Plymouth, MN

For the second month in a row, 18 of the 20 Case-Shiller real estate markets posted higher home values. It's the 6th consecutive strong showing for the benchmark private-sector housing index.

Combined with falling home supplies and rising sales figures, this month's Case-Shiller Index suggests that housing may have bottomed sometime earlier this year.

It's cause for optimism.

Even Case-Shiller respresentatives seem excited. In its press release, the publishers singled out the index's winning streak, commenting on the recent "stabilization in national real estate values".

But, in that statement, we see the Case-Shiller Index's biggest flaw. The index ipurports itself to be a national real estate metric but, in reality, there is no such thing as a national real estate market.

All real estate is local.

The Case-Shiller Index reports home values for 20 U.S. cities. Each of those cities, however, is comprised of smaller neighborhoods, each with its own character, desirability, and price points. Case-Shiller attempts to lump it all together -- an impossibility.

As an example, New York City posted a nearly 1 percent increase in July but that figure is just a city summary. The actual market in three distinct neighborhoods -- Upper East Side, Chelsea, and Flatbush -- vary tremendously. Not to mention Long Island, too.

Flaws aside, though, Case-Shiller is still important. It helps to identify broader trends in housing and housing may hold the key to our economic future.

With July's Case-Shiller Index, we see that the housing market's recovery is being sustained.

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Getting approved for a mortgage is about to get harder. 

For the second time in less than 3 months, Fannie Mae announced changes to its mortgage guidelines. 

In its official announcement, Fannie Mae details the updates, meant to reduce the mortgage firm's overall risk.

The first major change is with respect to credit scoring.  All Fannie Mae loans -- whether underwritten electronically or manually -- require a 620 credit score minimum.  There are very few exceptions.

A second change relates to loans with private mortgage insurance.  Homeowners whose loan-to-value exceeds 80 percent now have a choice:

• Accept higher mortgage insurance premiums month-after-month.
• Accept a one-time fee paid at closing to compensate for higher risk.

Both options pass higher costs to consumers.

Then, a third change relates to maximum debt-to-income ratio.  As announced in a separate document, Fannie Mae will no longer approve expense ratios exceeding 45 percent except with very strong assets and credit to back it up.  In no case can expense ratios exceed 50 percent.

There are other changes, too, including the elimination of seldom-used mortgage products and new risk-based pricing on "expanded level" approvals.

Fannie Mae implements its updates during the weekend of December 12. 

Therefore, if you're going to need (or want) a new mortgage later this year, consider moving up your timeframe to October or November.  Once the guidelines change, getting approved for a mortgage is going to be tougher.

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The mortgage market resumed its winning streak last week after a 1-week hiatus.  Markets rallied into the weekend and mortgage rates eased lower overall.

It's the third week out of four that rates improved and, ironically, rates may have dropped last week because traders were watching the wrong metrics. 

With respect to housing, analysts found August's Existing Home Sales and New Homes Sales reports disappointing. 

Both posted weaker-than-expected sales volume, sparking a stock market sell-off that led bond markets higher.

It was the wrong reaction.

Versus home supply, the number of monthly sales isn't nearly as important to the national housing recovery and the supply of homes fell in August.  If Wall Street had been paying better attention, mortgage rates may have risen instead.

The supply of homes for resale fell nearly a month, and of new homes by 0.3 months.

This week will be heavy with data so don't expect rates to stay low for long. 

Early in the week we'll get the Case-Shiller Index, a few consumer confidence surveys, and the Personal Consumption Expenditures report.  Late in the week, it's the September jobs report.

With mortgage rates are trolling near their lowest levels of the quarter, it may be prudent to lock something in to avoid the risk of rates rising.

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As reported by the National Association of REALTORS®, the number of Existing Home Sales dipped last month, ending the metric's 5-month winning streak.

Newspaper headlines today are overwhelmingly negative on housing. You'd almost believe this year's housing recovery had ended. 

That's hardly the case.

See, the other side of the Existing Home Sales story is that -- while the number of units sold did fall by 3 percent -- the existing supply fell by nearly an entire month.

To home buyers and home sellers, this is huge.  Home prices are based on supply and demand and with supplies plummeting, it means that home prices are poised to rise.

Indeed, dwindling inventory isn't "news" to today's buyers.  Multiple offer situations have been common since the start of the summer and, should supplies fall further, they may soon be the home-buying rule rather than the exception.

Since peaking in November 2008, existing home supplies are down 23%.

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The Federal Open Market Committee voted to leave the Fed Funds Rate within its target range of 0.000-0.250 percent.

It also reiterated plans to support the mortgage market to the tune of $1.5 trillion.

In its press release, the FOMC noted that the U.S. economy is "picking up following its severe downturn" and that financial markets have "improved further".

It's the second consecutive post-FOMC statement in which the Fed appears somewhat optimistic -- a signal that the recession will end soon, or has already ended.

That said, the economy still has some soft spots and the Fed made a point to single them out.  Each poses a distinct threat to economic recovery.

• Ongoing job losses.
• Sluggish income growth.
• Tight credit conditions.

Also in its statement, the Fed confirmed its plan to hold the Fed Funds Rate near zero percent "for an extended period" and to honor its $1.25 trillion commitment to the mortgage bond market.

However, the FOMC changed its timeframe on the mortgage-backed bond buys, extending its deadline to March 2010.  This move should help the Fed keep mortgage rates from rising too high as the economic expansion takes hold.

Market reaction to the Fed's press release is positive.  After an early day sell-off that drove rates higher by about a quarter-percent, most of the pressure is easing.  Pricing is worse on the day overall, but well off its lows.

The FOMC's next scheduled meeting is November 3-4, 2009.

website: http://www.homeloansmidwest.com/

youtube channel: http://www.youtube.com/midwesthomeloans

blog: http://www.homeloansmidwestblog.com/