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Housing America's Families

Chief Economist Frank E. NothaftThe U.S. is in the early stage of an economic expansion that began at the end of 2009 or the start of this year. As is sometimes the case in the initial phase of a recovery, there are mixed messages from economic indicators on the overall health of the macroeconomy and of the housing market. GDP growth surged late last year, but slowed in the second quarter. Similarly, job market growth turned positive last winter but appears to have lost momentum. The choppy pattern of economic recovery is not unusual and will likely continue throughout this year, with clearer signs of expansion eluding us before next year.

Still, there are a number of positives in the housing market. For one, declines in home sales, construction, and house prices have slowed or stopped – and have even rebounded in some metropolitan markets. This recovery has been supported, in part, by the low interest rate policy of the Federal Reserve and the active involvement of Freddie Mac, Fannie Mae and Ginnie Mae to assure that an adequate supply of funds is available to meet the mortgage credit needs of America's families. Mortgage rates on loans ineligible for pooling into their securities, such as "jumbo" loans, carry fixed-rates that are nearly a full percentage point above the rates on "conforming" loans.

Today's low interest rates have boosted home-buyer affordability. The National Association of Realtors has produced an Affordability Index for more than 40 years – which incorporates mortgage rates, house prices and family income – and affordability over the past two years has been at the highest range ever measured.

In addition, many borrowers have taken advantage of low rates to refinance and lock in the 50-year low in fixed-rate mortgages that we currently enjoy. Over the past two months, refinance has accounted for more than 80 percent of conventional loan applications. Freddie Mac and Fannie Mae have purchased most of these new refinance loans, assuring that a steady supply of credit continues to meet these needs. During the first half of this year, the two companies have purchased nearly 1.4 million refinance loans, including almost 200,000 loans under the Administration's Home Affordable Refinance Program.

On average, these 1.4 million families have shaved about one percentage point off of their interest rate, reducing annual mortgage payments by more than $2.5 billion over the first year that they have their new loan. By increasing the amount of disposable cash available for savings or consumption purposes, the ability to refinance provides a direct boost to household finances.

Further, the majority of borrowers have left unchanged, or reduced, their loan balance as part of a refinance. In the second quarter of 2010, nearly three-quarters of borrowers kept their refinance loan balance unchanged (except for a small amount of closing costs that were rolled in) or did a "cash-in" refinance where they paid down their balance. Furthermore, nearly one-in-three borrowers who refinanced shortened their loan term from 30 years to 20 or 15 years, thereby increasing the rate of future principal paydown and increasing the rate of home-equity buildup.

Freddie Mac and Fannie Mae play a vital role in supplying the finance to support both home purchases and refinance. During the first half of 2010, roughly three-in-five single-family loans were financed directly by the two firms. Also, the companies have financed more than 80 percent of all the mortgages supporting multifamily lending this year.

While the macroeconomy continues to endure challenges, with positive economic news interspersed with weaker news, economic growth is likely to continue – albeit modestly for the balance of this year and possibly accompanied with an uptick in the unemployment rate. Local housing markets are at or near bottom, with some having already turned the corner. And 2011 is likely to bring better prospects for sales, construction and home values, with financing continuing to be supported by Freddie Mac, Fannie Mae, and Ginnie Mae.


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