Housing starts exceed 16,000 in Califorina

California home builders beat a record established in 1989 by starting construction on more than 16,000 homes in June, the California Building Industry Association announced Thursday.

The state is on track to build slightly more homes in 2005 than were built last year, the strongest year for housing construction since 1989.

During the first six months of 2005, single-family home construction continued its surge with 80,540 housing starts, almost 2 percent more than in 2004. Multi-family construction, however, dipped to 25,600, almost 5 percent less than in 2004.

"The demand for new homes, condominiums and apartments is still phenomenally strong, and builders are doing everything we can to meet the housing needs of a growing population," Steve Doyle, a San Diego home builder and president of the CBIA, said in a written statement.

"Now that the weather is better, we're doing all we can to make up for lost time," he said, referring to the very wet winter experienced during the first half of the year, which delayed construction projects across the state.

In June, builders started nearly 11 percent more homes - 16,000 - than they did in June 2004 and almost 10 percent more than in May of this year.

CBIA chief economist Alan Nevin said the increased production indicates that California is on target to meet or beat the "exceptional performance" of last year.

Doyle noted that although prices are moderating, he sees no signs of bubble-bursting in the housing market as some have forecast.

"Because population growth continues to push housing demand, it's very unlikely that prices will fall sharply as some economists have been predicting," he said.

He urged the building industry to continue this record pace because a higher supply eventually should bring down prices in the affordable range for the first-time home buyers.

Existing-Home Sales Smash Record Again

Existing-home sales surpassed market expectations and reached another record in June as low mortgage interest rates and favorable market conditions continued to attract buyers, according to the National Association of Realtors.

Total existing-home sales-including single-family, townhomes, condominiums and co-ops rose 2.7 percent in June to a seasonally adjusted annual rate (see note) of 7.33 million from an upwardly revised pace of 7.14 million in May. Sales were 4.4 percent above the 7.02 million-unit level in June 2004; the previous record was 7.18 million in April of this year.

David Lereah, NAR's chief economist, said home sales were expected to ease slightly from peaks reached over the last couple of months. "Just when you think sales activity is ready to settle into a more sustainable pace, the housing market continues to surprise," he said. "We've been expecting sales to remain at historically high levels, but this performance underscores the value of housing as an investment and the importance of homeownership in fulfilling the American dream."

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage was 5.58 percent in June, down from 5.72 percent in May; the rate was 6.29 percent in June 2004. "Job growth and economic improvement also are boosting home sales," Lereah said.

The national median existing-home price for all housing types was $219,000 in June, up 14.7 percent from June 2004 when the median price was $191,000; this is the strongest increase since November 1980 when annual appreciation was 15.6 percent. The median is a typical market price where half of the homes sold for more and half sold for less.

NAR President Al Mansell, of Salt Lake City, said home sales are expected to ease as the year progresses. "When the housing market eventually slows from red-hot levels, we should see some cooling in price gains," he said. "Home prices continue to be bid-up in tight markets across the country. Eventually, appreciation rates will slow and come down to normal levels when the shortage of homes on the market improves and comes closer into balance, hopefully, by the second half of next year."

Historically, home prices rise at the general rate of inflation, plus one-to-two percentage points.

Total housing inventory levels rose 3.8 percent at the end of June to 2.65 million existing homes available for sale, which represents a 4.3-month supply at the current sales pace. "The irony is that housing inventory is tight enough to boost prices but not enough to curb overall sales," Mansell said.

Existing condominium and cooperative housing sales hit a fourth consecutive monthly record in June, rising 4.5 percent to a seasonally adjusted annual rate of 960,000 units from a pace of 919,000 in May. Last month's sales activity was 12.4 percent above the 854,000-unit level in June 2004. The median condo price was $223,500, up 14.8 percent from a year earlier. Condo/co-op sales accounted for a 13.1 percent market share.

