Nationwide, home affordability has received a serious boost from the combination of falling home prices and falling mortgage rates.

Today, because of the sagging economy, in most parts of the country, the cost of owning a home versus renting one is now very close to its historical average.

That said, though, near every major city, there are some neighborhoods in which home affordability and quality of life are stand-out. Using real estate data from OnBoard Informatics, Business Week highlights these areas in a report it calls the “Best Affordable Suburbs“.

Now, the country’s “Best Affordable Suburbs” doesn’t list the nation’s most affordable suburbs, but instead, a group of cities, towns, and villages in which the populace sits between five and sixty-thousand, and the economy, the schools, the lifestyle and the crime levels are all within a desirable range.

As concluded by Business Week, these are areas in which buying a home is a good value.

At the top of the list is Awake, Wisconsin, a suburb 20 minutes west of Milwaukee, prized for its outdoor lifestyle and healthy jobs market. The complete 50-state listing is posted at Business Week’s website.

In reading the headlines this morning, you’d think that last month’s Existing Home Sales figure signaled more trouble ahead for the housing market.

Quite the contrary.

Beyond the attention-grabbing headlines is the real story; the one that shows — once again — that housing market fundaments are coming back into balance.

As home values tick lower, it appears, value buyers are stepping in and snapping up supply. It’s true that the number of homes sold fell to its lowest levels in 12 years, but we can’t ignore the fact that the number of homes available to buy fell, too.

• Banks have put the brakes on foreclosures
• Economic uncertainty is reducing job-related relocations
• Builders have all but stopped building new homes

The national housing supply is as low as it’s been in more than a year.

Based on the current rate of sales activity, the national housing supply would be 100% sold in 9.6 months — a two-month improvement from the high point set in June 2008.

Demand for homes is expected to rise, too:

• The Federal Reserve is trying to hold mortgage rates low
• Fannie Mae is opening its checkbook to real estate investors
• The stimulus package is granting tax credits to first-timers

So, it’s not that the headlines are wrong; it’s just that they’re incomplete.

In looking at all of the data and not just one sliver of it, we can find hope. Falling supply plus rising demand leads home values higher and that’s the basis for a recovery.

One popular housing theory is that — before a bona fide housing recovery can begin — the cost of owning a home versus renting one must return to historical levels.

If that belief is a truth, a national return to rising home prices may be in store for 2009.

Falling home prices coupled with falling mortgage rates, too, have dropped the relative, after-tax cost of owning a home to 125% of the cost of renting a home.

This is the exact 18-year historical average and not since 2001 has the gap been this small.

As reported by the Wall Street Journal, though, the study has some flaws. For example, the data doesn’t account for ongoing home maintenance costs, nor does it consider real estate tax bills and insurance policies.

But, combining a relatively low cost of ownership with the government’s $8,000 tax credit for first-time home buyers is likely to convert long-time renters into never-before homeowners.

This, too, is thought to be a key element of the housing recovery.

In many markets (but not all), home prices are expected to edge lower through 2009. Provided mortgage rates stay low, the cost gap between owning and renting will shrink even more.

As part of the stimulus package passed last week, Congress authorized a temporary increase to conforming loan limits in certain high-cost parts of the country.

“High cost” is defined by a regions’ median sales price.

With the temporary increase, a greater share of Americans can now qualify for Fannie Mae- and Freddie Mac-backed loans, usually the least expensive source for mortgage money.

Higher loan limits can be good for the housing market and the broader economy for two reasons:

1. Cheaper money can spur new home demand, supporting home values.
2. Higher loan limits render more homeowners refinance-eligible, freeing up cash for spending, saving, or investing.

The complete county-by-county loan limit list is available on the OFHEO website.

Of the 3,232 U.S. counties, 10 percent are considered “high-cost”. Residents of these areas can expect the same low rates offered to the rest of the country, but with a slight premium. Be sure to ask your loan officer about how it works.

Everything old is new again.

Conforming mortgages are limited by loan size, based on “typical” housing costs around the country. The current conforming limit on a single-unit property is $417,000.

In 2008, as part of the Economic Stimulus Act of 2008, Congress authorized conforming loan limits increases in “high-cost” areas around the country. In Los Angeles County, for example, a mortgage could be as large as $729,750 and still be considered “conforming”.

Those temporary increases rolled back effective January 1, 2009, to a maximum of $625,500.

