Can't Put My Finger On the Housing Market and Mortgage Rates

Any positive statistic in the housing and mortgage industry has been attributed to low mortgage rates, high affordability and the federal government's $8,000 tax credit for first-time home buyers. But this silver cloud has a grey lining. The stimulus inspired tax credit is soon to expire, and mortgage defaulted properties make up a large portion of home sales this year. So, any forward momentum in housing and mortgage activity is not an indicator of the long-term outlook. Thomas Lawler, a housing economist, said he does not recommend an extension of the tax credit's expiration. "It is extremely expensive and the program does not directly impact the core issues facing the housing market, namely a weak jobs market and slow growth in household formation," he said. To make matters worse, the American jobless rate in September hit a 26-year high at 9.8 percent.

"The biggest cloud over the housing market right now is by far foreclosures and if it were not for that issue people should be feeling pretty good," Lawler said. "People cannot look at the number of loans that are delinquent and not be worried." The real estate market, however, has shown some signs of stabilization. Home sales have begun to rise for the first time in over a year. And house price declines are leveling throughout the country, home prices in some areas have risen. From Florida to California Mortgage Rates will be watched closely by those who regard them as the rudder to the housing market.

Mortgage rates fell yet again early last week, but then ended on a sour note as prices of mortgage backed securities fell steeply. The average rate on 30-year fixed-rate mortgages fell further below 5%, according to the weekly survey issued by Freddie Mac. Losses on mortgage backed securities continued all the way into the close of the day, which forced banks to reissue higher mortgage rates. We do have some potentially market moving data being released this week which could help slow the pace of rising mortgage rates, mainly the Fannie/Freddie news releases late in the week.The 30-year fixed mortgage averaged 4.87% for the week, which was the lowest since May. The average for the week prior was 4.94% and the year prior was 5.94%. Also, rates on 15-year fixed-rate mortgages were 4.33%, which is the lowest interest rate of it's kind on record.

But, how is this effecting the home mortgage industry, and where are mortgage rates expected to go? In order to secure a mortgage in todays economic climate, the borrower generally must have 20% for a down payment and a FICO above 740. This limits the pool to a small percentage of borrowers eligible for optimal financing or refinancing. However, the falling rates have spurred an increase in refinancing activity, which reached a 19-week high last week.

The quantity of U.S. mortgage applications dropped last week as interest rates on 30-year loans rose above 5 percent. The Mortgage Bankers Association said rates on the most widely used loan, 30-year fixed mortgages, rose above 5 percent for the first time in a month after falling to a four-month low. It is believed that when mortgage rates drop below 5 percent, refinancing activity will always see a steep rise.