As we approach the end of January, some of the economic optimism of late 2009 has faded, and Americans are reassessing their outlook for this year.  The stock market has fallen more than 500 points, but the market that in many ways continues to be the most central concern is real estate. Calculated Risk blog published an article about the Special Inspector General's quarterly report on the Troubled Asset Relief Program (TARP), which asserts:

"...the Federal Government's concerted efforts to support home prices risk re-inflating that bubble in light of the Government's effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market."

The Calculated Risk article also published this graphic from the report, showing the different ways that the government is currently supporting residential real estate and lending in our markets. The report also outlines why "too big to fail" institutions benefitted from the TARP while contributing to the problem, and that these institutions have grown larger and more problematic as a result.

As portions of government support for home prices wind down and withdraw price support as our economy recovers, the article speculates that home prices will continue to fall. Interest rates will rise and demand for housing will fall.  Our own opinion is that we'll see a greater adjustment in higher priced homes than at the low end of the market since loans are more difficult to obtain and an increasing number of owners of higher priced homes will be subject to defaults and foreclosures.

While the wave of subprime adjustable rate mortgage payment resets has passed, a new wave of resets, most prominently option-ARM mortgage payment resets, is about to begin. Many of the Option ARM loans went to purchase more expensive homes, so we expect more defaults in higher priced homes this year. See this graphic published by the IMF posted in an older article on the Calculated Risk Blog.

Also, unemployment continues to force defaults even among conventional borrowers, who now make up the largest group of defaults and foreclosures by loan type. See this graph, again from Calculated Risk, "Statistical Recovery and Human Recession," showing how unemployment in this recession compares with other recessions since World War II.

While this discussion at the national level will have an impact on our local market, it is important to distinguish that not all markets will be effected in the same way. For instance, Kitsap County has only 7.5% unemployment, while the national rate is 10%. Fewer defaults occur in Kitsap County as a result of unemployment.

The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. Note that unlike the discussion above these calculations only compare the affordability of standard conventional loans, not the different types of loan products that have been offered. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 20% down on a house priced at 80% of the median and obtains a 30 year fixed rate mortgage. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2003, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2009 are estimates using the latest monthly data for median prices and interest rates (2008 has been updated with average annual values), and an estimated median family income for 2008 and 2009. With interest rates rising from 5.34% in December to 5.13% in January for a typical 30 year fixed rate conforming loan and the median price falling in January to $239,950, affordability is improved slightly and remains very good. The outlook for rates is that they will continue to rise in the coming year, with some experts predicting they'll reach 6% by the end of 2010. Keeping in mind how median prices can be deceptive, you should be aware that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges. The affordability index improved to 1.29 in December from 1.27 in November. First time buyer affordability improved to 1.13 from 1.11 last month. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2003	2004	2005	2006	2007	2008	2009
Annual Average interest rate	5.83	5.84	5.87	6.41	6.34	5.80	5.13
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$239950
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1046
Affordable payment	$1,108	$1,123	$1,137	$1,215	$1,265	$1,354	$1,354
Affordability Index	1.28	1.15	0.96	0.88	0.88	1.09	1.29
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$837
1st time buyer affordable payment	$775	$786	$796	$850	$885	$948	$948
1st time buyer affordability index	1.12	1.01	0.84	0.77	0.77	.953	1.13

January's APR is 5.191% on a 30-Year and 4.573% on a 15-Year, both conforming. December's rates were 5.444% on a 30-Year and 4.952% on a 15-Year, both conforming. After rates rose somewhat in December, they are again back at very attractive levels. If you qualify for FHA, VA, or USDA loans , these programs have are attractive for low downpayment buyers. Limits for FHA and conventional conforming loans went up with the stimulus bill. The FHA maximum is $475,000, and the conventional conforming limit has returned to $475,000. Lending programs for jumbo loans have improved considerably, with the larger banks starting to come back to this market. A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.895% on one major bank web site - unchanged from last month. Local credit unions and savings and loans may be able to beat this rate for some jumbo loans. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/.