Single-family home sales increased 2.4 percent to a record seasonally adjusted annual rate of 6.37 million in June from 6.22 million in May, and were 3.2 percent above the 6.17 million-unit pace in June 2004. The median single-family home price was $218,600 in June, up 14.5 percent from a year ago.

Regionally, total existing-home sales in the West increased 5.5 percent to a record annual pace of 1.73 million units in June, and were 3.6 percent above June 2004. The median existing-home price in the West was $317,000, up 17.4 percent from a year ago.

Existing-home sales in the Northeast rose 3.4 percent to a record annual level of 1.23 million in June, and were 7.9 percent above the same month a year ago. The median existing-home price in the Northeast was $250,000, up 13.6 percent from June 2004.

Total existing-home sales in the Midwest showed a 1.9 percent gain to an annual sales rate of 1.63 million in June, the second highest on record, and were unchanged from June 2004; the record was 1.64 million in April of this year. The median price in the Midwest was $177,000, up 12.7 percent from a year earlier.

The home resale pace in the South was up by 1.1 percent to a record level of 2.74 million units in June, and was 5.8 percent higher than a year ago. The median price of an existing home in the South was $193,000, which was 9.0 percent higher than June 2004.

The National Association of Realtors, "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

Note: The annual rate for a particular month represents what the total number of actual sales for a year would be if the relative pace for that month were maintained for 12 consecutive months. Seasonally adjusted annual rates are used in reporting monthly data to factor out seasonal variations in resale activity. For example, home sales volume is normally higher in the summer than in the winter, primarily because of differences in the weather and family buying patterns.

Existing-home sales, which include single-family, townhomes, condominiums and co-ops, are based on transaction closings. This differs from the U.S. Census Bureau's series on new single-family home sales, which are based on contracts or the acceptance of a deposit. Because of these differences, it is not uncommon for each series to move in different directions in the same month. In addition, existing-home sales, which generally account for 85 percent of total home sales, are based on a much larger sample -- nearly 40 percent of multiple listing service data each month -- and typically are not subject to large prior-month revisions.

Because there is a concentration of condos in high-cost metro areas, the national median condo price is higher than the median single-family. In a given market area, condos typically cost less than single-family homes.

Fastest Growing Housing Markets

The nation's fastest-growing housing markets are located in the Southwest, a recent U.S. Census Bureau report shows.

The top three states are Nevada, with a growth rate of 4.5 percent, followed by Arizona at 3 percent and Utah at 2.6 percent.

The growth rates were measured according to the number of new housing units added during the 12 months ended July 1, 2004.

The fastest-growing county, according to the report, was northeastern Florida's Flagler County, which grew 13.9 percent. Florida has a total of three counties in the top 10, while Georgia has four.

Maricopa County, Ariz., experienced the biggest increase by the number of housing units added, Nevada registered the largest percentage gain, and Florida was the state with the highest number of housing units added—198,430 new units between July 2003 and July 2004.

Meanwhile, states in the Northeast and mid-Atlantic regions had the slowest growth rates.

U.S. housing starts steady in June

Construction of new homes was unchanged in June at a seasonally adjusted annual rate of 2.004 million, the Commerce Department estimated Tuesday.

The June figures, while weaker than the 2.07 million that had been expected by economists, show the housing market continues to sizzle. Starts of single-family homes fell 2.5% in June to a 1.667 million annualized rate. Starts on multifamily dwellings increased 14.2% to 337,000.

Building permits for new housing -- a signal of future activity -- increased by 2.4% to a 2.111 million rate in June from 2.062 million in May. Permits for single-family homes increased 1.3%, reaching 1.649 million.
Housing starts in May were revised slightly lower to a 2.004 million rate from 2.009 million estimated last month.

Continued low mortgage rates and strong price appreciation have kept the housing market hot this year. Industry groups are estimating another banner year for construction and sales.

