Real Estate Financing Update. Incline Village

U.S. existing home sales fell 3.0% from August to 4.9 million units in September, according to the National Association of Realtors (NAR). The NAR's revised numbers for August showed a 5.06 million unit sales rate (up from 5.03 million) after dropping 3.5% to 4.67 million units in July. As the NAR reported, existing home sales have remained close to the current level for most months this year. Despite favorable affordability conditions, rising rents and the fact that more creditworthy borrowers are looking to purchase homes, the share of contract failures has doubled over last year as banks tighten lending requirements and appraisals.

The inventory of unsold homes edged up to 8.5 months from 8.4 months in August. It is still well above the 5.5-6 month average seen in a normal market, which will likely squeeze prices further. It also doesn't take into account the shadow inventory of distressed homes that have yet to make it to the market, which likely adds a few more years of excess supply. This large imbalance between demand and supply will probably add downward pressure on home prices and could keep the housing recovery weak.

Prices for existing homes also declined in September. The median sales price fell to $165,400 from $171,200 in August, and is down 3.5% year over year, slightly worse than the 3.4% decline in August. Condominium/co-op sales rose by 1.8% to 580,000, according to the NAR, while single-family home sales fell by 3.6% to 4.33 million.

The only region to experience a month-over-month increase in sales was the Northeast: Sales rose 2.6% from August and were up 6.8% on an annual basis. Compared with September 2010, however, prices were down 3.3%. In the Midwest, sales were down 0.9% compared with August, but were 17.2% higher than a year earlier. The median price was 1.4% lower than the September 2010 level. The same trends were evident in other parts of the country. Existing-home sales in the South were down 2.6% for the month, but were up 10.5% year over year; the median price was 3.0% lower than last year. And in the West, sales fell 8.8% versus August, but were 10.7% higher than in September 2010; the median price was down 4.5% on an annual basis.

The NAR also reported that first-time buyers purchased 32% of existing homes in September, the same share as in August. Investors bought 19%, roughly the same as during the previous month (18%).

Latest Case-Shiller Numbers Show Modest Price Improvements
Data through August 2011, released October 25 by S&P Indices for its S&P/Case-Shiller Home Price Indices, showed increases of 0.2% for the 10- and 20-City Composites in August versus July. (See chart.) Ten of the 20 cities covered by the indices also saw home prices increase over the month. In addition, 16 of the 20 MSAs and both Composites posted improved annual returns compared with July's data. Los Angeles and Miami saw no change in annual returns in August, while Atlanta and Las Vegas saw their annual rates of change fall deeper into negative territory. The 10- and 20-City Composites posted annual returns of -3.5% and -3.8% versus August 2010, respectively. At -8.5%, Minneapolis posted the lowest year-over-year return, but has improved in each of the last three months. Detroit and Washington, D.C., were the only two cities to post positive annual returns of 2.7% and 0.3%, respectively.

Housing Starts Spike, But Most Growth Due to Apartment Construction
September housing starts (658,000 units at a seasonally adjusted annual rate) were up 15% from the revised August figure of 572,000 and were 10.2% higher than September 2010's rate of 597,000, according to the U.S. Commerce Department. Standard & Poor's noted that the report beat most economists' expectations by about 10%. As encouraging as this may sound, most of the gains were in apartments, which rose 53% from the previous month. Single-family homes gained less than 2% in September. While the overall number of building permits issued in September was 5% below the August rate, it was 5.7% higher than in September 2010.

Government Announces Plan to Ease Burden on Underwater Homeowners
On October 24, the Federal Housing Finance Authority announced several changes to the Home Affordable Refinance Program (HARP), designed to help more underwater borrowers refinance their loans at historically low interest rates. Key enhancements include eliminating fees for borrowers who refinance into shorter-term mortgages and lowering certain fees for other borrowers. The rules will also remove the current 125% loan-to-value ceiling that has determined eligibility for participation in HARP. In order to take advantage of the new refinancing opportunities, a borrower's existing mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. According to the FHFA, nearly 894,000 borrowers have already refinanced through HARP. By some accounts, the new regulations will have the effect of doubling that number.

First Mortgage Default Rate Climb for First Time in 10 Months
On October 18, S&P Indices and Experian released September data for the S&P/Experian Consumer Credit Default Indices, which measure changes in consumer credit defaults. The data showed increases in default rates across most consumer credit lines. First mortgage default rates rose from 1.92% in August to 1.99% in September and second mortgage default rates rose from 1.27% to 1.32% over the same period. This is the first time first mortgage default rates increased since November 2010.

Bankers Pessimistic About Quick Price Recovery
Nearly half (49%) of recently surveyed bank risk professionals said they do not expect housing prices to return to 2007 levels before the year 2020, according to a report by FICO. Only 21% said they expect a price recovery by then. In addition, 73% said they expect mortgage defaults to "remain elevated" during the next five years and 46% anticipate that delinquencies will increase over the next six months. Just 15% think the number of delinquencies will drop during that period.

Mortgage Applications and Refinancing Activity Slow Down
Mortgage applications decreased 14.9% during the week ending October 14, 2011, according to the Mortgage Bankers Association. The refinance share of mortgage activity decreased to 77.6% of total applications, from 79.1% a week earlier. Adjustable-rate mortgage activity decreased to 5.8%, from 6.0% of all applications the previous week. The average interest rate for conforming 30-year fixed-rate mortgages rose to 4.33% from 4.25%, while the average rate on 15-year fixed-rated home loans rose to 3.61% from 3.53%. It was the second week in a row of rising rates, after six consecutive weeks of declines.