Housing's Second Wind
by Ken Fears, Manager, Regional Economics

The strong home price appreciation that the housing market experienced from 2000 through 2006 was great for homeowners. Increases in home values helped those households build equity and wealth.

However, that price appreciation had a downside as well. It made achieving home ownership much more difficult for first-time buyers and those potential buyers with less-than-perfect credit, particularly when mortgage rates began to rise from historic lows in mid-2005. As rates increased, average monthly payments also rose. The consequence was that home sales fell as fewer people could afford to buy. Additionally, beginning in mid-2007, many homeowners who had taken out adjustable rate mortgages (ARMs) to finance their purchases made after mid-2005 could not refinance. Stagnant or declining prices reduced or eliminated the equity in their home. Unable to refinance, households were faced with making monthly mortgage payments that they could no longer afford. The impact of this trend was particularly harsh on the sub-prime market as funding in this sector evaporated after July of 2007. Default and foreclosure rates increased as a result.

Some Relief in Sight
The good news is that there is some relief on the way. One month ago, Congress passed and the President signed an important stimulus package that goes far beyond the well-publicized $600 tax rebate check. The package includes a provision that will temporarily increase FHA lending limits and the limits on loans that the GSEs can buy.

Prior to 2008, the FHA could only loan up to a maximum of $362,790 for a home in the highest priced markets; most markets had lower limits. Under the new provisions, that limits jumps to as much as $729,500 depending on the local median home price. Based on 2007 mortgage data, NAR Research estimates that more than 140,000 homes in this price category were purchased using sub-prime loans.