"Until mortgage rates rise significantly, housing should remain solid," said Joel Naroff, president of Naroff Economic Advisers.
On Monday, the National Association of Home Builders and Wells Fargo said their monthly housing market index fell to 70 in July from a six-year high of 72 in June, indicating little letup.

In June, housing starts fell in every region of the nation except the South, where they increased 11.4%. Starts in the West fell 10.4% to the lowest rate since November.

The government's housing data are subject to large sampling and other statistical errors.

The government cautions that it can take up to five months for a new trend to be established in starts. Over the past five months, starts have averaged 2.019 million, down from 2.056 million a month ago.

Housing starts have topped the 2 million mark in eight of the past 12 months.
In 2004, a total of 1.956 million units were started.

Mortgage bankers group expects real estate to remain strong

America's nesting trend is the main driver of a strong, three-year economic forecast released today by the Washington-based Mortgage Bankers Association.

This year's forecasted residential mortgage production - $2.74 trillion - will be the third-largest, trailing only 2002 and 2003. Projected economic growth through 2007 should average about 3.5 percent a year, reports the MBA.

Doug Duncan, MBA chief economist and senior vice president of research and development, calls the growth forecast "solid" in the face of surging energy prices and a widening trade deficit. Housing is a large reason for the positive outlook, he says.

"We expect the string of record-high home sales to continue for the fifth consecutive year," said Duncan in a statement announcing the MBA forecast. "The labor market will remain strong, even with an expected pickup in productivity in the second half of the year. Core inflation should edge higher this year but remain near the Fed's target of 1.5 percent."

To control inflation, he said, the Fed is expected to continue its modest tightening, but not so much to affect the real estate market. By 2007, Duncan says, a fixed-rate, 30-year mortgage should reach about 6.25 percent, which would still be low in historical terms. On Tuesday, the 30-year fixed mortgage stood at 5.24 percent, according to Bankrate.com.

Other findings and projections noted by MBA researchers:

Both new- and existing-home sales will rise 2 percent in 2005 nationally to a record level. But existing-home sales will fall by about 3 percent in 2006 and another 2 percent in 2007. Likewise, new-home sales will drop 4 percent in 2006 and 3 percent in 2007.

Price appreciation for homes will not be as intense, with median existing home prices increasing by 6.8 percent in 2005 compared with 9.3 percent in 2004. A 5.5 percent increase is expected in new home prices in 2005, compared with 13.3 percent in 2004.

Fixed mortgage rates will continue on an upward trend, increasing from 5.5 percent currently to 5.7 percent in the fourth quarter of 2005, 6.2 percent in the fourth quarter of 2006 and 6.3 percent in 2007.

Commercial loan activity should stay strong as rates stay low, and loans are refinanced.

Mortgage Applications Down as ARM Demand Tumbles

Applications for U.S. home mortgages fell last week amid a modest rise in rates on fixed 30-year loans, while demand for adjustable-rate mortgages (ARMs) fell to its lowest level in over a year, the Mortgage Bankers Association said on Wednesday.

The MBA said purchasing and refinancing activity dropped during the holiday-shortened week ending July 8, after surging the previous week.

The MBA's seasonally adjusted index of mortgage application activity decreased 7.2 percent to 791.9, nearly erasing all of the previous week's 9.6 percent gain.

On a four-week moving average, the index is down 2.9 percent from 826.4 to 802.6.

Fixed 30-year mortgage rates averaged 5.62 percent last week, excluding fees, up 4 basis points from 5.58 percent the previous week.

The MBA on Tuesday forecast gradually increasing mortgage rates through the end of 2005 even as it predicted a record year for the U.S. housing market. It said sales of both new and existing homes will hit new highs for the fifth consecutive year.

Many analysts say housing prices will stop climbing when mortgage rates hit levels that will deter buying. But for now, most believe rates are still at levels that are enticing to consumers.

Mortgage rates are still lower than a few months ago. The 30-year mortgage rate hit 6.08 percent at the end of March, according to MBA figures. A year ago, it was at 5.95 percent.

