Gradual progress in the housing market continues at a steady pace without government support. The market has shown remarkable improvement from the initial drop after the expiration of the home buyer tax credit this past July. Although higher-than-normal distressed sales skew the overall picture of home prices downward, inventory continues to shrink and sales continue to rise. The rock-bottom interest rates of 2010 are likely to trend upward. As economists anticipate rates at or above 6% by the end of 2012, buyers are moving off the sidelines and into the market.
A good sign for long-term market stability is that the median down payment on conventional mortgages has risen to 22%, up from 4% in 2006 and slightly above the 20% standard in the 1990s. This may keep buyers looking in slightly lower price ranges, but it is a good sign of future sustainability for homeowners and banks alike. There are still ample opportunities for those who would like down payments below 20%, including some conventional mortgages and those backed by the Federal Housing Administration, Veterans Affairs, and the Department of Agriculture’s Rural Development loans.
As the economy improves, stimulus efforts by the government and the Federal Reserve Board will gradually wind down, which typically means rising interest rates. Meanwhile, buyers continue to benefit from historically favorable buying conditions and sellers are encouraged by increased market stability.
Housing affordability hit a new record in January. The relationship between mortgage rates, home prices, and family income is the most favorable on record for buying. The home price-to-income ratio continues to remain well below the historical standard. Stabilizing home prices and rising interest rates are expected to reverse the recent affordability trend.
The Federal Housing Administration (FHA) will be increasing mortgage insurance premiums that its borrowers pay each year by 0.25% starting April 18, 2011.
Loans backed by the FHA currently account for more than one-third of all new loans, up from only 2% in 2006. The FHA has taken several steps to strengthen its financial standing since September 2009, when it indicated that reserves would fall below the 2% minimum. Measures taken in January 2010 include raising the upfront insurance fees by 0.5%, capping seller contributions to buyers closing costs at 3%, down from 6%, and requiring a higher down payment for those with poor credit.
As the FHA remains a great option among first time home buyers, those with smaller down payments, and those with spotty credit, its strength and continued viability of FHA is key to the housing market. Upcoming changes to FHA insurance premiums also mean that buyers who are out looking and who intend to use FHA financing will want to finalize their deal and close before April 18.
Sources: National Asoociation of Realtors, Wall Street Journal, Bloomberg and Forbes
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