However, as part of the American Recovery and Reinvestment Act of 2009 signed into law this week, conforming loan limits in high-cost areas have been returned to their elevated levels of 2008.

You can see the text on the bottom of page 111 of 407.

Changes to conforming loan limits impact everyone with a stake in real estate, even if their neighborhoods are not considered “high-cost”. This is because conforming mortgages offer the widest selection of home loan products, and often at the lowest rates. The widespread availability of conforming mortgages helps to support home sales nationwide as well as providing ample refinancing options for people that need it.

Lenders have yet to pick up the change, but are expected to shortly. Once they do, more homeowners will be eligible for cheap home financing.

To lookup your neighborhood’s conforming loan limits, visit the HUD Web site. Or, if you have specific questions related to your home or an upcoming purchase, contact me directly anytime.

In Mesa, Arizona, Wednesday, the President presented the Homeowner Affordability and Stability plan, a multi-pronged effort to support the housing market.

The story made the front page of nearly every newspaper in the country.

The president’s plan is sweeping:

• Incent mortgage servicers to work with at-risk homeowners before delinquency starts
• Let homeowners with good credit but little equity refinance to today’s low rates
• Fund Fannie Mae and Freddie Mac to support mortgage markets

It’s a broad plan with many positive angles, but for now, we can’t forget that it’s just a plan. Although the White House shapes and influences housing policy, Congress, Loan Servicers, and the Federal Agencies must still implement and execute it. Until that implementation occurs, these reforms exist only on paper.

It’s a key aspect of the speech that’s not getting coverage.

One thing we learned during the stimulus package debate was that just because the President wants something to happen doesn’t mean that it will. There are always details to be worked out and that’s one reason why the Homeowner Affordability and Stability Plan couldn’t go into effect immediately. There are still loose ends to tie and details to define.

According to its website, the White House lists March 4, 2009 as the plan’s effective date. Until March 4, therefore, nothing in Wednesday’s speech is guaranteed.

The just in, the President’s plan to assist homeowners in trouble with their loans. Just announced by President Obama, hours ago, in Mesa, AZ..

Help for homeowners

The President's strategy for economic recovery is a stool with several legs, as he's said, and one of them is solving the foreclosure crisis.

“We must stem the spread of foreclosures and falling home values for all Americans, and do everything we can to help responsible homeowners stay in their homes,” he said yesterday as he signed the American Recovery and Reinvestment Act into law.

Though communities across the country have been affected by the crisis, Arizona has been hit particularly hard — in 2008, only two states had more foreclosures.

And President Obama is there today, in Phoenix, to unveil his “Homeowner Affordability and Stability Plan,” which will help bring relief to homeowners and bring some order to the housing market.

The President will talk more about his plan a little later today. In the meantime, we're sure you have a lot of questions, like, Am I eligible for assistance? Might I be able to modify my loan? When do I apply? We’ve put together an example sheet that will show you what options might be available to you, depending on the circumstances of your mortgage, as well as answers to some common questions (below).

Questions and Answers for Borrowers about the
Homeowner Affordability and Stability Plan

Borrowers Who Are Current on Their Mortgage Are Asking:

• What help is available for borrowers who stay current on their mortgage payments but have seen their homes decrease in value?

Under the Homeowner Affordability and Stability Plan, eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value, may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

• I owe more than my property is worth, do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

Eligible loans will now include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if your property is worth $200,000 but you owe $210,000 or less you may qualify. The current value of your property will be determined after you apply to refinance.

• How do I know if I am eligible?

Complete eligibility details will be announced on March 4th when the program starts. The criteria for eligibility will include having sufficient income to make the new payment and an acceptable mortgage payment history. The program is limited to loans held or securitized by Fannie Mae or Freddie Mac.

• I have both a first and a second mortgage. Do I still qualify to refinance under the Homeowner Affordability and Stability Plan?

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under the Homeowner Affordability and Stability Plan. Your eligibility will depend, in part, on agreement by the lender that has your second mortgage to remain in a second position, and on your ability to meet the new payment terms on the first mortgage.

• Will refinancing lower my payments?

