2010 ends with mortgage and housing markets slumping

December 31st, 2010

2010 was a year of ups and then downs for the real estate and mortgage industries. As 2011 begins the uncertainty of a year ago regarding where mortgage rates and housing prices are heading has been replaced by some certainty for the early part of the new year. The final quarter of 2010 has seen a reverse in momentum that was building through much of 2010, and early 2011 is setting up to mirror the same period in 2009. If you are using mortgage calculators for a mortgage refinance or new home loan, 2010 saw historically low mortgage rates.

Home prices

The Standard & Poor's/Case Schiller Home Prices indexes of 20 major cities were released for October 2010 and showed prices declining in all 20 markets from the prior month. In the 10-city index prices were up only 0.2 percent from October 2009 and in the broader 20-city index prices were down 0.8 percent from October 2009. The price drop is the third straight month of price declines in major markets.

While prices for November and December 2010 will not be available until January and February 2011 respectively, the mortgage application indexes from the Mortgage Bankers Association for the final two months of the year show a slowing trend in purchase applications.

In the Weekly Mortgage Applications Survey released by the MBA for the week ending Dec. 17, 2010, purchase applications were down 8.4 percent from the same week in 2009. The refinance application index was down 24.6 percent from the prior week and at its lowest level since the week ending April 30, 2010.

Mortgage rates

Freddie Mac has been tracking mortgage rates with its Primary Mortgage Market Survey since April 1971. In its final survey of 2010 for the week ending Dec. 30, 2010 the 30-year fixed rate mortgage at a cost of 0.8 origination points was 4.86 percent up 0.05 percent from the prior week and 0.69 percent from the all-time low of 4.17 percent on Nov. 11, 2010.

Jan. 7, 2010, was the first Freddie Mac survey of the year and the 30-year fixed rate was 5.09 percent at 0.7 origination points. The 30-year rate peaked for 2010 on April 8, 2010, at 5.21 percent at 0.6 origination points. Mortgage calculator users saw mortgage rates moving down consistently from the April 2010 peak to the November 2010 bottom. Since November the 30-year fixed rate has risen six out of seven weeks.

The increase in rates in November and December were in reaction to the Federal Reserve announcement in early November that it would purchase $930 billion in Treasury bonds between November 2010 and June 2011. Of the $930 billion the Fed intends to spend on its asset purchasing program, $650 billion will be "new money" created by the Fed specifically for the purchase of Treasury debt. This infusion of new money into the economy worried bond investors that their investments would be eroded by inflation created by the Federal Reserve. As a result mortgage rates and other investment rates have climbed.

What's in store for 2011

Mortgage rates are on the rise as of the end of 2010 and housing prices are on the decline. This is a worrisome combination for the housing markets, and for the national economy. Housing was the beginning of the economic recession that began in 2007 and a poorly performing housing industry will slow any economic recovery and possibly stop any growth that may occur.

If mortgage rates continue to increase ahead of growing employment, if housing prices continue to decline because of more foreclosures coming to market, buyers will shy away from purchasing new homes. This will further depress prices and result in more foreclosures. Higher rates and lower prices will decrease the ability of families to refinance their adjustable rate mortgages at a time those rates will be increasing.

As 2011 begins mortgage rates and home sales and prices will be carefully watched by investors and economists as critical indicators of U.S. economic recovery. If you are using a refinance calculator to determine your monthly mortgage savings from a refinance mortgage you will want to be prepared with your application submitted to a lender should rates dip in January 2011. Waiting longer into 2011 may see your equity erode and make your refinance more costly due to higher loan-to-value requiring mortgage insurance.

If you have been using the pre-qualification calculator and considering new home purchase you may be tempted to wait and see if housing prices decline further before making your purchase. Waiting too long however could see your purchasing power decline because of higher mortgage rates. You'll have a difficult decision between purchasing a home that may decline further in value at a lower interest rate, or waiting and possibly purchasing a lower priced home at a higher interest rate.

2011 will see continued struggles in the economy as jobs are still lacking and over 14 million Americans are out of work. A key component of any overall economic recovery will be a stronger national housing industry; strength is not the word to describe the industry as we end 2010.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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