Breaking down mortgage financing by sector, the MBA said its purchase index, a gauge of loan requests for home purchases, fell 6.1 percent to 489.0, after rising 9.1 percent the previous week.

The MBA's seasonally adjusted index of refinancing applications dropped 8.4 percent to 2554.3, after climbing 10.2 percent the prior week.

Applications for adjustable-rate products experienced an even steeper decline of 15.8 percent, according to Michael Cevarr, MBA's director of member surveys.

"As a result, the ARM share of applications, at 27.9 percent, is at its lowest level since March of 2004," he said in a press release.

The ARM share of activity stood at 30.7 percent the week before. The drop was also against the backdrop of lower rates on one-year ARMs, which fell to 4.56 percent from 4.60 percent the prior week.

ARMs' low initial payments allow borrowers to buy homes that they would not necessarily afford with a fixed-rate loan.

Refinancings also decreased as a percentage of all mortgage applications, at 45.1 percent, down from 45.7 percent the previous week.

The MBA also said the average contract interest rate for 15-year fixed-rate mortgages rose 3 basis points last week, to 5.21 percent from 5.18 percent a week earlier.

In forecasts earlier this year, industry analysts and economists said they expected home sales to edge off record 2004 levels as the Federal Reserveraises interest rates.

But now, some of them have revised their predictions, pointing to the fact that demand remains robust and shows few signs of waning.

Last week, Freddie Mac (FRE) Chief Economist Frank Nothaft, in his monthly outlook, boosted his forecast for new and existing home sales to 7.21 million for 2005 from a previous target of 7.10 million. Last year, home sales hit a record 7.17 million.

In June, the National Association of Realtors' chief economist boosted his target for existing home sales to a record after earlier forecasting the start of a slowdown in 2005.

In its forecast on Tuesday, the MBA said new and existing home sales would each increase by 2 percent this year.

The MBA's survey covers approximately 50 percent of all U.S. retail residential mortgage originations. It has been conducted weekly since 1990.

Respondents include mortgage bankers, commercial banks and thrifts.

Record for Housing Sector Expected This Year Says the National Association of Realtors

The National Association of Realtors(r) has again raised its forecast for the housing sector, with both existing- and new-home sales to set an even bigger all-time record in 2005.

Existing-home sales are expected to rise 2.8 percent to 6.97 million this year; last month, the association was expecting 6.89 million sales -- the record was 6.78 million in 2004. New-home sales should increase 3.2 percent to 1.24 million in 2005, also a record. Total housing starts - single-family and multifamily -- are forecast to grow by 5.0 percent to 2.05 million units, the second highest on record; the peak was 2.36 million in 1972. This year is seen to be a record for single-family construction, with 1.68 million homes started.

David Lereah, NAR's chief economist, said that in each month of 2005 the forecast has been looking stronger than in previous projections. "The housing expansion is continuing as more Americans take advantage of favorable conditions to achieve the dream of homeownership," he said. "Earlier this year, we expected 2005 home sales to be the second-highest on record, but monthly sales have been at or close to record levels. Although we should come off of sales peaks in the months ahead, mortgage interest rates have remained lower than expected, and job gains are providing additional stimulus, meaning unprecedented sales totals this year."

"The most notable problem in the housing market is the shortage of homes available for sale, as well as some shortages of building materials," Lereah said. "These shortages are proving to be a challenge for home buyers, builders and remodelers, and are continuing to put pressure on home prices."

He expects the national median existing-home price for all housing types to rise 9.4 percent this year to $202,600, with the typical new-home price increasing 5.8 percent to $233,900.