The objective of the Homeowner Affordability and Stability Plan is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with affordable payments that are sustainable for the life of the loan. Borrowers whose mortgage interest rates are much higher than the current market rate should see an immediate reduction in their payments. Borrowers who are paying interest only, or who have a low introductory rate that will increase in the future, may not see their current payment go down if they refinance to a fixed rate. These borrowers, however, could save a great deal over the life of the loan. When you submit a loan application, your lender will give you a “Good Faith Estimate” that includes your new interest rate, mortgage payment and the amount that you will pay over the life of the loan. Compare this to your current loan terms. If it is not an improvement, a refinancing may not be right for you.

• What are the interest rate and other terms of this refinance offer?

The objective of the Homeowner Affordability and Stability Plan is to provide borrowers with a safe loan program with a fixed, affordable payment. All loans refinanced under the plan will have a 30 or 15 year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

• Will refinancing reduce the amount that I owe on my loan?

No. The objective of the Homeowner Affordability and Stability Plan is to help borrowers refinance into safer, more affordable fixed rate loans. Refinancing will not reduce the amount you owe to the first mortgage holder or any other debt you owe. However, by reducing the interest rate, refinancing should save you money by reducing the amount of interest that you repay over the life of the loan.

• How do I know if my loan is owned or has been securitized by Fannie Mae or Freddie Mac?

To determine if your loan is owned or has been securitized by Fannie Mae or Freddie Mac and is eligible to be refinanced, you should contact your mortgage lender after March 4, 2009.

• When can I apply?

Mortgage lenders will begin accepting applications after the details of the program are announced on March 4, 2009.

• What should I do in the meantime?

You should gather the information that you will need to provide to your lender after March 4, when the refinance program becomes available. This includes:

• information about the gross monthly income of all borrowers, including your most recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.

Borrowers Who Are at Risk of Foreclosure Are Asking:

• What help is available for borrowers who are at risk of foreclosure either because they are behind on their mortgage or are struggling to make the payments?

The Homeowner Affordability and Stability Plan offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current. By providing mortgage lenders with financial incentives to modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage.

• Do I need to be behind on my mortgage payments to be eligible for a modification?

No. Borrowers who are struggling to stay current on their mortgage payments may be eligible if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

• How do I know if I qualify for a payment reduction under the Homeowner Affordability and Stability Plan?

In general, you may qualify for a mortgage modification if (a) you occupy your house as your primary residence; (b) your monthly mortgage payment is greater than 31% of your monthly gross income; and (c) your loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by your mortgage lender based on your financial situation and detailed guidelines that will be available on March 4, 2009.

• I do not live in the house that secures the mortgage I'd like to modify. Is this mortgage eligible for the Homeowner Affordability and Stability Plan?

No. For example, if you own a house that you use as a vacation home or that you rent out to tenants, the mortgage on that house is not eligible. If you used to live in the home but you moved out, the mortgage is not eligible. Only the mortgage on your primary residence is eligible. The mortgage lender will check to see if the dwelling is your primary residence.

• I have a mortgage on a duplex. I live in one unit and rent the other. Will I still be eligible?

Yes. Mortgages on 2, 3 and 4 unit properties are eligible as long as you live in one unit as your primary residence.

• I have two mortgages. Will the Homeowner Affordability and Stability Plan reduce the payments on both?

Only the first mortgage is eligible for a modification.

• I owe more than my house is worth. Will the Homeowner Affordability and Stability Plan reduce what I owe?

The primary objective of the Homeowner Affordability and Stability Plan is to help borrowers avoid foreclosure by modifying troubled loans to achieve a payment the borrower can afford. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and at your lender's discretion modifications may include upfront reductions of loan principal.

• I heard the government was providing a financial incentive to borrowers. Is that true?

Yes. To encourage borrowers who work hard to retain homeownership, the Homeowner Affordability and Stability Plan provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce your mortgage debt. Borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.

• How much will a modification cost me?

There is no cost to borrowers for a modification under the Homeowner Affordability and Stability Plan. If you wish to get assistance from a HUD-approved housing counseling agency or are referred to a counselor as a condition of the modification, you will not be charged a fee. Borrowers should beware of any organization that attempts to charge a fee for housing counseling or modification of a delinquent loan, especially if they require a fee in advance.

• Is my lender required to modify my loan?

No. Mortgage lenders participate in the program on a voluntary basis and loans are evaluated for modification on a case-by-case basis. But the government is offering substantial incentives and it is expected that most major lenders will participate.

• I’m already working with my lender / housing counselor on a loan workout. Can I still be considered for the Homeowner Affordability and Stability Plan?

