At a time when mortgage rates have dropped to historically low levels, it would seem normal for home purchases to be on the increase, especially since home prices also remain down. While stricter lending guidelines may be one of the causes of fewer home purchases, high mortgage refinance volume may actually be keeping housing inventory low.

According to the National Association of Realtors (NAR) the Pending Home Sales Index dropped 1.4% in June due to low inventory. The Mortgage Bankers Association's Market Composite Index for the week ending July 27th showed that the seasonally adjusted Purchase Index decreased 2% from a week earlier when it also decreased. While many home buyers may believe it is still a buyer's market, the number of homes for sale has dropped significantly in most locations which is having an impact on home prices. According to the National Association of Realtors, house listings for sale across the nation were 24% lower in June than a year ago.

At the same time, mortgage refinance applications are soaring and reached the highest level in over three years last week. According to the Mortgage Bankers Association's Market Composite Index, the Refinance Index rose 0.8% from the previous week, which hasn't been seen since April, 2009. Refinance applications accounted for 81% of all application activity for the week. There is no doubt that refinances are now the latest financial move to make as mortgage rates continue to be at all time lows. The availability of HARP 2.0, for underwater borrowers who have loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009, has given many borrowers the opportunity to refinance to cheaper mortgage payments or shorter terms. FHA's streamline refinance with reduce mortgage insurance fees, although not as popular, did have a surge of business when it first became available.

Both of these programs are helping to prevent strategic defaults and future foreclosures. In the meantime, many of these borrowers who have used these offers are remaining in their homes and making lower monthly mortgage payments until they gain back some lost equity. The resulting low inventory of houses for sale is now causing the price of homes to increase in many areas, even in those locations, such as Florida, that were extremely hard hit by depressed home prices. As home values increase and loan to values decrease, more existing homeowners will find it easier to obtain a HARP or FHA streamline refinance (when lender overlays don't prevent them), while others may even be able to obtain a traditional refinance. With refinancing, monthly mortgage payments are often much lower than rental payments which will encourage many to remain homeowners.

Without the abundance of jobs available across the country, very few homeowners really have a need to move, at least not for employment purposes. For many it is making more sense to sit back and ride out what's left of the housing crisis until they can see some gains from selling. If high mortgage refinance volume continues, homeowners may very well see equity in their homes increase faster if housing inventory remains low for an extended period of time.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.

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