Hope you had a great Thanksgiving!

The stock market has been up and down recently with investor ambivalence about whether things are getting better or worse. The market rose when NAR reported that September existing home sales rose 10.1%. This large rise was primarily because of the final throes of the first time home buyer tax credit, which has now been extended and expanded. Last week the stock market fell when new home sales in the week of November 13th fell to a 12 year low. As pointed out in the blog Calculated Risk, new home sales, residential investment, and housing starts are much more important for the economy than residential resales. With high unemployment and continued weakness in the economy, new home sales are likely to remain at a low level.

Last month we reviewed how affordability had changed from 2006 considering the other loan types that were available then versus loans available to today’s buyer. Then we followed up with a lengthier post at kitsaphomefinder.net. Although our analysis in this article shows a significant improvement in the affordability of conventional loans over the past year, affordability was much better a few years ago if we compare the exotic loans available then with the conventional loans available today. Here is a recent post from Mark Hanson about the mid to high (MTH) end real estate market, describing the process and stage of the current MTH market.

The hot period for MTH Real Estate was 2003-2007. During this time 75%-80% of all houses either a) changed hands b) were refinanced (including cash-out, which increasing the loan balance c) were built and purchased for the first time d) or leveraged further through the addition of a second or third mortgage. Yes, the potential at-risk population is the vast majority of MTH owners.

Later in the 2009 season we finally saw more MTH houses turn-over but at sharp discounts or on short sale. Unlike the low end of the market the increased activity was not spurred by a surge in buyer demand, rather due to end-of-season seller panic and increased short sale activity. That being said, there is pent-up demand for this sector at the right price. The problem is that the right price on one sale destroys the net-worth of scores more. This type of increased activity in the earlier innings of the MTH collapse is not a positive market factor because it sets comps and locks-in values for everybody.

We can take a look at some mid to high end sales to see how our Kitsap MTH market is doing. Here is a graph of original asking price to sale price for October 2009 sales on Bainbridge Island. As you can see, sale price has diverged from asking price significantly in most cases for sales above $600,000.

With nearly 23% of all loans underwater (owing more than the house is worth) and with the number of distressed properties (in foreclosure or in default) at an all time high, any predictions of rising prices or a market turnaround are premature. It may take years to turn this market around, particularly the mid to high end.

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 falling from 5.22% last month to 5.02% in November for a typical 30 year fixed rate conforming loan and the median price rising about 1 percent in November to $252,950, affordability is very good. 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 remained constant at 1.24 in October, unchanged from September. First time buyer affordability improved slightly to 1.09 from 1.08 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.

November's APR is 5.065% on a 30-Year and 4.573% on a 15-Year, both conforming. October's rates were 5.191% on a 30-Year and 4.700% on a 15-Year, both conforming. If you qualify for FHA or VA loans (or the newly popular USDA loans), these programs have are attractive for low downpayment buyers. Limits for FHA and conventional conforming loans went up with the stimulus bill signed earlier this year. 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/.