U.S. Banks Tighten Loose Lending in 2008

U.S. Banks Tighten Loose Lending
By David Andrews

Recently released data provided by the Federal Home Financing Board (FHFB) reveals that homeowners are putting large down payments to purchase a home. The percentage of all conventional mortgage loans with less than a ten percent down payment dropped dramatically in 2008. From 29 percent of all loans in January, the percentage of loans with low down payments fell to only nine percent in December 2008. (See Chart).

Low down payment loans accounted for one-third (33 percent) of all conventional loans in December 2007. This figure dropped to one-quarter (25 percent) of all loans in March 2008, the month when Bear Stearns, which was the first major casualty in the sub-prime mortgage crisis, collapsed. With the relatively high risk of falling home prices, mortgage lenders became more cautious over the summer. The percentage of loans financed by less than ten down payments fell to 13 percent in September 2008, the month when Lehman Brothers filed for bankruptcy.

Banks further tightened their lending standards during the autumn by requiring larger down payments by borrowers. In October, the U.S. Congress passed the $700 billion Emergency Economic Stabilization Act of 2008. The U.S. Treasury Department began buying stock in the nation’s largest banks. Using funds from the first half of the revised Troubled Asset Relief Program (TARP), the Treasury bought preferred stock and warrants and quickly capitalized lenders.

Many mortgage lenders had suffered unrealized losses because of the sub-prime mortgage crisis. By December 2008, only nine percent of all conventional home mortgages were made to borrowers who had put down less than ten percent toward the purchase price of their single-family homes.

As the percentage of mortgage borrowers who put low down payments fell during 2008, the percentage of single family home purchasers who put larger down payments increased. In December 2008, nearly half (49 percent) of all purchasers had a down payment of between 20 and 30 percent, up from the approximately one-third (35 percent) of all borrowers in January. The figures are for 30-year, fixed-rate, conventional mortgages of less than $417,000. Similar patterns held for loans for both new and previously occupied homes by all major lenders.

Long-term mortgage interest rates, meanwhile, stayed relatively stable for most of 2008, despite a sharp drop in short-term rates. In December 2007, the target for short-term, Federal Funds rate stood at 4.25 percent. The Federal Open Market Committee (FOMC) lowered its target rate for the Federal Funds rate to between zero and one-quarter percent in mid-December 2008. Meanwhile, thirty-year, fixed rates for conventional mortgages by all major lenders rose from 5.96 percent in January to 6.42 percent in August, before falling to 5.52 percent in December. The data on interest rates reflects reporting by savings associations, mortgage companies, commercial banks, and mutual savings banks to the Federal Housing Finance Agency (FHFA). A further small drop in long-term, fixed rate, mortgage interest rates is expected in January.

Sources: Federal Housing Finance Agency, Federal Home Finance Board (http://www.fhfb.gov/).



U.S. Banks Tighten Loose Lending in 2008
The percentage of borrowers putting down payments of less than ten percent dropped dramatically in 2008.

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U.S. Housing Inflation Slows in 2008

U.S. Housing Inflation Slows in 2008
By David Andrews

Two broad measures of housing inflation slowed in 2008. According to data released by the Bureau of Labor Statistics (BLS), the Rent component of the Consumer Price Index (CPI) slowed to 3.4 percent from 4.3 percent in 2007. Meanwhile, the larger and more important component of the CPI called the Owners’ Equivalent Rent of Primary Residence (OER) slowed to 2.4 percent in 2008, down from 3.4 percent in 2007. Overall consumer inflation as measured by the CPI grew by 3.8 percent in 2008, up from 2.8 percent in 2007, but this is largely due to the run-up in energy prices during the first half of last year.

The largest component in the overall Consumer Price Index is the Owners’ Equivalent Rent of Primary Residence. The OER accounts for nearly one-fourth (23.94 percent) of the total CPI. According to the BLS, OER measures the change in the implicit rent and is the amount a homeowner would pay to rent or would earn from renting his or her home in a competitive market. From December 2007 to December 2008, the 12-month OER measure of consumer inflation slowed to 2.1 percent.

Although housing costs as measured by the Owners' Equivalent Rent component of the Consumer Price Index slowed and showed only a modest increase during the fourth quarter of 2008, core inflation, as measured by the CPI excluding food and energy, grounded to a halt. On a seasonally adjusted basis, the CPI, excluding food and energy, fell at a compound annual rate of 0.3 percent during the last quarter of 2008. For the year as a whole, core inflation grew at 2.3 percent, the same as the previous year. (See chart)

Disinflation is the slowing of inflation, but deflation is an actual decline in prices. Since early last July, when oil prices peaked above $145 a barrel, energy prices have fallen precipitously. Lower oil prices dragged down overall inflation both at the wholesale and consumer levels. From December 2007 to December 2008, the overall CPI grew at just 0.1 percent in 2008, down from the 12-month rate of 4.1 percent measured during the previous year.

