mortgage

The grand illusion

Monday, March 30
Posted 4 p.m. EDT

Senior editor Chris Kissell contributed this entry. Holden Lewis is on vacation.

THE GRAND ILLUSION: As mortgage rates plunge to historic lows, applications for new loans are skyrocketing.

But home sellers dreaming of a new real estate boom should keep the celebratory champagne on ice a bit longer.

Mortgage activity jumped more than 32 percent last week, and the four-week moving average is up a robust 13.9 percent, according to the Mortgage Bankers Association.

Unfortunately, those perky numbers mask a gloomier reality -- a huge percentage of new applications are for refinancing, not home purchases.

For example, refinancing increased 41.5 percent for the week ending March 20 when compared with a week earlier. Meanwhile, applications for new purchases were up a relatively puny 4.2 percent.

Now, it's important to note there are stirrings of life amid the housing-bubble wreckage. Sales of new and existing homes were up in February, and January saw the first uptick in nationwide home prices since last July.

Still, the MBA forecasts 2009 existing-home sales to drop 2.5 percent compared with 2008.

The picture is even worse for new-home sales, which the MBA predicts will plunge by a cliff diving 39 percent. That would be even worse than the 37.8 percent drop in 2008, as reported by the U.S. Commerce Department.

Why all the pessimism? In a word, jobs. Or the lack thereof.

Jay Brinkmann, MBA chief economist, says home sales are likely to remain in the deep freeze until Americans get back to work.

"Even with amazingly low interest rates, lower home prices and the first-time homebuyer tax credit, it is unlikely that we will see an increase in overall home sales until we see some stabilization of employment," says Brinkmann in an MBA press release.

SECOND-HOME SALES SLIDE: A buddy from up north called a few years back and left a message asking for my opinion about the wisdom of buying a second home in Florida. At the time, property values here in the Sunshine State were heading into the stratosphere.

I never got around to returning the call. So he shelved the idea of dropping a chunk of his life savings into a shiny new South Florida condominium.

John, you owe me -- big time.

As prices here in my adopted state and elsewhere have cratered, Americans appear to have given up the fantasy of the second home as a surefire ticket to instant riches and early retirement on their own private island.

A just-released NAR report found that second-home sales -- which include vacation and investment properties -- fell to 30 percent of all existing and new home transactions in 2008.

It was the third straight year second-home purchases declined as a share of overall home sales. Second-home sales made up 33 percent and 36 percent of all transactions in 2007 and 2006, respectively.

In 2005 -- when the housing bubble was rising to its peak -- second-home sales made up a record 40 percent of all existing and new home transactions.

Coincidentally, that was the same year John remembered his long-lost pal in exile and decided to give him a ring.

Who is still buying second homes today? People with relatively deep pockets.

The typical vacation-home buyer in 2008 was 46 years old and had a median household income of $97,200, according to the NAR. The average investment-home purchaser was 47 and earned $85,000.

The median household income in the United States in 2007 was $50,740, according to the Census Bureau.

In addition, more than four in 10 investment-property buyers and more than three in 10 vacation-home buyers paid cash for new digs purchased in 2008.

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