Monthly Recap: Single Family Homes Sales Rise, The Fed Shows their Hand and FHA Gets Strict on Buyers

2012 has started off with a bang!

As the final hours of the first month of the year tick away we wonder if any more bits of news will sneak in, we hope not as this is all she wrote!

Single Family Homes Surge

The US Commerce Department reported that nationwide production of new single-family homes rose 4.4 percent in December 2011, a positive outlook as this is the third consecutive increase since April 2010. On a local level, single family home sales in Naples Florida increased 5 percent in 2011 (5,162 contracts) as compared to 2010 (4,896 contracts).

Constrained Real Estate GrowthBob Neilsen, chairman of the National Association of Home Builders stated “the report adds to the growing evidence that demand for new, single-family homes is finally starting to firm up in an increasing number of markets nationwide.  This emerging trend is allowing builders to put more crews back to work, and could be even stronger if not for the overly tight credit conditions that prevail for both builders and buyers, as well as the continuing foreclosure crisis and the challenges of obtaining accurate appraisal values on new homes.”

Neilsen’s statement underscores the sentiment throughout the housing industry; we are operating under the theory of constrained growth. Markers exist that the economy is showing signs of improvement yet there is still much to overcome as institutions place restrictions on consumers and the system.

A recent survey of economists outlines:

  • The risk of a U.S recession is falling; while consumer confidence is still low, trends indicate that the future economic outlook remains positive.
  • Europe’s financial crisis is being contained and experts predict that U.S growth in 2012 (as a result of this crisis) will be diminished by only a quarter of a percentage point.
  • Job growth predictions by the panel suggest that 144,000 jobs will be created on a monthly basis and unemployment will not reach a manageable level until at least 2014.
  • The Federal Reserve will wait until late 2013 or even 2014 to raise interest rates.
  • Fed governors believe the economy will grow by 2.2 percent to 2.7 percent this year and unemployment will reach 8 percent.

Federal Transparency

The economic uncertainly has many speculating that the Federal Reserve will need to shake things up in order to get the economy moving again. Earlier this month it was announced that the Fed will disclose its members’ forecasts for key federal fund rates.  The fund rate is the rate that banks charge one another for overnight loans and influences bank loans and deposits on a grand scale.   This rate has been kept near zero for several years and a rate increase is not expected in 2012. This type of disclosure will provide consumers with a greater ability to choose when to refinance a home or purchase a car as interest rates that affect these purchases will be known.  In the corporate arena, financiers will have the foresight to purchase short or long term investment products with greater clarity.

On January 26, 2012 Fed Chairman Bernanke left open the possibility that the Fed could do more to combat joblessness even at the short term risk of inflation above the bank’s 2 percent annual target. Some speculate that the Fed may purchase up to $ 1 trillion in mortgage-backed bonds from banks and institutions though a final decision on this alternative has not been publicized.

The FHA Squeeze

As the Federal Reserve moves swiftly to create clarity in the marketplace and spur on the economy, the Federal Housing Administration (FHA) is enacting practices that may curb the ability for buyers to purchase homes.

Acting FHA Commissioner Carol J, Galante announced that in order to strengthen their Mutual Mortgage Insurance Fund, a new rule is to be enacted to “reduce the maximum allowable seller concession from its current level to one more in line with industry norms.”The law states that a seller may contribute 6 percent towards the buyer’s closing costs to include prepaid expenses, discount points and other financing items.   FHA is looking to reduce seller concessions to 3 or 4 percent of closing costs, thereby placing the burden on the buyer to bring more money to the table.  Buyers have faced stricter financing policies since the downturn in the market and those buyers who have jumped through the necessary hoops to obtain financing are now being rewarded by paying all if not most of their closing costs?

The nation is still at grips with a frail housing market and adding an additional monetary barrier jeopardizes the rate of recovery within the housing sector.  The Obama administration proposed a broader refinancing plan for all Americans during his State of the Union address; the Federal Reserve is taking measures to entice banks to increase lending by keeping the fund rate at zero. At a minimum FHA should aid buyers in their quest to purchase a home by keeping seller concessions to 6 percent.  Growing the economy and encouraging homeownership is the name of the game and FHA needs to get with the program.

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