Mortgage Market Beginning Revival

When will we see an improvement in mortgage volume, and so real estate sales? This is probably the most asked question these days. Both the Fed and Congress are doing all they can to make mortgages reasonable and affordable to more borrowers. But in fact it is just Fannie and Freddie—now owned by the government—who are originating most of those mortgages.

So-called jumbo loans—those above $603,750 for a single unit in Santa Barbara County—are still not saleable on the secondary market, meaning that investors will only buy them for a tremendous premium. This has jacked up their rates into the 6-8 percent range for both jumbo ARMs and fixed rates.

But mortgage volumes are rising. The Mortgage Bankers Association (MBA) Weekly Mortgage Applications Survey for the week ending January 9, 2009 showed an increase of 15.8 percent on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index increased 95.7 percent compared with the previous week and was up 52.4 percent compared with the same week one year earlier.

It is mostly refinances, whose volume is back up to June 2003 levels, and now comprise 85 percent of transactions. So the purchase market is still hurting, as perhaps homebuyers are reluctant to buy until they see a bottoming out in prices. That is common during deflationary times.

It is incumbent upon Realtors in particular to chart the direction of home prices in their territories. For instance, Santa Barbara and South Coast prices seem to have bottomed out in the $700 to $900,000 median price range. And that is in the range of the new high-balance conforming loan amount.

Why have mortgage volumes fallen so drastically last year? It is not only because of the credit squeeze. Housing expenses—including rent or mortgage payments as well as the cost of utilities, property taxes, insurance, and maintenance—have grown much faster than incomes from 1996 to 2006, according the Harvard’s Joint Center for Housing Study. But household incomes grew just 36 percent during that time.

In fact, Americans' incomes since 2000 have grown more slowly than at any time since the 1960s. So most consumers had to borrow to even maintain their standard of living. Therefore there has to be a push to boost the jobs that will boost the wages and salaries of working Americans to bring this economy back into equilibrium.

This is a 180 degree turn for many economists who believed that smaller government and lower taxes were the prescription that fit all economic ailments. But we now know that such a philosophy led to the excesses that government is working to fix.

Harlan Green © 2009