February 3, 2010

Ken Fears, Manager of Regional Economics

The year 2009 was an important one for the U.S. housing market. In September of 2008, the Lehman Brothers investment bank declared bankruptcy. The subsequent months saw a chain of events that sent global credit markets into turmoil and threw a brake on the national housing market. Nationally, seasonally adjusted home sales slipped 11.0% between September and November of 2008. But the aggregate numbers only tell part of the story. All portions of the market slowed, but the jumbo market ground to a virtual standstill. A year later, the jumbo market is finally breathing a bit easier.

In the wake of the credit crisis, mortgage investors and lenders hurt by the subprime crisis pulled back on lending, favoring only loans that could be backed by the Federal government. FHA became the lending source of choice for many borrowers. Meanwhile, the spread between rates on jumbo and conforming loans, already on the rise from 2005 through 2007, surged 73 basis points¹ between December of 2007 and December of 2008 as depicted in the graph below.

The jump in the spread between jumbo rates and conforming rates made higher priced homes relatively more expensive and froze the upper end of the market. Not surprisingly, there was also a disproportionate increase in inventory at the higher price ranges in 2007 and 2008 as depicted in the chart below.

But the market appears to have turned a corner. Over the 12 months ending in November of 2009, home sales rose 44.1% to reach 6.540 million at a seasonally adjusted and annualized rate. The strong incentives for first time buyers spurred buying at the lower end of the market, but the improvement at the upper price range was due to a different factor: more favorable mortgage rates. While $8,000 tax credit drew first time buyers to the lower end of the market, a decline in the rate spread from 143 basis points in January of 2009 to 71 basis points² in December of 2009 breathed life back into the upper end of the market. The resulting boost to sales brought the months supply of homes for sale above $1,000,000 down from 63.8 in November of 2008 to 23.3 months by November of 2009. Buyers in the conforming market had seen rates around or below 5.0% for nearly a year, but jumbo borrowers were seeing rates down to the 6.0% level for the first time since 2005….a dramatic improvement in affordability.

Just as soon as prospects for jumbo borrowers improved, another change could impact that portion of the market. The Federal Reserve's program of purchasing mortgage backed securities to keep mortgage rates low is set to expire on March 31st. The result is likely to be a 100 basis point increase in the average 30-year fixed rate mortgage for all price categories. That change would push jumbo rates back above 7.0% and increase the monthly payment on an $800,000 mortgage by $526. Even if this program does not end as scheduled, rates are likely to rise as the economy improves. Thus, jumbo borrowers now must weigh the gamble of waiting to see if the rate remains unchanged or perhaps shrinks. Should the rate spread fall some of the likely increase in mortgage rates will be offset for jumbo borrowers. If rates rise and the rate spread does not collapse, affordability issues could once again stymie sales as the upper end of the market.

The housing market in 2010 is likely to be better than that of 2009. However, the hay day for buyers at the upper price echelons could be brief. Regardless, the decline in the rate spread has taken away one more reason for jumbo market fence sitters to stay put.

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1. There are 100 basis points in a percentage, so a change from 6.0% to 6.05% is 5 basis points.
2. Source: Bankrate.com

 

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