Ask your lender or counselor to be considered under the Homeowner Affordability and Stability Plan.

• How do I apply for a modification under the Homeowner Affordability and Stability Plan?

You may not need to do anything at this time. Most mortgage lenders will evaluate loans in their portfolio to identify borrowers who may meet the eligibility criteria. After March 4 they will send letters to potentially eligible homeowners, a process that may take several weeks. If you think you qualify for a modification and do not receive a letter within several weeks, contact your mortgage servicer or a HUD-approved housing counselor. Please be aware that servicers and counseling agencies are expected to receive an extraordinary number of calls about this program.

• What should I do in the meantime?

You should gather the information that you will need to provide to your lender on or after March 4, when the modification program becomes available. This includes

• information about the monthly gross income of your household including recent pay stubs if you receive them or documentation of income you receive from other sources
• your most recent income tax return
• information about any second mortgage on the house
• payments on each of your credit cards if you are carrying balances from month to month, and
• payments on other loans such as student loans and car loans.
• My loan is scheduled for foreclosure soon. What should I do?

Contact your mortgage servicer or credit counselor. Many mortgage lenders have expressed their intention to postpone foreclosure sales on all mortgages that may qualify for the modification in order to allow sufficient time to evaluate the borrower’s eligibility. We support this effort.

The American Recovery and Reinvestment Act of 2009 was signed into law Tuesday in Denver, Colorado. Also on Tuesday, stock markets fell near their November 2008 lows.

The two moves are related.

With each new stimulus; with each potential jumpstart of the economy, Wall Street questions whether the federal push will be enough to make an impact.

Traders ended undecided on that issue yesterday, but resolute in something else — that whatever change stimulus bill brings, it’s not going to come fast enough to help.

The sell-off in equities was a boon to home buyers. For the first time since early-December, mortgage markets gave a sustained rally, extending gains from the 8:30 AM market open through the 4:00 PM market close. Conforming mortgage rates were down on the day.

Longer-term, though, it’s not likely that pattern will last. Not only will the stock market eventually find balance, but, more importantly, there was verbiage in the stimulus bill that increased the nation’s debt ceiling by 53.4 percent. Debt, of course, is often financed with the printing more money and that leads to inflation.

Inflation is the enemy of mortgage rates.

So, for now, the stimulus plan is helping mortgage markets, albeit indirectly. If you’re shopping for home loan, consider locking quickly. When markets flip — and they always do — it figures to be sudden.

(Image courtesy: Recovery.gov)

Below is the latest Orange County Market Report, as compiled by my friend Steven Thomas, of Altera Real Estate. I have a comment at the end.

'Orange County Housing Report: Demand Takes Off , Feb. 5, 2009
Steven Thomas, President, Altera Real Estate
Quantitative Economics and Decision Sciences, B.A.

Even though the United States is waiting on the stimulus package, demand for Orange County real estate is beginning to take off. In the past two weeks, demand, the number of new pending sales within the prior month, increased by 24% to 2,671 pending sales, an increase of 674 homes. Last year at this time there were 1,103 fewer pending sales, totaling 1,568.
Two years ago there were 2,463 pending sales, 208 fewer than today. After slowly increasing in demand during the first few weeks of the New Year, demand has surged and is following a course similar to 2007.

It will be interesting to see what happens to demand as the Obama stimulus package is passed in the coming weeks. In the past two weeks, the total active inventory decreased by 41 homes to 11,519. Last year there were 3,740 additional homes on the market, totaling 15,259. Two years ago there were 464 additional homes on the market. The current expected market time dropped from 5.39 months two weeks ago to 4.31 months today. Last year the expected market time was 9.73 months and two year ago it was 4.87 months.

Total Orange County pending sales is at a much healthier level compared to the last couple of years. Currently, total pending sales just eclipsed the 4,000 pending sale mark and now stands at 4,019. Last year, total pending sales did not surpass the 4,000 mark until June. Last year at this time, total pending sales climbed to 1,969, 2,050 less than today. Two years ago it was at 3,026, 993 fewer compared to today.

There has not been much of a change along the distressed property front. The total number of distressed homes on the market, both foreclosures and short sales, dropped by 31 homes in the past couple of weeks and now stands at 5,073, 44% of the total active inventory. 63% of all pending sales are either a short sale or a foreclosure. The expected market time for foreclosures dropped to the lowest level of the current downturn, 1.08 months. Foreclosures are HOT and are selling almost as fast as they are placed on the market.

