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The housing market: An analysis
Bank sees rebound in late 2009

by David Walden

In most years the holiday season is a season to give thanks for our riches and show our appreciation for others. This year, however, the markets are very concerned that consumers do not have the cash to show their appreciation. Poor retail sales in October could very well lead to a disastrous holiday season. In essence, this could be the peak of the recession.

The poor economy started spreading from the housing slump and judging by tighter inventories, the housing market will have reached its bottom sometime this year. How long it will stay on the floor is anyone's guess, but Bank of America economists are predicting that the economy will start rebounding in late 2009. Just in time for the next holiday season.

While we are expecting Congress to come up with one more stimulus package and this package is likely to squarely aim at the housing crisis, we also expect that the government does not have much additional ammunition in reserve. The Federal Reserve Board has lowered short-term rates to record levels and we are in the process of running up a trillion dollar annual deficit to shore up the financial system. Now we must work through the hard times. Lower oil prices will help. Lower long-term rates would help even more. The worse the holiday shopping season gets, the more likely rates could come down even further despite the fact that the government is borrowing so heavily to fund the deficit.

The Markets.

Rates fell moderately in the past week. Freddie Mac announced that for the week ending Nov. 13, 30-year fixed rates averaged 6.14 percent, down from 6.20 percent the week before. The average for 15-year fixed fell as well to 5.81 percent. Adjustables were mixed with the average for one-year adjustables increasing to 5.33 percent and five-year adjustables falling to 5.98 percent. A year ago 30-year fixed rates were at 6.24 percent.

"Long-term rates fell slightly this week as signs the overall economy is weakening brought interest rates down market-wide," said Frank Nothaft, Freddie Mac vice president and chief economist. "In addition, the actions of the Fed in recent weeks to assist commercial paper markets appear to be thawing part of the credit freeze that has gripped capital markets in the U.S., giving banks some breathing room."

"This is the second week that rates have come down," he added. "The NAR reported that pending existing home sales fell 4.6 percent in September, below the market consensus; however, the index was 1.6 percent above that of the same period last year."

Mortgage Rates

Despite pressure on Congress to extend higher temporary limits, the government has announced that conforming limits for 2009 will stay at a base $417,000 and move to $625,500 in high cost areas, down from the current limit of $729,750. FHA has released its limits for 2009 as well and these are set at 65 percent of conforming limits for low-cost areas ($271,050) and 150 percent of conforming limits for high cost areas ($625,500).

This means that prospective homeowners in high-cost areas should be acting before the end of the year to take advantage of these higher limits with lower rates.

First-time buyers

The 2008 NAR Profile of Home Buyers and Sellers reveals that the number of first-time buyers has risen as a percentage of the market share and that they plan to own their homes longer than buyers in the past.

Lawrence Yun, NAR chief economist, said a higher share of first-time buyers makes perfect sense, and it's a trend he expects to grow.

"First-time buyers are much more flexible in entering the market because they aren't concerned about selling an existing home," he said. "Given low home prices, plentiful supply, and affordable rates, it's been an optimal time for entry-level buyers with a long-term view."

"Considering the temporary first-time buyer tax credit and improvements to the FHA loan program, we expect stronger entry-level activity as the flow of credit improves," he added. "That, in turn, should free more existing owners to make a trade in 2009."

The number of first-time buyers rose to 41 percent from 39 percent of transactions in last year's survey and 36 percent in 2006.

Housing inventories

Housing inventories in 29 major metropolitan areas declined 1.6 percent in October compared to levels in September, according to figures compiled by ZipRealty Inc. Typically home inventories rise in October compared with September, increasing an average of 1.1 percent, says research firm Zelman & Associates. The number of homes for sale in the 29 metro areas where ZipRealty does business was down 9.3 percent from a year earlier, the company says. This figure doesn't include foreclosed properties not included in the multiple-listing services.

David Walden is a Certified Mortgage Planning Specialist in Pleasanton. He can be reached at david@WealthByStrategy.com