You may have seen a recent headline on high end home sales performing well this year, with the suggestion by our friends at the National Association of Realtors that it is primarily due to low jumbo mortgage rates.  While low mortgage rates have definitely improved the affordability scenario, that trend has been across the board of all price categories, so in our data feature this week we decided to take a closer look at what else could contribute to the sales of high end homes in particular, including new construction, courtesy of Housing IntelligencePro.

One statistic that sticks out is the average percent financed of homes by price category.  For homes under $500,000, buyers finance 88% of the total purchase amount, on average.  For homes between $500k and $750k, that falls to 75%, from $750k to $1M it drops again to 69%, from $1M-$1.5M it comes in at 65%, and on homes $1.5M+ the average amount financed falls to only 60%.

What’s the moral of the story?  From the credit side it’s clear that on jumbo loans that banks are more likely to hold in their own portfolios, there is going to be a strong preference for situations in which the buyers are providing a larger down payment as it affords the bank less risk in case of default; with a 40% down payment, it’s highly likely a bank would be able to regain the principle loan amount even if the home owners defaulted.  From the demand side, it also makes sense in that if these buyers have sufficient capital to front a 35-40% down payment, they have the financial flexibility and mobility to make home purchase decisions that many other home owners are not able to.  If high end home buyers have the reserves for a 35-40% down payment, chances are they had a similar equity buffer on their previous home and have more options for reselling it.  Meanwhile, for many home owners in lower price categories, with the recent years of price deterioration it’s likely they would not be able to sell their home for what they current owe on it; stuck “underwater,” as they say.

So while low mortgage rates are undoubtedly a welcome variable for anyone considering a home purchase, when it comes to high end homes and banks willing to take on a portfolio jumbo loan, it seems there is an agreeable meeting of low loan-to-value ratio on the credit side and above average reserves on the purchase side that is driving the stability in high end home sales in 2010.

The Economy
First-time unemployment claims posted another increase this past week and remain at alarmingly high levels.  Initial jobless claims rose by 2,000 to 484,000 in the week ended August 7th.  This is the highest level of first-time claims since February and puts further doubt into an economic recovery.

In further efforts to spark the economy, the Fed announced it would keep their target Fed Funds rate at almost zero and reinvest its maturing mortgage-backed securities into government bonds to keep interest rates low.  In the Fed’s statement from their scheduled meeting earlier this week, they stated that “the pace of recovery in output and employment has slowed in recent months.”  The Fed also stated that the risk of inflation “is likely to be subdued for some time.”  But rising unemployment and a shaky economy has now posed what the Fed sees as a deflationary risk.  Deflation would be seen by the Fed as a blow to a potential recovery for the equity and housing markets.

The immediate concern is that growth domestically and internationally is slowing and the resources that both the government and Federal Reserve have to spark growth are already being exhausted.  Interest rates are near zero, the Fed has already built up its balance sheet, and federal deficits are mounting.  The broader market is likely to take a more cautious stance until there is some evidence that the employment situation will improve.

Housing Market
National average mortgage rates declined from the previous week to a new all-time low of 4.44% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on August 12th.  This is the fourth straight week that mortgage rates have fallen to new record lows.

In the week ending August 6th, the MBA’s seasonally-adjusted purchase index increased a slight 0.3% from the previous week but was still down 34.4% compared to the same time last year.  This is the fourth straight week that the purchase index has increased and the highest it has been in seven weeks.  Despite recent gains, the index remains near its lowest levels in almost 14 years.

For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com.  For more detailed information on the indicators discussed in this key indicator alert, please visit the following links: