The housing market is changing, and as it adjusts, so do homebuyers, legislators, and administrators. The following developments include actions by government agencies, Congress, and the Federal Reserve and how they could impact the housing market.
The Federal Reserve Will Stay the Course
According to the Federal Reserve’s latest monetary statement, the central bank plans on continuing the era of rock-bottom interest rates, which should continue to keep mortgage lending costs down and encourage home-buying.
The current base federal funds rate is between zero and 0.25%; that rate corresponds to mortgage rates at all-time lows and is set to continue for the foreseeable future.
The ongoing purchases of mortgage-backed securities by the federal government will also continue; the Federal Reserve plans on buying $40 billion worth of mortgage-backed securities per month. This move encourages real estate investment because the performance of the MBS is dictated by the underlying strength of the mortgages supporting the security. As the housing market improves, the performance of these securities improves as well – which encourages even more real estate investment.
In addition, the Fed will roll over principal payments from these securities into the purchase of additional securities and Treasuries, which – according to the bank – will have the effect of keeping long-term interest rates low.
How long this continues basically depends on inflation and the national unemployment rate. In the note, the Fed hinted at changes after the rate falls below 6.5%; it is currently at 7.7%.
FHA Raises the Credit Score Limit
One of the leading forces in the U.S. housing market, without a question, is the Federal Housing Administration (FHA). A division within the Department of Housing and Urban Development, the FHA is tasked with providing mortgage insurance on home loans, in effect providing a government guarantee to encourage lending.
One notable impact is a change in credit score standards required for the FHA’s signature feature, a 3.5% down payment. Under new changes, the minimum FICO credit score required for this 3.5% payment feature is 580. Anyone with lower than a 580 score will have to pay 10%.
Ordinarily, this wouldn’t have a big impact on a healthy market. The market would not be as dependent on loans to those with a score of less than 580. Now, though, every sale counts, which means those who would ordinarily be able to purchase a home will have to pay 6.5% more down – which, for a $150,000 mortgage, equals $9,750 more.
Other changes within FHA’s loan structure could also impact the market.
The JOBS Act Could Encourage Condo Sales
The Jumpstart Our Business Startups Act, designed to stimulate the economy, contains in it a provision that could help with sales of condo units across the country.
Formerly, condo units with rental pools (units with shared ownership) were considered securities by the Securities and Exchange Commission and had to be registered as such. Now, with the JOBS Act, said properties no longer have to be registered as securities. What’s more is that advertising can now be conducted in conjunction with selling these properties.
Condo sales do not constitute a massive part of the housing market, but every bit helps. This measure could be particularly important for areas with high rates of tourism, such as Florida and California – two states already hit hard by the real estate crash.
Without a doubt, additional developments will occur as the housing market recovery continues and matures. With federal debt issues still at the forefront of the national political scene, real estate could be further impacted this year.