The Mortgage Corner

The Pending Home Sales Index, a forward-looking indicator, rose 10.4 percent to 89.3 based on contracts signed in October from 80.9 in September. It was the highest jump since early 2003 when the surge in housing began. The index remains 20.5 percent below a surge to a cyclical peak of 112.4 in October 2009, which was the highest level since May 2006 when it hit 112.6.

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This, and the continued rise in mortgage purchase applications signals an upsurge in housing demand. But is it sustainable? Is there enough pentup demand for housing—whether via increased household formation, or continued low interest rates—to sustain the surge? The seasonally adjusted Purchase Index increased 1.8 percent from one week earlier. This is the third weekly increase for the Purchase Index which reached its highest level since early May 2010, and is now back to its mid-1998 level, when housing was at the beginning of its last surge.

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NAR chief economist Lawrence Yun said excellent housing affordability conditions are drawing home buyers. “It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels. The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011,” he said.

“More importantly, a return to more normal loan underwriting standards and removal of unnecessary underwriting fees for very low risk borrowers is needed and could quickly help in the housing and economic recovery,” Yun said. Recent loan performance data from Fannie Mae and Freddie Mac clearly demonstrates very low default rates on recently originated mortgages, much lower that the vintages of 2002 and 2003 before the housing boom.

That is the real issue. Probably because almost 90 percent of all mortgages are either guaranteed or insured by the federal GSEs, Fannie Mae, Freddie Mac, or FHA/VA, their guidelines have become increasingly restrictive, with heightened credit score and lower allowable debt ratios restricting many eligible borrowers.

But housing pricing haven’t yet stabilized, with the S&P Case-Shiller same-home price index still at the bottom. he S&P/Case-Shiller 10-city home price index (seasonally adjusted) fell for the third month in a row and fell very steeply, down 0.7 percent in September and down 0.3 percent the prior month. At only plus 1.5 percent, the adjusted on-year rate extended its run of weakness. Weakness is no longer concentrated in the West or Florida with declines sweeping across regions.

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Also, with badly depreciated housing prices, the current appraisal system hurts housing values on legitimate, arms-length purchases by not taking into account compensating factors, such as whether a neighborhoods value has been damaged by a recent foreclosure, or short sale.

But the PHSI fell only in the Western region, while in the Northeast it jumped 19.6 percent, in the Midwest the index surged 27.3 percent, and in the South rose 7.1 percent. So we are in an uneven recovery, with those regions that have resumed growth leading the way, while those states with huge foreclosure backlogs—like California, Nevada, Arizona, and Florida—holding back growth in their regions.

Harlan Green © 2010