Housing Market Faces Warning Signs Entering Crucial Season

Thursday, 08 Apr 2010 02:58 PM

U.S. 30-year mortgage rates have soared to their highest level in eight months on the brink of the important spring sales season because of rising bond yields, data from home funding company Freddie Mac showed.

Separately, sales of foreclosed or other "distressed" homes are flirting with the peaks of the housing crisis in early 2009 when heavy inventory was pressuring home prices lower, according to First American CoreLogic.

Distressed sales accounted for 29 percent of all sales in January, the highest since April 2009 and just shy of the 32 percent seen in January 2009, the mortgage data company said Thursday.

Distressed transactions have a strong negative influence on home prices, according to First American, which noted the lows in prices for 2009 coincided with a peak in bank-owned property sales.

Distressed sales include short sales, in which lenders allow a home to sell for less than the outstanding debt.

The trend is worrisome to economists who have warned that federal home loan modification efforts and foreclosure moratoriums would result in a backlog of homes hitting the market, forcing prices lower and hurting the economy.

However, pent-up demand after a three-year housing crash is already driving buyer traffic higher despite expectations that higher borrowing costs would curb buying, housing experts said.

The 30-year loan rate average jumped to 5.21 percent in the week ended April 8 from 5.08 percent in the prior week and from 4.87 percent a year earlier.

The last time the long-term fixed borrowing rate was higher was in the week ended Aug. 13, 2009, when it averaged 5.29 percent, Freddie Mac said.

Treasury yields, which have been rising on signs of economic improvement, are used as a peg for setting mortgage rates.

Mortgage rates were also widely seen trending higher after the Federal Reserve pulled the plug March 31 on its 15-month program to buy more than $1.4 trillion in mortgage-tied debt aimed at keeping home borrowing costs low.

Fixed home loan rates should stay under 6 percent this year, most economists agree. The last time rates topped that psychological level was around October 2008.

"Higher mortgage rates will not impact the overall economic recovery," said Craig Thomas, senior economist at PNC Financial Services Group in Pittsburgh, which forecasts 5.7 percent home loan rates by year-end.

"But we don't expect significant house price growth in the months ahead as the rates take a little bit of the momentum out of housing," he said, adding that was "combined with the fact that we've essentially borrowed home sales" pushed forward by the first-time buyer tax credit.

The first wave of that tax credit, which was ultimately extended last November, robbed some of this year's sales.

Buyers who have yet to take advantage of the $8,000 first-time buyer credit or $6,500 repeat-buyer credit need to sign contracts by the end of April and close loans by the end of June.

Mortgage rates in the latest week "followed bond yields higher amid a positive March employment report," Frank Nothaft, Freddie Mac's chief economist, said in a statement.

The economy added 162,000 jobs in March, the largest monthly gain in the past three years, and the employment in the two prior months was revised higher.

The eight-month high in rates sapped demand for home loan refinancing last week but applications to buy homes rose slightly amid the final push for the tax credits, according to the Mortgage Bankers Association.

Pending home sales surprisingly rose 8.2 percent in February for the same reason, the National Association of Realtors reported on Monday.

© 2015 Thomson/Reuters. All rights reserved.

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