Home Prices Increase While Mortgage Rates Remain Low and Fiscal Cliff Looms

While the housing market continues to be the bright spot in the economy, other markets continue to be faced with uncertainty. Home prices are on the increase in many areas while mortgage rates continue to remain low. Amid this good news, the fiscal cliff looms over the economy and threatens to lead us back into a recession if a solution and agreement are not made by the end of the year.

Home prices continued to climb in September for the sixth straight month, according to the S&P/Case Shiller report. The Composite Index rose 2.2% during the third quarter of this year and was 3.6% higher than the third quarter of 2011. The average home price increased 0.3% in September 2012. Also reporting, the Federal Housing Finance Agency (FHFA) House Price Index (HPI) showed a 0.7% increase in home prices for August which was a 4.7% increase from a year ago. According to FHFA, homes prices nationally are about at the same level as in June of 2004 and 15.9% below the peak in prices that was reached in April of 2007. The FHFA index is based on the purchase price of homes with mortgages that are owned or guaranteed by the GSEs, Fannie Mae and Freddie Mac. Housing is expected to fluctuate just as the seasons change. The Commerce Department reported that new home sales were down 0.3% in October to a seasonally adjusted 368,000 unit annual rate. September sales rate was also cut from 389,000 to 369,000.

With the availability of special mortgage refinance programs, HARP 2.0 and the FHA streamline refinance, many borrowers have been able to save money by trading in for lower mortgage rates. Most of these borrowers were underwater and were considered at high risk of default. According to Lender Processing Services (LPS), national mortgage delinquencies and the foreclosure presale inventory fell sharply in October. At the end of October, the delinquency rate, including loans that were 30+ days past due was 7.03%, a decline of 4.91% from September and -7.19% change from October of 2011. The foreclosure pre-sale inventory rate was 3.61% which was a decrease of 6.77% from September and down 15.99% from a year ago.

Many homeowners have taken advantage of HARP 2.0 which is available for loans that were sold to Fannie Mae or Freddie Mac prior to June 1, 2009. This refinance program was created mainly for underwater borrowers who are unable to refinance. By eliminating loan to value caps and making guidelines easier, borrowers are able to trade in to lower mortgage rates in order to save money. For FHA mortgage holders, the FHA streamline refinance with no cash out was enhanced to drastically reduce the upfront and annual mortgage insurance premiums for loans that were endorsed prior to June 1, 2009. Eligible homeowners can take advantage of these programs until the end of 2013. By doing so, it is estimated that borrowers are able to save approximately $250 per month or $3,000 per year. Both of these programs are helping to keep shadow inventory down by giving homeowners a better option instead of defaulting.

Mortgage rates have remained low for most of this past year and should continue to do so with the help of the Feds through QE3, at least until there is a significant improvement in jobs and the overall economy. The result has been an improving housing market through sales, as well as, increased loan production through mortgage refinances. Through refinances, consumers have been able to put more money back into their own pockets which has increased optimism. According to the Consumer Confidence Index calculated by the Conference Board, confidence increased to 73.7 in November, up from 73.1 in October. This is the highest level reached in over four years since February of 2008.

While all of this may appear as though we are heading in the right direction, it is politics as usual in Washington as lawmakers are not yet in agreement on actions to take to avoid the fiscal cliff. In the meantime, markets and businesses are faced with uncertainty.

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