Tags: Housing | Markets | Slow | 2006

Housing Markets to Slow in 2006

Thursday, 22 December 2005 12:00 AM

The United States is hardly the only country struggling with an uncertain housing market. As we have reported in MoneyNews before, the UK is experiencing similar troubles.

On Wednesday, Britain's largest mortgage lender, Halifax and Bank of Scotland (HBOS), announced that the country's housing market would slow in 2006, with home values topping out at only 3% growth.

That's a substantial reduction from 2004 through 2005, when growth doubled that amount. But the HBOS growth prediction fits in with inflation expectations for the new year.

The firm also says that average salary increases in 2006 will reach 4.5%, giving UK homeowners a leg up on both inflation and housing price rates. And that could provide first-time homeowners with a better shot of landing a new mortgage next year.

"The UK housing market is set for a period of broad stability, with house prices forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation," said Martin Ellis, chief economist at Halifax.

"Continuing economic growth, the high level of employment, robust earnings increases and the prospect of further interest rate cuts will support housing demand during the coming year."

Meanwhile, back in the U.S., mortgage application rates have fallen to an 11-month low, Reuters reports. That could indicate a slide in the housing market, despite this week's reports that home prices are on the rebound.

"The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity for the week to December 16 fell 4% to 594.6 from 619.3 the week before," reports Reuters.

"The group's seasonally adjusted index of applications for mortgages to buy homes fell 5.2% to 453.1 from the previous week's 477.9."

That's causing consternation among mortgage industry analysts.

"Housing has passed its peak," says Robert Brusca, chief economist at Fact and Opinion Economics.

Reuters also cites the National Association of Home Builders, warning that U.S. homebuilder optimism fell in December to its lowest level since April 2003.

The good news is that housing starts rose 5.3% in November, to 2,123 million units.

This week U.S. federal regulators are warning lenders to back off on issuing creative, high-risk mortgages – such as interest-only loans and adjustable-rate financing packages.

ConsumerNews.com reports that guidance rules from the federal government "target both the increasing usage of ‘creative' mortgages, and the widening spectrum of borrowers making use of them, including some who may not otherwise qualify for traditional fixed-rate or other adjustable-rate mortgage loans, and who may not fully understand the associated risks."

The guidance reports stem from a new combined initiative from the Federal Reserve Board (FRB), the Office of the Comptroller of the Currency (OCC), the Federal Insurance Deposit Corporation (FDIC), the Office of Thrift Supervision and the National Credit Union Administration.

Their aim is to get home-mortgage lenders to alert customers to the high risks associated with nontraditional mortgage products.

"When an institution offers nontraditional mortgage loan products," the guidance said, "underwriting standards should address the effect of a substantial payment increase on the borrower's capacity to repay when loan amortization begins."

The federal government initiative comes at a time when new home purchasers own a lot less of their homes than ever before, according to a study released by SMR Research.

The SMR report says that, in the first six months of 2005, 38.1% of homebuyers who financed their homes did so with a down payment of 5% or less of the purchase price, up from 30.6% in 2000. The percentage of buyers paying the traditional 20% down payment fell to 33.7% of borrowers, down from 39.1% in 2000.

But those numbers may be changing.

This week The Wall Street Journal is reporting that fixed-rate mortgages are on the rebound of late, with a 5% increase in fixed-rate loan applications in November.

Viewers tuning into CNBC on Wednesday saw a slew of talking heads discussing how the difference in yields between the two-year and five-year note had become inverted.

Fears of a yield-curve inversion and its impact have also been discussed at length on Wall Street ever since the Fed moved the base interest rate past 3% earlier this year.

But some financial experts say many analysts are missing the point. The real question is: What will this mean for the "Main Street" investor?

"We are really looking at a flat yield curve," says Tony Proctor, a certified financial planner based in Wellesley, MA.

"If we do see a real inversion, investors need to position their portfolios defensively. The real concern will come when the two-year and the 10-year yields show inversion, since historically inverted yield curves are a precursor to recession."

Proctor, who founded and runs investment advisory Proctor Financial, suggests that "Main Street" investors should "patiently keep their fixed income and short-term investment dollars in money-market funds as they wait for the yield curve to show the way."


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The United States is hardly the only country struggling with an uncertain housing market. As we have reported in MoneyNews before, the UK is experiencing similar troubles. On Wednesday, Britain's largest mortgage lender, Halifax and Bank of Scotland (HBOS), announced that...
Thursday, 22 December 2005 12:00 AM
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