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Why higher mortgage rates will help the housing market

iStock house of money 300x300

Mortgage interest rates have been rising on signs that the U.S. economy is improving.  Last week, the 30-year fixed rate reached the highest level in more than six months, climbing to an average of 3.63%, compared with 3.52% the previous week and 3.92% a year earlier.  The current rate is the highest it's been since the week of August 23rd when the 30-year fixed rate averaged 3.63%, according to Freddie Mac.

With economic prospects improving, rates could rise even higher this year.  This increase could mathematically make buying a home more expensive, but it's unlikely to stall the housing recovery.  To the contrary, higher rates could actually support it. 

For the past few years, mortgage rates have sunk to new lows as the Federal Reserve continues to buy up hundreds of billions of dollars worth of bonds.  The policy is meant to get everyone from investors to consumers to borrow and spend more.  While it has driven many homeowners to refinance existing home loans, it hasn't spurred nearly as many mortgages for home purchases.  In 2012, refinances made up 71% of all mortgage originations. 

Home sales last year rebounded more than most ever thought.  Even if mortgage rates edged higher, the recovery could last for a few reasons.

For one, those who have been eyeing to buy a home may finally pull the trigger once they realize that borrowing is still cheap and it would be wise to lock in today's mortgage rate rather than wait and see where rates could fall tomorrow or months from now. 

However borrowers interpret higher rates, the increase ultimately reflects an improving economy.  Which, in turn, is something that would support the housing recovery rather than stall it.  Investors have increasingly turned to riskier investments since the start of the year.  The stock market has reached new highs, making bonds look less attractive and therefore pushing mortgage rates higher.

The rise in mortgage rates coincides with growing demand for loans across U.S. businesses- a marked turnaround from the dark days of the financial crisis and subsequent economic recession.  At the end of January, commercial and industrial loans stood at more than $1.5 trillion, up more than 12.5% from a year earlier.  What's more, the current level is more than 75% above the low point of $870 billion in mid 2004, according to Federal Reserve statistics.

From that perspective, the recent increase bodes well for the future of the U.S. economy and increased home sales. 


Area home sales rose 8.1 percent in February

Home-sale agreements in the nine-county Indianapolis area rose 8.1 percent in February, suggesting last year's housing recovery is continuing into 2013. 

Purchase agreements for existing homes totaled 2,034 in February, up from 1,882 in the same month a year earlier.  That follows a 17.2 percent increase in January.

Pended home sales totaled 870 in Marion County last month, up 8.3 percent from February 2012. 

Purchase agreements in Hamilton County climbed 5.4 percent, to 392, and 6.5 percent in Hendricks County, to 180. 

Every county in central Indiana recorded an increase except Boone County, where agreements dipped 1.4 percent, to 68. 

Average selling prices rose 7.7 percent to $144,225.  The sale price in Hamilton County rose 9.2 percent to $237,778.  In Marion County, the price increased 8.6 percent to $109,972. 



Home prices finally returning to normal

After years of wild swings, the U.S. housing market is slowly returning to normal.  The latest forecast predicts home prices will increase by an average of 3.3% annually over the five years ending September, 2017. 

2012 was the first year since 1997 that the housing market has resembled something close to normal.  For the past 15 years, home price changes and sales volume have either been boosted by a bubble mentality or crushed by crash psychology.  From 1998 until the housing bubble peaked in 2006, home prices grew by 5% or more a year.  But once the bubble burst, home prices plunged, falling 30.5% through the end of September 2012.

It wasn't until late 2011 that markets started to stablize.  Between Sept. 2011 and Sept. 2012, average U.S. home prices rose 3.6%.  By then, 62% of the metro area reported rising home prices, up from just 12.5% of all markets during the same period a year earlier. 

By the end of the year, it is predicted that home prices will be heading higher in almost every metro area.  It is expected that Miami home prices will sustain a 10.7% loss over the same period, the largest drop of any market.  A steady stream of foreclosures will keep prices soft in the area during that time. 

All in all, prices are extrememly affordable and mortgage rates are at or near historic lows.  A stronger demand for housing is expected, and the sector should, once again, have a positive impact on the economy. 


Home construction off to strong start


Home construction got off to a strong start in 2013, as builders filed for the greatest number of permits in more than four years in January.

Permits are a sign of builders' confidence in the market.  Last month, builders filed for permits at an annual rate of 925,000, up about 2% from December and up 35% from a year earlier.  It was the best month for permits since June 2008. 

Meanwhile, the pace of housing starts slowed to an annual rate of 890,000 in January, down 9% from December, when there was a spike related to repairs from Superstorm Sandy.  But even the lower pace of starts was up 24% from a year ago.

The housing market has been helped by a number of factors in recent months, including increased sales of both new homes and previously-owned houses, a drop in foreclosures, and near record low mortgage rates.  A drop in the nation's unemployment rate is also helping.

The rebound in housing is good news for builders, such as PulteGroup, KB Homes, D.R. Horton and Toll Brothers, whose shares are all outpacing gains in the broader markets so far this year.  But all were down in early premarket trading Wednesday ahead of the government report because Toll Brothers reported financial results that missed forecasts. 

The rebound in home sales, prices and construction are all positives for the broader economy.  Economists believe this is the year that housing could help lead the way on overall economic growth. 


Why some homeowners are turning down free money

money picAmerican homeowners are in the midst of a hot and heavy love affair with low interest rates.  But not every courtship has a happy ending.

As the final days of 2012 slipped away, Lisa Price made her client an offer she thought he could not refuse.  Her client, John, was paying a rate of 6.16% on his $435,000 mortgage, with 25 years left to go.  Price, a mortgage banker, offered to refinance his loan at 4.125%, keeping the 25-year payout time.  The deal would have knocked his monthly payments down to $3,383, a savings of $630 per month.  Closing costs were minimal and would have been recouped through the savings within four months.  And with the streamlined process she proposed, it would have required very little paperwork and wasn't contingent on any appraisal valuation.  It seemed like a no-brainer, but John said no thanks.

It's typically pretty easy for mortgage brokers to give money away, and indeed, refinancing activity has skyrocketed as interest rates plummeted in recent years.  The one group of homeowners who didn't participate in the refi boom, those whose home prices tanked, leaving them without enough equity in their home to qualify for refinancing, are not eligible to restructure their loans thanks to a new government program. 

The first government assistance programs after the housing bubble burst offered to help homeowners only after their stopped paying their mortgages.  But a later program, the Home Affordable Refinance Program (HARP), was designed specifically to help out those underwater homeowners still paying their mortgages on time by giving them access to the low rates so many others are enjoying.  HARP has been refined several times since its inception in 2010, and every version of the plan has made it easier for homeowners to qualify. 

Ultimately, only about 25% of the homeowners who qualify for HARP actually end up refinancing.  And that's the shame of it all.  HARP is a smart program.  It rewards good behavior, those who have continued to pay their mortgages, while lending a helping hand to those who could really use it.  And it attempts to even the playing field by giving more Americans fair access to the low interest rates enjoyed by big businesses and the wealthy.  This program is also good for the economy, as consumers spend much of the money they save on their mortgage payments.

So how do the government and mortgage originators convince the public to take advantage of a program that can truly help many who need it?  It's the classic lesson of once bitten, twice shy.  Wounds from all those no-money-down loans and balloon payments have yet to heal for the homeowners bitten when the housing bubble burst.  Others still feel the sting of paying hundreds for appraisals in an attempt to refinance, only to be spurned when their homes were valued at less than they owed on their mortgage.  It may be hard for those consumers to trust again anytime soon, but for those with the courage to give it another go, love might actually be better the second time around. 


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