These seven have the biggest impact on home prices.
Driver Mkt. Peak Mkt. Trough End 2009
Existing Home Prices $230,000 $165,000 $178,000
Existing Home Sales 6.5 million/yr. 4.9 million/yr. 5.2 million/yr.
Months Supply 8.9 11.0 7.2
HAI (affordability index) 108 179 164
30 Year Fixed Mortgage 6.5% 4.95% 5.0%
Consumer Confidence 105 30 52
Unemployment rate 5.8% 10.2% 10.2%
As you can see from the first row, housing prices have bounced off their lows. There are still several regions-such as certain parts of California, Nevada, Arizona, and Florida-that are still feeling the pain of the housing crisis. Clearly those areas had the biggest runup and so it is not surprising they have been the hardest-hit.
Existing home sales volume-line two-has also flattened and even rebounded a bit, which naturally brings us to line three, which shows that market inventory is coming down. So, with inventories shrinking and prices holding, what we see happening is the beginning of the supply and demand shift.
The home affordability index is currently at extremely favorable levels. This index combines pricing, income, and interest rates to evaluate how affordable housing is at any point in time relative to history. The higher the number, the more affordable it is to buy a house.
The recently reported average of 164 shows home prices are still at attractive levels but the number is falling, meaning the expectation is that it's soon going to cost you more to buy a house.
No surprise there since one of the factors that makes up the HAI is interest rates, and as I have written before, they are expected to be heading higher.
Rates are still around 5% for a 30-year fixed loan. But the rate for "jumbo loans"-that is, for a mortgage loan greater than $417,000-is around 6.5%. That's a pretty good indication that if next quarter the Fed stops buying mortgage-backed securities-securities backed by the payments on mortgages of $417,000 or less-lenders are going to begin charging more for home loans. Interest rates will trend upward and move the affordability index down further.
Is this a sign that the economy is at least leveling off? Hopefully. If we put all of this data together, what does it tell us? While some regions still have a bit more pain to endure, there are quite a few favorable trends here for most homeowners. First, the numbers suggest we've achieved the first important step of stabilization, which started with a deceleration of poor statistics in the second quarter of 2009. Second, we are actually seeing the beginnings of an improving economy, as evidenced by the changes in consumer confidence, housing affordability, and housing prices in both of the previous two quarters.
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