The Mortgage Corner

Here’s a shocker. Prices of homes with agency-conforming mortgages rose for a third straight month in June and at an accelerating rate. This maybe the first time we can see housing reviving since last June’s homebuyer tax credit ended. 

The Federal Home Finance Authority (that supervises Fannie Mae and Freddie Mac) purchase-only house price index is up a surprisingly strong 0.9 percent in June following a 0.3 percent increase in May (revised from plus 0.4 percent). Homebuyers want to buy, in other words, in spite of the reluctance of banks or their regulators to make it easier for borrowers in good financial standing to qualify for a mortgage.

The year-on-year rate improved for a second straight month, to minus 4.3 percent vs minus 6.2 in May and minus 6.3 percent in April. Seven of nine census divisions posted monthly gains led by a 3.3 percent gain for the East North Central. The Pacific region was the weakest at minus 0.8 percent.

What is happening? Contract signings for existing home sales were on the rise in June as the pending home sales index rose 2.4 percent to 90.9. The gain is especially notable given that it follows a surge in May of 8.2 percent. The year-on-year rate is another positive, moving from May’s plus 13.4 percent to 19.8 percent. June is led by mid-single digit monthly gains in the West and in the largest region which is the South.

However, the recent boost in signings of pending existing home sales is not following through with actual closings as hoped. Existing home sales fell 3.5 percent in July to a 4.67 million annual rate that was well below expectations for 4.92 million and followed a 0.6 percent rise in June. Much of this is because of tighter lender restrictions, and uncertain real estate values that may have brought in lower appraisal values.

A little noticed surprise this week was another gain in construction spending.  Construction outlays in June advanced 0.2 percent, following a revised 0.3 percent gain in May (originally a 0.6 percent decrease). The boost was led by private nonresidential outlays with public spending also up.  Private nonresidental spending rose 1.8 percent, following a 1.2 percent boost in May. 

So despite weakness in homes sales in May (existing homes down 3.8 percent and new homes down 0.6 percent), home prices are holding up. The Case-Shiller seasonally adjusted 10-city composite rose 0.1 percent in May, following a 0.4 percent gain the month before. Apparently, supply is down enough to keep monthly price changes from declining.  Also, buyers are likely concerned about possibly higher mortgage rates as the Fed was ending its second round of quantitative easing.

A look at the unadjusted data shows wide gains as the unadjusted composite 10 index rose 1.1 percent.  But spring and summer are when demand is strongest. So will the summer rally hold? Existing and new home sales are still falling, but that is last month’s news.

Supply on the market at the current sales pace turned higher to 9.4 months from 9.2 and 9.1 in the two prior months. In turn, the median price slipped 0.9 percent to $174,000 and down 0.8 percent for the average to $224,200. Year-on-year prices, which had turned positive in June, are back in the negative column, at minus 4.4 percent for the median.

So the real estate recovery is uneven, and new home sales at record lows. Why? Everyone is waiting for someone to resolve the foreclosure crisis. Banks are waiting for government, and government is too timid to require banks to speed up clearing their books of delinquent mortgages. No one is helping homeowners, in other words. Conservative that want to cut spending are setting the agenda, rather than those who want to revive housing. This is unfortunate, as Fannie Mae and Freddie Mac—who originate at least 80 percent of mortgages these days—in particular should be easing their qualification criteria, or the housing market cannot revive.

Harlan Green © 2011