By Lauren Baier Kim
Seattle sales slow
It seems that even Seattle is showing signs of the housing slowdown. The metro, although tied with Salt Lake City as the strongest housing market in the U.S ., saw pending home sales in King County drop 9.4% year-over-year in June, while the number of homes for sale rose 53% year-over-year, according to a Seattle Times article. Although boosted by a strong job market, Seattle's housing market is being hurt by its high prices and lack of affordability, the Times says. But the outlook isn't all gloom and doom: "I'd still characterize the Seattle market as being healthy -- one of the few in the country," the paper quotes Lawrence Yun, senior economist for the National Association of Realtors, as saying.
Rising foreclosures in Atlanta
Atlanta, which has one of the highest rates of foreclosure in the U.S., may be a signal of what's to come for the U.S. housing market, says a New York Times article. The city's surge in foreclosures -- about 2.7% of the metro area's homes were in foreclosure at the end of 2006, versus about 1% of U.S. housing units -- has come despite a healthy local economy, the Times says. Attributed to the increase are "aggressive" low-interest-rate mortgages -- about half of them adjustable-rate mortgages -- taken out by area home buyers when home prices were rising, and a Georgia law that speeds up the foreclosure process, the Times says. Experts fear that such a trend will become apparent in the rest of U.S., as housing values fall and interest rates on loans reset. "Everybody thought if the home prices kept going up, the lenders will keep refinancing you," the newspaper quotes an economics professor from Georgia State University as saying.
The long-term demographics favoring rental housing—namely the coming of age of the echo boomers and strong immigration level—make the sector a favorite among equity investors. Although the Equity Financing Index fell slightly to 53 from 56 in the last quarter, it was still the 15th straight over-50 reading. Equity capital for investment in apartments remains widely available as evidenced by the 71 percent of respondents who considered conditions unchanged compared to three months earlier.
The 15-year FRM this week averaged 6.39 percent with an average 0.4 point, up from last week when it averaged 6.30 percent. A year ago, the 15-year FRM averaged 6.37 percent.
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 6.35 percent this week, with an average 0.5 point, up from last week when it averaged 6.29 percent. A year ago, the 5-year ARM averaged 6.33 percent.
One-year Treasury-indexed ARMs averaged 5.71 percent this week with an average 0.5 point, unchanged from last week. At this time last year, the 1-year ARM averaged 5.75 percent.
The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax-deductible 5.9%. The Office of Federal Housing Enterprise Oversight says that home prices rose 10.7% that year.
As long as buyers expected prices to keep rising, the implied real mortgage rate -- home-price increase minus mortgage-interest rate -- was minus 4.8%. This was an enormous incentive to borrow heavily to buy real estate. Result: a bubble.
But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there's no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate further.
Over the past 30 years, there's been a very close association between our measure of real mortgage rates and the pace of home sales, adjusted for the U.S. population's expansion.