It’s the old “Good news; Bad news” scenario. The good news is that home prices are on the rise; the bad news is that home prices are on the rise (Home Prices).
With home values increasing, many who own a home that was previously underwater see some recovery in their equity position. Accordingly, with interest rates at an all-time low and dropping, they now have the chance to either refinance or sell. That’s a good thing.
However, with the home prices increasing, fewer first time homebuyers can afford the cost of a new home, regardless of the reduced down payment requirements or cut in the FHA annual insurance premium. Although the median price for a home increased last year, the number of homes on the market declined by about 11%. That means fewer homes at higher prices. Not a good formula for a first time homebuyer strapped for cash, carrying some pretty hefty student loans.
So what do we do? Reduce down payment requirements to zero? That won’t work as it will just mean a higher loan amount, with more of monthly payment on the higher priced home.
Don’t think we can cut the FHA premiums anymore as many are a little skeptical about the initial cut as it is. Some believe this cut will hurt the FHA fund, and end up costing the tax payers more money if loans default, ending up actually increasing the cost of FHA financing? That will definitely not be good for first time buyers or the economy.
With fewer first time buyers we have fewer move-up buyers which ends up hurting the housing recovery and hurting the economy. That will have the effect of reducing home values. Then, more people can afford them but only if they have jobs making enough of an income to afford the payments. But will they have these jobs, at the needed income levels to afford a home, if the economy isn’t recovering?
I think what this all means is that things are not going to change overnight; no matter how bad we want. There is no quick fix to the problems. The economic and housing recovery will be a slow, drawn out process but we need to allow it to take its natural course.
With home prices increasing, some people will be able to better their position, either through refinance, or sale. This will slowly inject some money back into the economy; resulting in people spending a little more. That will help business and the overall economy.
Other factors, like reduced gas prices may also help. As business picks up, so will employment, and more importantly, wages (I hope). As that happens, more people will look to buy homes. Although prices may rise, people will be a better position to afford them.
The key then will depend on what the Fed does with the long term interest rates? If they raise them too quickly, it may have the negative effect of blocking more first time home buyers out. That will start the whole process over again. Hope you like roller coasters…