Home Affordability Still Soaring; New Records Reached

Home affordability moved higher last quarter, buoyed by stable mortgage rates and falling home prices in Wisconsin and nationwide. The National Association of Home Builders reports that Q1 2011 Home Opportunity Index reached an all-time high for the second straight quarter last quarter.

Nearly 3 of 4 homes sold between January-March 2011 were affordable to households earning the national median income of $64,400. It's the 9th straight quarter in which home affordability surpassed 70 percent, and the highest reading in more than 20 years of record-keeping.

From metropolitan area-to-metropolitan area, though, affordability varied.

In the Midwest, for example, affordability was high. 7 of the 10 most affordable markets were in the Midwest, including Kokomo, Indiana, in which 98.6% of homes were affordable to median income-earning families. Indianapolis, Indiana placed second for "big city" affordability.

The most affordable "big city" last quarter was Syracuse, New York. With a 94.5% affordability rate, Syracuse ranks 8th nationally in the Home Opportunity Index. It's the second time that Syracuse placed first in the last 4 quarters.

Meanwhile, on the opposite end of home affordability, the "Least Affordable Major City" title went to the New York-White Plains, NY-Wayne, NJ area for the 12th consecutive quarter. Just 24.1 percent of homes were affordable to households earning the area median income, down more than 1 percent from the last reading.

Regardless of where you live, remember that rising mortgage rates can levy more pain on your household budget than can rising home values. And mortgage rates are expected to rise long before home prices do.

The rankings for all 225 metro areas are available for download on the NAHB website.

Home Price Index Shows Values Down 19 Percent From Peak

Home values dropped for the sixth straight month in March 2011, according to the Federal Home Finance Agency's Home Price Index. The Home Price Index is a government-sponsored home value tracker.

The HPI report is the latest in a string of "falling home values" stories -- a trend that's troubling home sellers across Plymouth and nationwide.

However, although the Home Price Index says home values are falling, that doesn't necessarily mean that they are. Like most statistics in the housing sector, the Home Price Index is plagued by poor methodologies and a lack of timeliness.

In short, the Home Price Index is flawed. In three ways.

The first big flaw in the Home Price Index is that it only measures the values of homes with mortgages backed by Fannie Mae or Freddie Mac. Homes financed via FHA, or via other means are specifically excluded from the calculation. For today's purchase market, that leaves more than 1 in 4 homes "uncounted" -- a big percentage of the market.

Second, the Home Price Index determines home values by measuring price change from sale to subsequent sale. This eliminates new homes -- a major market segment.

And, lastly, the Home Price Index reports on a 60-day delay; we're only now seeing data from March. This two-month lag renders the HPI a trailing indicator for the housing market instead of a forward-looking one. If you're a home buyer looking for market insight, the HPI can't give it -- it's out-dated and out of season.

Despite its shortcomings, though, we can't ignore the Home Price Index completely. It's among the most thorough home valuation models available, and it's used in public policy discussions. When the HPI says prices are down, Wall Street and Capitol Hill take notice, and that trickles down to everyday life on Main Street.

Since peaking in April 2007, the Home Price Index is off 19.1 percent.

New Home Sales Increase For The Second Straight Month

Sales of newly-built homes surprised Wall Street, jumping 7 percent to an seasonally-adjusted, annualized 323,000 units last month.

In addition, the supply of new homes dropped to 6.5 months — a 2-month decrease from October 2010 and the best reading in a year.

The report runs counter to recent reports from the National Association of Homebuilders and the National Association of REALTORS® which suggest a looming housing slowdown. April's New Home Sales report runs counter to that theory; it shows ongoing, steady, staggered improvement in terms of sales volume and sales inventory.

Broken-down by sales prices, the New Home Sales report also showed that homes are selling across all price tiers. The "luxury market" improved most:

• Up to $199,999 : +1,000 homes from March
• $200,000 to $399,999 : +2,000 homes from March
• $400,000 and over : +3,000 homes from March

These figures suggest that that move-up buyers -- not first-timers -- are driving the new home market. Homes under $200,000 now account for just 40% new home sales, down from 46% a year ago.

However, as with most months, it's important that we recognize the New Home Sales data's margin of error. Although New Home Sales showed a 7% improvement in April, the reported margin of error was ±17%. This means that the actual reading could have been as high as 24 percent, or as low as -10 percent. 

It's a huge range, and because it encompasses both positive and negative values, the Census Bureau assigned its April reading "zero confidence". It's right there in the footnotes.

For home buyers in Minneapolis , rising sales and falling supply may mean higher home prices. And, combined with the issuance of fewer building permits, supplies may be constrained into the summer months. This, too, would pressure home prices higher.

Memorial Day Messes With Mortgage Rates

Mortgage rates across the state are near year-to-date lows, but locking them in this week may be difficult. As Memorial Day nears, and Wall Streeters get a head-start on the long weekends, trade volume in the mortgage bond markets will dip.

When bond volume drops, mortgage rates get jumpy. It's a relationship based more on scarcity than actual market fundamentals.

It works like this:

1. Conforming and FHA mortgage rates are based on the "market price" of a mortgage-backed bond
2. Mortgage-backed bonds can't be bought or sold without a buyer and a seller at a specific price

As Friday gets closer this week, and more and more Wall Street traders will leave for their "extended" 3-day weekend, and bond markets will be left with fewer and fewer participants. This will create a market situation in which it's harder to match a buyer and seller at any given bond price, resulting in larger mortgage rate shifts than usual.

These jumps in rates are exaggerated during periods of economic uncertainty like these. What's more, there's a lot of economically-important data due for release this week. That, too, can put markets in hysterics.

If this were a "normal" week, mortgage rates would be volatile. The coming of Memorial Day is just adding to the mix.

Mortgage rates may rise in Plymouth this week, or they may fall.  Either way, if you have the opportunity to lock something favorable, consider doing it.  Rates are low and likely won't last.

What's Ahead For Mortgage Rates This Week : May 23, 2011

Mortgage markets were unchanged last week, despite improving on four of five days. Economic data was worse-than-expected almost across the board, but neither FHA nor conforming mortgage rates in Minnesota budged.

Instead, markets grappled with the just-released Fed Minutes which weighed heavily on investors and on Wall Street.With the release of the minutes, it's increasingly clear that the Federal Reserve will end its support for bond markets on schedule in June, and that a Fed Fund Rate hike is possible within the next 12 months.

Not surprisingly, the date of the Fed Minutes release -- Wednesday -- was the singular "down day" for mortgage markets last week.

After falling for 4 straight weeks, Plymouth mortgage rates appear to have troughed. This week they could rise, and there's no shortage of data on which for bonds for trade.

• Tuesday : New Home Sales; Speeches from Fed's Plosser and Bullard
• Wednesday : Durable Goods; FHFA Home Price Index
• Thursday : GDP; Initial Jobless Claims
• Friday : Core PCE; Pending Home Sales; Consumer Sentiment

There's other forces on markets, too. First, there are 3 bond auctions -- a 2-year, a 5-year, and a 7-year. Weak demand for any of the three will lead mortgage rates higher.

And, second, this is a holiday week. Memorial Day is next Monday and, with the 3-day weekend ahead, expect large numbers of Wall Streeters to skip out on Friday (and likely part of Thursday, too). As the week concludes, therefore, bond volume will thin, amplifying mortgage rate movement -- up or down.

If you're shopping for a mortgage, it's a good time to look at locking in. As the week progresses, mortgage rates should become less predictable and more volatile.