NAR President Al Mansell, of Salt Lake City, said low interest rates are keeping housing affordable in most of the country. "We have to go back to the mid-1960s to see a period of comparably low mortgage interest rates," he said. "A big difference now is a decline in mortgage origination costs, plus a mushrooming in the availability of low- and no-downpayment loans. These are particularly helpful to first-time buyers in high-cost markets, but buyers need to shop loans and be aware of long-term consequences, and they may need to stay in their home longer to build enough equity to trade-up to a larger home in the future."

The 30-year fixed-rate mortgage should rise slowly to 6.1 percent in the fourth quarter, and reach only 6.5 percent by the end of 2006. According to Freddie Mac, the 30-year fixed rate currently stands at 5.62 percent.

The U.S. gross domestic product is forecast to grow 3.6 percent in 2005, with the unemployment rate averaging 5.1 percent. Inflation is expected to stay modest, with the Consumer Price Index rising 3.1 percent in 2005.

Inflation-adjusted disposable personal income should grow 3.2 percent this year, while the consumer confidence index is forecast to average 104.

The National Association of Realtors(r), "The Voice for Real Estate," is America's largest trade association, representing more than 1 million members involved in all aspects of the residential and commercial real estate industries.

------

The next existing-home sales release will be July 25; the Pending Home Sales Index is scheduled for August 1; and the next forecast will be August 9.

Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the Web site's "News Media" section in the NAR Media Center. Statistical data, charts and surveys also may be found in the NAR Media Center by clicking on Economic & Housing Statistics.

REALTOR(r) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS(r) and subscribe to its strict Code of Ethics.

Pictures of a mania? - US Housing Bubble

First, let me confess my ignorance, I know very little about housing.
However, I do...

... know something about bubbles and something about psychology. The debate over the possibility of a US housing bubble raging in almost every paper, and even within the exalted shrine of the Federal Reserve Board, has prompted me to take a cursory glance at the housing market to see if I could spot signs of aspeculative mania.

Frankly I am amazed there is even a debate. All I can see are signs of speculative excess. Let me take you through the key pieces of evidence for the prosecution which, I believe, represent a prima facie case that a bubble exists.

Firstly, the near-exponential rate of price increases that characterize bubble behavior are clearly visible in the chart below.



However, prices alone don't define a bubble. Rather it is the deviation of prices from their fundamental value that truly create a bubble. The chart below shows the 'PE' ratio for US housing. It is constructed as the ratio of house prices to rental income. Once again the exponential explosion that is so typical of a bubble can clearly be seen. Either historically, housing has been remarkably undervalued (unlikely, we suspect), or prices have been driven way out of line with underlying values.




Of course, people don't think about housing in this fashion. Instead people tend to think about housing in terms of affordability. That is to say, most people examine housing in terms of the amount of their monthly salary that will beconsumed by the mortgage. This might sound perfectly reasonable, but it flies in the face of the rational investor's view of the world.

The chart below shows the interest rate on a typical 30-year mortgage with 10% down, as a proxy for the average interest rate facing homeowners. It also shows the household mortgage debt payments as a percentage of disposable personal income as calculated by the Federal Reserve Board in their flow of funds statistics. Despite the near record low interest rates that home owners are enjoying, the repayments have soared to over 10% of monthly income!



An alternative source shows an even higher percentage of income going on mortgage repayments. According to the Joint Center for Housing Studies (JCHS) at Harvard University, after-tax mortgage payments consume nearly 20% of income. The JCHS also found that nearly one in three are now spending more than one third of their monthly salary on mortgage rates. Around 10% of Americans spend more than 50% of their monthly income on mortgage repayments!



Evidence of loosening standards is also fairly typical of a bubble. For instance, investors were happy to buy firms with no track record of earnings and value them on the basis of clicks and eyeballs during the dot.com years. Within the housing market we can find evidence of a general easing of standards. The percentage of loans with a loan to price ratio above 90% is 18%. New measures of financing have become increasingly popular. 35% of mortgages are now adjustable rates (ARMS) leaving borrowers very vulnerable to rising rates. Perhaps the US homeowner has bought into our Ice Age philosophy, but we doubt it.

