is under control, the credit crunch in mortgage markets is showing signs of easing, and the supply-demand equation will be better balanced as builders begin to whittle down their excess inventories.

That's the prediction of David Seiders, chief economist for NAHB. “With the housing sector facing a large backlog of unsold inventory, new construction starts and permits won't begin to move forward until sales firm up. Home sales should bottom out by the end of the first quarter of next year, and housing starts will be up in the third quarter, assuming the inventory overhang stabilizes,” he said.

NAHB's short-term forecast is based on several assumptions: skillful management of monetary policy by the Federal Reserve, maintenance of solid growth in personal income and employment, a manageable wave of home mortgage foreclosures and better performance of mortgage markets going forward. The report observed that the long-term potential for housing activity is very good. “By the end of 2009, we may be at a pace of 1.5 million units of new housing production (including manufactured homes). Once we are out of the woods, we should see good growth in front of us – maybe 2 million units per year.”

New law to fix tax flaw

A currently proposed bill (H.R. 1876) would correct what many consumers and real estate professionals consider to be a serious flaw in our tax system. It would change the current law that forces individuals to pay an income tax when they have had part of a mortgage loan forgiven or have been forced to foreclose because of their inability to pay their mortgage payments.

In cases where home owners with only a small amount of equity have no choice but to sell their home, their stagnant or declining property values can cause them to fall short of the amount needed to pay off a mortgage. This is called a “short sale,” and is often accepted by the lender. Then the IRS steps in and demands that the forgiven amount be taxed. The current tax code requires lenders who forgive debt to provide a Form 1099 to the IRS stating the amount the borrower has been forgiven.

“How can we add insult to injury?” asked Pat Combs, president of the National Association of Realtors. “As if losing your home isn't painful enough, to turn around and tax a family on what the government calls income is distressing. Clearly, it's unfair to tax people on a phantom income, particularly right at the time they have experienced a serious economic loss and probably have no cash to pay the tax.”

New reform legislation may cost mortgage borrowers

Currently proposed legislation to reform the bankruptcy code and allow judges to impose debt on primary residential mortgages will create significant costs on consumers by restricting the flow of capital into the mortgage market thus increasing their cost, according to David Kittle, chairman-elect of Mortgage Bankers Association.

“If you chip away at the security created on home mortgages you chip away at the entire core of the mortgage finance system. In order to account for the added risk you will add costs to obtaining a mortgage. Rates would jump, going up to 2 points for everyone taking out a loan,” Kittle predicted.

Tightening mortgage standards won't derail housing recovery

The tightening standards for home mortgages will not derail a national recovery in the housing market, according to a study by the National Association of Home Builders. However, it will complicate the system for a while.

The impact of the new standards on housing markets comes in two forms. First, tightening lending standards have reduced the availability of some loans and raised the price to riskier borrowers. Second, it creates the potential for a cycle of defaults and price declines, depending on the local home price environment and strength of the local economy, the NAHB study revealed.

New home sales up

Newly constructed home sales increased in September, recovering from very sluggish activity during the summer months, it was noted in a Commerce Department report. Sales increased by 4.8 percent over the previous month. However, sales were still down by 23 percent over the past year.

At the same time, sales of existing homes and condos fell 8 percent in September to the lowest level in at least eight years, according to the National Association of Realtors. Inventories of existing homes rose 0.4 percent at the end of September to 4.4 million available units for sale, representing a 10.5-month supply at the current sales pace. There was a 9.6-month supply at the end of August.

Buying a home vs renting a dorm for students

An increasing number of parents of college-bound offspring are purchasing a condo or small house in the area of the college for their student's residence while attending the college or university. In some cases, it appears to be more cost-effective than paying for a room in a dorm. The student will often rent out a portion of the purchased unit to one or more students to minimize the investment. When the student's attendance at the college is completed, the unit will be sold, hopefully at a profit.

There are now about 3 million campus houses and condos that have been purchased by students or their parents, according to a report from the National Association of Realtors. That represents about 8 percent of the nation's 37.4 million investment properties, but excludes 6.8 million vacation homes. In addition to the possible financial advantage, owning such a residence gives the student more freedom, and a choice of roommates. For parents, it offers a chance to recoup some of the rising costs of higher education, assuming it turns out to be a good investment.

Many parents are spooked by the unknowns in such an arrangement. Can the extra space be rented at the projected rental amount? Will the student handle his extra freedom responsibly? Will the property later sell at a profit? These and other concerns tend to keep the dorms fully occupied despite the growing trend.

Many markets still stable and prospering

While there is much press coverage about today's troubled real estate markets, there are many markets throughout the country that have minimal subprime mortgage exposure and are now experiencing a stable market, it was noted by the National Association of Home Builders. These markets experienced modest and sustainable home price appreciation during the boom years and have relatively strong local economies. The markets are positioned to outperform the national trends with earlier and stronger recoveries than the more troubled markets, according to David Seiders, NAHB's chief economist.

These little-publicized markets are primarily located in the Pacific Northwest , mountain states and in the Southeast. The areas are now recording single-family home construction permits at or above pre-boom levels. “The contrast between the strongest and weakest markets across the country points out substantial regional variation and suggests that steep nationwide home price declines and mortgage defaults are unlikely,” Seiders said.

Another good news signal comes from the mortgage front. More people are managing to keep up with payments on mortgage loans made in recent months, according to data from First American Loan Performance, a research firm. The trend reflects more conservative lending policies adopted by mortgage companies this year in the wake of a surge in defaults and foreclosures, said Mark Carrington with First American.