Historically low mortgage rates are a crucial component of record affordability for home buyers, but lack of confidence in the market and fear of further price declines are challenges that are outweighing that factor, Credit Suisse analysts wrote Wednesday.

Credit Suisse said its affordability index is at an all-time low at 13.4% in 3Q10 compared to 14.9% in both 3Q09 and 2Q10. The index tracks the monthly mortgage payment on the median-priced home relative to median income and has a 17-year average of 20%.

The low index reading is the result of low mortgage rates, the analysts said, as rates are a critical factor of home buying affordability. A 10-basis point change in rates has an impact equivalent to a 1% change in home prices. Mortgage rates in 3Q10 were down 71 basis points from 3Q09 and 39 bps from 2Q10.

It's a long-term positive for home sales and prices, but in the near-term, economic challenges like high unemployment, weak buyer confidence and fear of further price declines are challenges high affordability hasn't been able to trump.

Existing home sales were down in all 50 states in 3Q10, with double-digit year-over-year declines in 47 states, the result of weakened demand after the homebuyer tax credit. In new construction, housing starts in October were at a seasonally adjusted annual rate of 519,000, down 1.9% from the October 2009 rate and 11.7% below September's rate, the Census Bureau and Department of Housing and Urban Development reported Wednesday.

While widespread foreclosures are to blame for the flood of real estate owned properties for sale on the market and depressed housing prices over the past three years, Credit Suisse projected the recent slowdown in completed foreclosures brought on by robo-signing-related foreclosure moratoria will result in even greater decreases in home sales in 4Q10. REO properties account for an estimated 25% share of all home sales.

Single-family prices fell 0.2% yr/yr in 3Q, with declines in 28 of the top 50 markets, up from 21 markets in 2Q. "We expect further declines in the coming quarters as pricing pressures intensify due to weak demand and high inventories," the report said.

Whether the high levels of affordability will continue may rest in the outcome of the Federal Reserve's $600 billion quantitative easing buy-up of Treasury securities. The recently announced initiative is aimed at the economy at large, so its direct impact on mortgage rates is yet to be seen. The Credit Suisse analysts said it could lead to sustained levels of high affordability.
"We expect affordability metrics to improve further in the coming quarters as home prices fall further and mortgage rates decline or remain near current low levels as the Fed continues its quantitative easing program."

In other housing news, home prices fell 1.1% in September after falling 1.2% in August, according to the just released CoreLogic house price index.

"The September HPI shows that home prices in the U.S. declined for the second month in a row after rising slightly for the first seven months of the year," the CoreLogic report said. The Santa Ana, Calif., firm collects and analyzes property and mortgage data.

House prices have declined by 2.8% since September 2009, according to the CoreLogic HPI, which is not seasonally adjusted and includes distressed sales. Excluding distressed sales, prices are down 0.73% from a year ago.

"We're continuing to see price declines across the board with all but seven states seeing a decrease in home prices," said Mark Fleming, chief economist for CoreLogic. "This continued and widespread decline will put further pressure on negative equity and stall the housing recovery."
The seven states that have experienced year-over-year price appreciation are: New York, North Dakota, California, Nebraska, Virginia, Alaska and Maine.

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