The risk of deflation in the broader economy in 2009 is real. Including food and energy, the overall CPI fell at an annual rate of 12.7 percent during the fourth quarter of 2008. If the overall CPI declines in 2009, it would be the first time that this has occurred in more than 50 years. In 1955, the overall Consumer Price Index fell by 0.4 percent.

Whether the decline in core consumer prices is a temporary phenomenon or the beginning of a long-term trend cannot yet be determined. In addition, the impact of the recently passed $787 billion American Recovery and Reinvestment Act of 2009 on inflation remains to be seen. The Congressional Budget Office report released earlier in February 2009 did not specifically address the inflationary impact of the bill. Economists disagree on both the short-term and long-term impact of the Recovery and Reinvestment Act of 2009, commonly referred to as the Economic Stimulus Plan of 2009.

Source: Bureau of Labor Statistics (http://www.bls.gov/).



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Two broad measures of housing inflation slowed during 2008.
http://www.associatedcontent.com/article/1479402/housing_inflation_slows.html

U.S. Home Prices Remained High in 2008

U.S. Home Prices Remained High in 2008
By David Andrews

Nationwide, single family home prices remained high in 2008. According to data recently released by the Federal Housing Financing Board (FHFB), the purchase price for single family homes financed by conventional mortgages averaged $304,600 in 2008, up 1.4 percent from 2007. The average purchase price of single family homes financed by conventional mortgages in the United States reached an all time high of $306,400 in 2006.

The contract interest rate for 30-year, fixed-rate mortgages of $417,000 or less averaged 6.05 percent in 2008. In December, however, the contract interest rate fell to 5.52 percent. The Federal Open Market Committee lowered its target rate for Federal Funds to between zero and one-quarter percent on December 16th, so the contract interest rate for mortgages can be expected to fall further in January.

Even though nominal home prices rose 1.4 percent last year, real home prices fell 1.0 percent in 2008, the third consecutive year of decline. Earlier in January, the Bureau of Labor Statistics (BLS) reported that the Owners’ Equivalent Rent of Primary Residence (OER) component of the Consumer Price Index (CPI) rose 2.4 percent in 2008. Real home prices are calculated by dividing the average purchase price by the OER index. In constant 1982 dollars, single family home prices peaked in 2005. Real home prices are less than 10 percent lower than their 2005 peak, but remain 20 percent higher than 2000 levels.

In most years, the Owners' Equivalent Rent component of the Consumer Price Index correlates closely with what renters pay as measured by the rent component of the CPI. For the past 20 years, the difference in the annual rate of change in these two components has been less than 1.0 percent. In 2008, however, rent prices increased by 3.7 percent compared to the 2.4 percent rise in the OER. Anecdotal evidence suggests that some homeowners may have become renters over the last year, because of the increase in the number of foreclosures caused by the sub prime mortgage crisis.

The accompanying chart shows the nominal change in the purchase price of single family homes, the percent change in the Owners’ Equivalent Rent (OER), and the change in the real housing price from 2005 to 2008. At the height of the sub-prime lending boom in 2005, the average purchase price jumped by 14.4 to nearly $300,000. The Owners’ Equivalent Rent component of the CPI did not keep pace that year, accounting for the large spike in real home prices.

When real housing prices previously peaked in 1989, single family homes across the United States cost an average of $142,800. According to the FHFB, the nominal purchase price of homes financed by conventional mortgages fluctuated between $142,000 and $147,000 from 1989 through 1995. In real terms, however, housing prices fell by 25 percent during that six-year period. If a similar pattern occurs during this housing cycle, real housing prices can be expected to fall through the year 2011.

Sources: http://www.fhfb.gov/ and http://www.bls.gov/.



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http://www.associatedcontent.com/article/1471313/housing_prices_remain_high.html

The Takeaways from this article are:

• Home prices for single family homes financed by conventional mortgages remained high in 2008.


• Real home prices declined modestly for the third consecutive year, but remained high above 2000 levels.


• Conventional mortgage interest rates for 30-year, fixed-rate loans averaged 6.05 percent in 2008, but fell to 5.52 percent in December.