2013-08-28ml-implode.com

While housing market gains have been promising, recent changes in the industry may be causing some turbulence. Small increases in mortgage rates along with home prices have had an impact that shows that home sales are falling as home affordability slides.

According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index, affordability for median income earners has fallen to 69.3% for the period April through June from 73.7% during the first quarter. This is the first time the measure has dropped below 70% since late 2008. "Rising home prices signal the improving health in housing markets, and the median price of all new and existing U.S. homes sold in this year's second quarter, at $202,000, was well ahead of the second quarter 2012 median price of $185,000," observed NAHB Chief Economist David Crowe. "Together with rising mortgage rates, this contributed to affordability slipping to the lowest level in more than four years."

In another report released by the National Association of Realtors, the Pending Home Sales Index came down 1.3% from 110.9 in June to 109.5 in July. Although down, July's numbers are still 6.7% higher than at July of 2012.

Further, the U.S. Census Bureau and the Department of Housing and Urban Development reported that new single-family home sales were at a seasonally adjusted annual rate of 394,000 in July, down 13.4% below the revised June rate of 455,000. However, this number is still 6.8% higher than July of 2012.

While housing has been the leader in the economic recovery, rising home prices and slightly higher mortgage rates are starting to take effect on consumers who are in need of financing. In order to help previous homeowners return to the marketplace, FHA has updated its guidelines to offer the Back to Work-Extenuating Circumstances Program. This will allow borrowers, who have previously lost their home to foreclosure, bankruptcy, deed-in-lieu or short sale, to purchase a home after 12 months instead of the normal 24 to 36 month waiting period. The borrower must prove that there was an economic event that caused a loss of income of 20% or more for at least six months and that they have returned to work. There are specific guidelines for this latest FHA loan program which includes housing counseling.

Even though home prices have improved tremendously, there still remains many homeowners who are underwater in certain areas of the country. The HARP refinance program has helped approximately 2.4 million homeowners refinance underwater mortgages as of March 2013. This continues to be one of the most popular refinance programs available to homeowners and will remain available until the end of 2015, although rising home prices has led many homeowners out of "underwater" status with the ability to refinance through traditional methods.

With home affordability decreasing in recent months, many homeowners will remain in their existing homes while many new potential home buyers will be priced out of the market. This is an ongoing issue since the advancement of the economic recovery has been relying on the housing market. The potential taper of QE3 in the fall may send mortgage rates higher which will further impact the housing market. The increase in part time jobs instead of full time jobs is another area of concern since, although consumers may be employed, their income may not withstand rising home prices and borrowing rates.

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