By Mike Caggeso
After a litany of government measures to boost the U.S. housing market, mortgage applications have risen steadily in the past four weeks as 30-year fixed-mortgage rates hit new record lows.
And that’s on top of existing home sales in February rising 5.1%.
The perfect storm of ingredients fueling consumer demand also includes new incentives such as the $8,000 federal tax credit for first-time homebuyers and a significant reduction in home prices. Average home prices across the U. S. are now at levels not seen since late 2003. As of January 2009, the 20-city composite index is down 29.1%, from its peak in the second quarter of 2006. A measure of the 10 largest cities is down 30.2%.
Appealing to one specific market niche – first-time buyers – is critical to turning around the entire market, National Association of Realtors spokesman Walter Molony told Reuters. As more first-time buyers step into the market, the people they buy houses from can afford financing for a new house.
“The market heals from the bottom up,” Molony said. “That’s what provides liquidity to help people to sell their existing homes and to trade up and ultimately buy a bigger home or perhaps a new home.”
Tracking the influx of demand dates back to mid-November, when U.S. Federal Reserve Chairman Ben Bernanke first signaled to the U.S. House of Representatives’ Committee on Financial Services his intentions to lower fixed-rate mortgages.
A week later, the Fed announced it would buy up to $500 billion in home-loan securities. And two weeks ago, the central bank increased that number to $1.25 trillion, which trigged a record low in fixed-rate mortgages.
As of now, 30-year fixed-mortgage rates are 4.78%, the lowest in records dating back to 1971.
Home prices are expected to continue falling until the middle or latter part of the year, a positive for first-time buyers but also an indication that the 8.5% unemployment rate – currently at a 25-year-high – is continuing to put pressure homeowners already struggling to make monthly payments.
Foreclosures soared 29.9% in February compared to a year ago after rising 17.8% in January, according to RealtyTrac Inc. One out of every 440 homes is in some stage of foreclosure, the company estimated. The glut of unsold properties keeps prices low, reducing household wealth and crimping consumer spending, the engine of the economy.
Turning that around will be the true test of Bernanke’s mortgage repurchase plan.
"The likelihood is the trend will continue with more refis than actual purchases," Daniel Penrod, industry analyst for the California Credit Union League in Rancho Cucamonga, Calif., told Reuters. "Despite the perfect storm for a buyer of home prices continuing double-digit declines and interest rates at all-time lows, the missing ingredient is the financing. Institutions still are very hesitant to lend, or they've ratcheted up their standards so hard that people are having a tough time meeting them."
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