Other exotic mortgage types have become increasing common. Interest-onlymortgages are now commonplace. Negative amortization loans are easily available. These beasts allow buyers to pay less than the interest due, and the balance is then added to the principal repayment. Indeed 105% loan to value mortgages are also available, so buyers can cover the costs of buying!



Indeed even the bubble blowers who run the Fed seem to be getting increasingly nervous about the state of play in the housing market. Susan Schmidt Bies gave a speech (Current Regulatory Issues, June 14 2005 Remarks by Susan Schmidt Bies) recently in which she stated:

We see indications that underwriting standards are beginning to weaken. For example, "affordability products" - such as interest-only loans, negative amortizations, and second mortgages with high loan-to-value ratios - are becoming more popular; sub-prime lending is growing faster than prime lending; adjustable-rate mortgages, or ARMs, have grown substantially and now account for more than a third of all mortgage originations, the highest level since 1994. Industry experts are increasingly concerned about the quality of collateral
valuations relied upon in home equity lending and residential refinancing activities.

As Bies noted, sub prime (lending to those with blemished credit histories or unusually high debt to income ratios) lending has seen a meteoric rise. The evidence of a slippage of credit standards doesn't come much clearer than this. Sub-prime lending now accounts for nearly 17% of all home equity lending.



Another tell-tale sign of an investment mania is the generally relaxed nature of those investing in the asset in question. William Goetzmann and Ravi Dhar from Yale University have just completed a major survey of institutional perspectives on real estate investing (Goetzmann and Dhar (2005) Institutional perspectives on real estate investing: the role of risk and uncertainty, available from www.ssrn.com. 200 Funds took part in the survey).

They reveal some unsettling attitudes towards property investing. A couple of questions in particular are highly relevant to our discussion here. Firstly, they asked investors how comfortable they were at extrapolating past returns into the future across a wide range of assets. Investors were most relaxed about extrapolating fixed income returns into the future, then came equity and then real estate. Bubbles of belief (see Global Equity Strategy, 12 January 2004 for a discussion on the taxonomy of bubbles) tend to be characterized by investors extrapolating past returns into the future, so the prevalence of professional investors willing to do precisely that is disturbing.



The second question of relevance to us is the percentage of investors who think that a crash is either 'not at all likely' or 'not too likely'. As the chart below shows, investors still have tremendous faith in fixed income with nearly 65% believing a crash is unlikely. 50% think a crash in real estate is unlikely, and 30% think a crash in equities is unlikely. The high percentage of those who think a crash in real estate is unlikely is surprising given the immense amount of press coverage that housing market seems to be generating!



The final question of use to us in the current context is an examination of the top factors influencing real estate allocation decisions. The top three factors citied were "statistical estimates of risk and return", "long-term historical performance" and "advice from external consultants". So these investors are essentially extrapolating the past on the basis of advice from the guys who told them to be 80% in equities during the dot com years - well that is alright then!

The final characteristic of a bubble is people buying simply because prices are going up (the greater fool element). According to the National Association of Realtors, 23% of all home purchased in 2004 were for investment, while another 13% were vacation homes! They also found that 92% of all second homebuyers saw their property as a good investment. 38% said it was very likely they'd purchase another home within two years!

A simple but worrying proxy for speculative buying in the housing market can be found by looking at the number of new houses that have been sold but are not yet under construction. This category now accounts for 40% of all new home sales!



Surely this evidence amounts to a prima facie case that the US housing market is undergoing a bubble. The bulls rely on arguments on immigration and demographics to support their views. But with a home ownership rate of 70% these amount to little more than betting that prices will keep rising. Of course, bubbles can and do run for longer than everyone expects them to do. But the US housing market is looking increasingly vulnerable to any change in 'fundamentals' (interest rates and unemployment) or sentiment.

