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2006: A look back - A look ahead  
  Mortgage rates and home prices rose in 2006 while a refi boom is anticipated in 2007.
 Personal finance calendar  Personal finance calendar 

Mortgage rates fell… but so did home sales

As the feds saw it, nontraditional loans endangered borrowers who didn't know what they were getting into and could eventually result in hundreds of thousands of people losing their homes for inability to pay their mortgages. Regulators were especially wary of pay-option ARMs, in which the minimum monthly payment doesn't cover the interest charged, so the amount owed keeps going up. Eventually, borrowers could hit a debt ceiling, triggering a "recasting" of the loan in which the required monthly payment could more than double abruptly, in just one month.

The agencies issued a final "guidance" on nontraditional loans in early fall. In the guidance, the regulators told banks not to underwrite loans that couldn't be repaid. That's oversimplifying it, but not a lot -- which shows just what sort of Wild West atmosphere prevailed in the mortgage business during the housing boom.

At midyear came the event that home sellers and the real estate industry had hoped for: a sustained decline in mortgage rates. After that peak in late June of 6.93 percent, mortgage rates fell for three straight months, with just a couple of small weekly blips. In the last week of September, the average rate on a 30-year fixed reached 6.29 percent.

Rates went down, but home sales didn't go up, despite the conventional wisdom that falling rates would bring out the house hunters. As unsold houses started piling up, prices started going down. The median used-home price in August 2006 was 1.7 percent lower than the median price in August 2005. Half of homes cost more than the median.

By the time leaves were changing color, lenders and real estate agents were trumpeting affordability. Low rates combined with falling prices, they said, spelled great news for buyers. But buyers weren't buying it, apparently secure in the belief that house prices were destined to fall even more. Why not wait for a better deal?

And so buyers bided their time and sellers' anxiety climbed as piles of pumpkins materialized outside grocery stores and were expected to continue waiting as Thanksgiving and Christmas approach.

-- Posted: Nov. 1, 2006
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