Many buyers looking for a deal are fooled into thinking that they can purchase a foreclosure at a massive discount, only to find that multiple offers are generated on foreclosures and the average sales to list price ratio is 101%. That's right, on average foreclosures are selling for above their list price. The expected market time for short sales also dropped to their lowest level of this downturn, 5.78 months. Foreclosures and short sales have driven prices down to levels where affordability has improved tremendously fueling an increase in first time home buying and overall demand.

Lastly, the upper end market is still extremely stagnant and will remain so until the economy improves and something is done about jumbo financing. Currently, jumbo financing begins at $625,500, has a much higher interest rate, and qualifying is a lot more difficult than conventional financing.
So, where is the real estate market going from here? The real estate market is going to dramatically improve with the right stimulus package. The Obama administration and Congress is feverishly working on a major stimulus package and should be passed within the coming week. Let's examine some of what they are strongly considering:
Reduce interest rates to at least 4.5%
Increase the conventional loan limit for high cost areas from $625,500 back to $729,900
Eliminate repayment of the $7,500 first time home buyer tax credit and make it available to all buyers

The Federal Reserve and the FDIC are working on programs to prevent foreclosure and increase loan mitigation. Out in the real estate trenches, the topic of the day is 'loan modifications.' The industry is acutely aware that all eyes are on decreasing the flow of foreclosures and finally putting a bottom under the housing market. In terms of units, Orange County housing bottomed out between the fourth quarter of 2007 and the first quarter of 2008; just take a look at current demand compared to demand last year, 70% higher. Pricing is a different story, and only with a bump in demand are we going to experience a true bottom in pricing.

With historically low interest rates, an increased conventional loan limit, a buyer tax credit, foreclosure abatement and other forms of stimulus, the end result will be an increase in housing demand and a high probability of reaching a bottom in pricing around mid-year.
The final whistle of the Super Bowl marked the beginning of the Spring real estate market. Sure enough, there already was a considerable increase in demand. From here, demand will continue to rise and will most likely receive an 'Obama bounce' with the passing of the stimulus package.

With demand increasing and a return of the discretionary homeowner opting to keep their homes off of the market unless they really have to sell, we can expect the active listing inventory to remain flat or even slightly fall. The expected market time will fall as well to levels not seen in quite some time. The undercurrent of foreclosures and short sales will continue to fuel supply; but, depending upon the reach of the stimulus package, this flow may begin to ebb. Up to this point, the Orange County real estate market has been controlled by lenders (foreclosures and short sales). However, it has come to the point that not only the Orange County real estate market, but the entire national real estate market, is in the hands of our government. They know that the first step to turning around our economy is to stop the fall of real estate values and the flow of foreclosures and short sales. Stay tuned round one is going to be signed by President Obama within a week.' ( End of report.)

As I mentioned, I have one comment where I take slight exception to one small sentence in Steven's report. He says that jumbo loans are at a 'much higher' rate. Fortunately, I have an excellent lender who is offering jumbo loans only slightly higher than conforming loans. Give me a call (949-643-2100) or send me an email ( Bob@BobPhillips.net ) if you would like more information, or rates. In the meantime, have a great day!

Consumer Confidence fell this month for the first time in three months, reflecting Americans’ concern for the economy, housing, and the financial system.

The reading isn’t much of a surprise given our collective exposure to a near-constant stream of negative news. Before long, the reports become a self-fulfilling prophecy.

Despite falling confidence, however, the housing industry appears to be reviving. Sales of existing homes are on the rise and an increasing number of homes are under contract to sell. And, if these statistics seem out of place, consider the external forces that are accompanying this “down” economy:

• In some markets, home values have plummeted to early-2000 levels
• Government intervention has brought mortgage rates to near-5 percent
• Congress is pledging key support to housing and mortgage markets

These points can’t be captured in confidence surveys which, by comparison, ignore facts and focus on Big Picture behavioral questions like “Do you think you’ll be better off a year from now?” and “What’s your attitude toward buying major household items?”. It’s useful information for economists, but not so much for home buyers.

Anecdotally, a lot of the country’s housing markets have already started their recovery. Couple that with the natural momentum of Spring Buying and the stimulus package’s proposed first-time home buyer tax credit and you can clearly see the disconnect.

Just because confidence is down doesn’t mean that home prices will be, too.