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Home Prices Versus FHA Loans

by Peter G. Miller
December 28th, 2009

During the past few days there have been interesting — if somewhat conflicting reports — which suggest that home prices in some areas have begun to stabilize and perhaps even rise.

First up, we have the National Association of Realtors which reports that “the national median existing-home price4 for all housing types was $172,600 in November, which is 4.3 percent below November 2008. Distressed properties, which accounted for 33 percent of sales in November, continue to downwardly distort the median price because they generally sell at a discount relative to traditional homes in the same area.”

Next, the Federal Housing Finance Agency tells us that “U.S. house prices rose 0.6 percent on a seasonally adjusted basis from September to October.” As well, says the agency, “the previously reported 0.0 (zero) percent change in September was revised to a 0.4 percent decline. For the 12 months ending in October, U.S. prices fell 1.9 percent. The U.S. index is 10.8 percent below its April 2007 peak.”

Lastly, we have an NAR report which says that “during the third quarter, 123 out of 153 metropolitan statistical areas2 reported lower median existing single-family home prices in comparison with the third quarter of 2008, while 30 areas had price gains.”

FHA Guidelines

I bring these reports up not because they’re great (they’re not) because they’re incrementally better than what we have been seeing for the past two years or so. They may also impact FHA loan guidelines.

The numbers that we’re seeing do not suggest in any way that we’re out of the financial woods. And that, for FHA qualification standards, is a concern.

Imagine that you ran the FHA. Looking ahead do you relax guidelines or make them tighter? Do you raise downpayment requirements? What about mortgage insurance premiums?

This is a real-world issue because if the FHA tightens standards it also reduces the availability of FHA loans for people with bad credit. And if there are fewer FHA borrowers, there’s less demand in the marketplace and less pressure to maintain price levels. Which means, of course, that tougher FHA loan guidelines produce exactly the result that was anticipated. The become a self-fulfilling prophecy.

Tax Credits

So what happens next? We have already artificially increased short-term demand with an $8,000 tax credit for first-time buyers and now we even help owners who sell homes for less than $800,000 with a $6,500 tax credit.

The catch is that the tax credits at this time will stop for contracts made after April 30, 2010.

So here’s an idea: Let’s not raise the FHA downpayment requirement or the FHA mortgage insurance premium if the tax credit actually ends. If the tax credit is extended, then maybe yes — that could be a political and financial requirement for the FHA program. But if the tax credit really ends in April , then no because a fragile market would then face two blows that would undermine buyer demand.

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