Home Buyer Beware

Just as consumers have overspent their credit cards, many homeowners are now taking on more mortgage than they can handle. Interest only and other alternative mortgages have become so prevalent that the federal Office of the Comptroller of Currency is considering issuing a warning about such products. The office is concerned that consumers don't fully understand the risks of these mortgages.

Even without OCC guidance, good advice from a former mortgage underwriter is that if you can't qualify for a conventional mortgage to buy a home, you probably can't afford that home. Interest-only and adjustable-rate mortgages have advantages for affluent home buyers or those buying property in areas where values are increasing rapidly.

Interest-only mortgages allow buyers to get into a home while making low monthly payments for a few years. However, the payments can double after the first five years. Some who finance a home this way do so with the hopes that their financial situation will improve before the larger payments are due. This is a risky gamble.

Adjustable rate mortgages (ARM) have many of the same shortcomings. They have the attraction of allowing borrowers to make low monthly payments. In fact, 70 percent of ARM borrowers made only the minimum payments in the first three months of 2005, according to UBS, a large financial group. Again, they have to pay much more later.

According to an analysis by Deutsche Bank recently published by The New York Times, about $80 billion, or 1 percent of mortgage debt, will switch to an adjustable rate this year. Next year, $300 billion of mortgage debt will be adjusted. Then, in 2007, $1 trillion of the country's mortgage debt will switch to adjustable rates, according to the analysis.

This trend worries Federal Reserve Chairman Alan Greenspan. "The dramatic increase in the prevalence of interest-only loans, as well as the introduction of other relatively exotic forms of adjustable rate mortgages, are development of particular concern," he told Congress earlier this month.

In areas of rising home prices, like California and Atlanta, nearly half of mortgage loans are either ARMs or interest-only. Mortgages with changing payments generally have higher default rates than mortgages with fixed payments, according to Fannie Mae, the country's largest home finance company.

The Office of the Comptroller of the Currency plans to look at these loans to ensure they are being marketed properly. Such loans pose little risk to borrowers with substantial assets, but the office wants to ensure that others aren't exposed to too much risk by assuming such debts. The office does not expect to release guidance until this fall.

In the meantime, the average homebuyer should read the fine print. Small monthly payments may be attractive now, but they can come at a big price later.

Low Inflation Threat Allows Long-Term Mortgage Rates To Drift Even Lower This Week

Freddie Mac released the results of its Primary Mortgage Market Survey^SM (PMMS^SM) in which the 30-year fixed-rate mortgage (FRM) averaged 5.53 percent, with an average 0.6 point, for the week ending June 30, 2005, down from last week when it averaged 5.57 percent. Last year at this time, the 30-year FRM averaged 6.21 percent.

The average for the 15-year FRM this week is 5.12 percent, with an average 0.6 point, down from last week when it averaged 5.16 percent. A year ago, the 15-year FRM averaged 5.62 percent. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.06 percent this week, with an average 0.6 point, up slightly from last week when it averaged 5.05 percent. There is no annual historical information for last year since Freddie Mac only began tracking this mortgage rate at the start of this year.

One-year Treasury-indexed ARMs averaged 4.24 percent this week, with an average 0.7 point, also up slightly from last week when it averaged 4.23 percent. At this time last year, the one-year ARM averaged 4.19 percent. (Average commitment rates should be reported along with average fees and points to reflect the total cost of obtaining the mortgage.)

“With still little or no threat of inflation to be found, long-term mortgage rates this week had some breathing room and that allowed rates to drift a little lower,” said Frank Nothaft, Freddie Mac vice president and chief economist. “Short-term rates, though, may be another matter, since the Federal Reserve is expected to continue raising its target for the federal funds rate at least a few more times this year.

“Meanwhile, housing constituted 22 percent of the growth in real Gross Domestic Product (GDP) in the first quarter of this year. With mortgage rates hovering near historic lows, housing will undoubtedly continue to add to economic growth in the foreseeable future.”