This week there have been some doubts about the nascent economic recovery. The stock market seems to be “taking a breather”, and national sales of existing homes reversed the trend of recent months and fell 3% in August. While the housing market inventory turnover is improving, there is a large inventory (7 million homes) of potential foreclosure properties not yet on the market. This huge number is more than 30 percent higher than the annual rate of existing home sales in the US and is about twice as large as the current inventory of homes on the market nationwide. Calculated Risk points out that the Amherst Securities analysis does not see much impact from mortgage modifications programs. The time between first missing a payment and foreclosure has been lengthening. Banks are reluctant to take on more real estate and various moratoriums and judicial delays probably contribute as well.

All this means that the the time is ripe for the government to shift its incentive programs to encourage more expedient processing of short sales, as we described in a more detailed article earlier this week. Just a look at current numbers tells the story. In Kitsap County in August there were 92 bank owned active listings and 43 closed sales, while there were 142 short sale listings and only 12 closed transactions. So a bank owned (post foreclosure) listing is about 5 times as likely to sell as a short sale (preforeclosure) listing. Considering that virtually all parties derive added benefits from the short sale versus the foreclosure, you’d think we could make more of them close. With the first time home buyer tax credit expiring, we should consider that each additional purchase from this program was costing $43.4k, not $8k, if we consider the cost to obtain each additional sale. Maybe implementing a loan servicer incentive to complete short sales would be more effective stimulus - again see details.

Each month we look at affordability as a means of seeing how close our market is to returning to its pre bubble conditions. The Washington Center for Real Estate Research provides local affordability calculations that we can use to check on housing affordability using current median prices and interest rates. We assume that a buyer making the median family income puts 20% down on the median priced home and obtains a 30 year fixed rate mortgage. We assume that a first time buyer making 70% of the median income puts 20% down on a house priced at 80% of the median and obtains a 30 year fixed rate mortgage. We assume that both buyers can afford to spend a maximum of 25% of their monthly income on the principal plus interest of the loan. Using the annual averages of median price, median income, and average annual 30 year fixed interest rate since 2003, we plot an affordability index equal to the maximum affordable payment divided by the actual payment. When the index is greater than 1, the loan is affordable to the typical buyer. When it is less than 1 some buyers cannot afford to purchase. Our numbers for 2009 are estimates using the latest monthly data for median prices and interest rates (2008 has been updated with average annual values), and an estimated median family income for 2008 and 2009. With interest rates falling from 5.33% last month to 5.22% in September for a typical 30 year fixed rate conforming loan and the median price dropped a few percent in August to $245,000, affordability is very good. Thus for the first time in several months we see both interest rates and median price dropping. Keeping in mind how median prices can be deceptive, you should be aware that the bulk of sales are concentrated below $400,000, with considerably fewer than normal in the higher price ranges. The affordability index improved to 1.25 in August from 1.21 in July. First time buyer affordability improved to 1.10 from 1.06 last month. Affordability improved this month after 5 months of declines. Below is a  graph of the year-to-year changes in affordability and a second graph showing month-to-month affordability progress over the past year.

Year	2003	2004	2005	2006	2007	2008	2009
Annual Average interest rate	5.83	5.84	5.87	6.41	6.34	5.80	5.22
Median Income	$53,160	$53,923	$54,582	$58,304	$60,719	$65,000	$65,000
Median Price	$184000	$206900	$250000	$275000	$290343	$265000	$245000
Monthly payment	$867	$975	$1182.43	$1378	$1443	$1244	$1079
Affordable payment	$1,108	$1,123	$1,137	$1,215	$1,265	$1,354	$1,354
Affordability Index	1.28	1.15	0.96	0.88	0.88	1.09	1.25
1st time buyer payment	$693	$780	$946	$1102	$1155	$995	$863
1st time buyer affordable payment	$775	$786	$796	$850	$885	$948	$948
1st time buyer affordability index	1.12	1.01	0.84	0.77	0.77	.953	1.10

September's APR is 5.191% on a 30-Year and 4.700% on a 15-Year, both Conforming. August's rates were higher, 5.444% on a 30-Year and 5.078% on a 15-Year, both Conforming. If you qualify for FHA or VA loans (or the newly popular USDA loans), these programs have are attractive for low downpayment buyers. Limits for FHA and conventional conforming loans went up with the stimulus bill signed earlier this year. FHA maximum is $475,000, and the conventional conforming limit has returned to $475,000. Lending programs for jumbo loans have improved considerably, with the larger banks starting to come back to this market. A typical 30 year fixed jumbo APR (with total costs of the loan, not just the rate factored in) is 5.895% on one major bank web site - down about half a point from last month). Local credit unions and savings and loans may be able to beat this rate for some jumbo loans. To check the daily rate you can contact your lender or preview web sites such as this one - http://bankrate.com/ .