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Spring is typically the season when people shop for houses. Many families like to complete their home purchase by the end of the summer so as to not uproot their children during the school year. And let’s face it: houses just look more enticing when flowers are out. But the real estate bust and economic downturn have made the past few housing hunting seasons rather slow. Some buyers have waited on the sidelines hoping prices had further to drop.

This year looks to be different. Already, falling interest rates, an improving economy and a last bit of economic stimulus are helping the housing market stage a revival. In April alone, sales of existing homes jumped 23% from a year ago, according to the trade organization National Association of Realtors. Sales of new homes rose even faster, up 48% from a year ago. What’s more, a growing number of economists believe the three-year plunge in housing prices is at an end. (See pictures of Americans in their homes.)

“Units, volume and sales price are up on all fronts,” says real estate broker Todd Hetherington, who is based in Alexandria, Va. “Houses that are priced well are getting multiple offers in the first week.”

For now, though, housing prices, like everything else, remain rocky. According to the S&P/Case-Shiller nationwide index, home prices fell 3.2% in the first quarter of 2010, down from the already low levels where they stood at the end of 2009. And home prices may stay down for a little longer. The continued recent slide in the stock market is hurting consumer confidence and likely to make some people pause before buying a house. Foreclosures aren’t helping the housing market either. The government’s home-loan-modification programs have helped keep a relatively small amount of home owners out of foreclosure. But more repossessed homes are now starting to land on the market, driving up the number of houses for sale and holding down prices. In addition, some economists are concerned that the expiration of an $8,000 tax credit for homebuyers, which essentially ended in April, will hurt home sales. Indeed, the Mortgage Bankers Association said last week mortgage applications for new home purchases fell to the lowest level since 1997. Lastly, mortgage credit remains tight, making it hard for some prospective home buyers to qualify for a loan. (See high-end homes that won’t sell.)

“We think the tax credit has dragged a lot of house sales forward, and we think we are going to pay for it,” says Jay Brinkmann, the chief economist for the Mortgage Bankers Association. He expects home sales to drop 5% in the fall of 2010.

Nonetheless, a growing number of economists believe this spring could end up being the start of a sustained rebound in the housing market. The biggest driver of that rebound will likely be interest rates. Though rates were expected to rise this summer, the continuing problems in Europe are driving down rates in the U.S., which is still seen as a safe haven for investors. The result is that mortgage rates have fallen to their lowest point in a year and are expected to continue to drop through the summer. In general, for every percentage-point decline in mortgage rates, houses effectively become 10% cheaper.

A recent study of 92 economists by financial-products firm MacroMarkets found that on average housing prices are expected to drop slightly in 2010 and begin rising again next year. That means that for the first time in years someone who buys a house this spring will most likely see their home appreciate in the next year. And rising housing prices, just like falling ones, tend to feed on themselves.

“Low interest rates will be a powerful incentive,” says William Hummer, chief economist for Wayne Hummer Investments. “People who want to be home owners will get back into the market.”

By Stephen Gandel

Time.com

The financial turmoil in Europe is providing an unexpected windfall for American home buyers, as international money seeking a safe haven is flowing into the U.S., pushing domestic mortgage rates to the lowest levels of the year and back near 50-year lows.

Getty ImagesA real estate agent leaves an open house for a home for sale in San Francisco. Falling mortgage rates could lift the U.S. housing market.

The housing industry had been bracing for months for a period of rising mortgage rates, triggered by the end of the Federal Reserve’s $1.25 trillion mortgage-securities purchase program. Conventional wisdom held that mortgage rates would rise as the Fed pulled back from propping up the market.

Instead, many in the industry now say rates could drift as low as 4.5% this summer from 4.86% now, instead of rising to 6% as some economists projected, making for significantly lower payments for Americans buying homes or refinancing their mortgages.

Refinance business “exploded” last week, says Jeff Lazerson, chief executive of Mortgage Grader, a brokerage in Laguna Niguel, Calif. “It’s schizophrenic. We all had this expectation of higher interest rates and no more refinances.” He says he helped a borrower lock in a 30-year loan with a 4.25% fixed rate last week, the lowest in his 24 years in the business.

Rates on 30-year mortgages averaged 4.84% last week, according to a survey by mortgage-insurance titan Freddie Mac. Rates were quoted late Friday at 4.86%, the lowest since December 2009, according to a survey by financial publisher HSH Associates, and down from a high of 5.27% for the week ended April 9. Rates on 15-year mortgages averaged 4.24% last week—the lowest since Freddie began its survey in 1991.

Economists largely attribute the decline in mortgage rates to the European debt crisis and new concerns about the global economy, which unleashed a massive wave of cash into U.S. bonds from investors around the world.

This buying pushed down yields on Treasury bonds. Because mortgage rates are closely pegged to yields on 10-year Treasury notes, which fell to 3.2% Friday, the decline in Treasurys pulled down mortgage yields. Typically, mortgage yields remain around 1.5 percentage points above yields on 10-year Treasury notes.

Falling mortgage rates can give a powerful lift to the housing market. A general rule of thumb holds that every one percentage point decline in mortgage rates is the equivalent of roughly a 10% reduction in the home price for the buyer. So, if the current rates hold, say economists, that could help stabilize prices and allow current homeowners to sell existing homes without substantial price cuts.

It isn’t clear how much home-buying the lower rates will spur. Demand had fallen in recent weeks after buyers raced to close sales ahead of last month’s expiration of an $8,000 federal tax credit for home purchases. Applications for new-purchase loans hit a 13-year low in the week ending May 14, according to the Mortgage Bankers Association.

Borrowers do face roadblocks. Underwriting standards are their strictest in a decade, and record numbers of borrowers are “underwater,” owing more to the bank than their homes are worth. That has excluded large swaths of borrowers from getting loans at the new lower rates.

Still, lower rates could widen the pool of people who qualify for a mortgage, while others may find they qualify for a slightly larger loan. “They can buy the place with the extra bedroom or the swimming pool,” says Jay Brinkmann, chief economist at the Mortgage Bankers Association.

Falling rates have encouraged some Americans to consider refinancing their existing mortgages to save money. A one-percentage-point decline in mortgage rates can cut $250 off the monthly payment on a $400,000 30-year fixed-rate mortgage, giving consumers cash they can use to spend.

Richard Hunsinger plans to refinance two loans on his Potomac, Md., home into a new 15-year mortgage this week with a 4.37% rate. The 55-year-old dentist is worried that interest rates will eventually rise sharply, boosting the payment on his home-equity line of credit. His first mortgage, also a 15-year loan, currently has a fixed rate of 5.25%. And while the rate on his $240,000 home-equity loan is just 3.25%, it has risen as high as 8% in the past.

Rates “can’t stay low forever,” says Dr. Hunsinger. If they go up over the next year, “this will look like a really bright decision.”

By historical standards, rates are incredibly low. Until 2003, rates on 30-year fixed-rate loans hadn’t dipped below 5% since the 1960s. Rates fell to similar points throughout much of the past year as the government was helping to hold down costs for borrowers.

Nearly half of all borrowers with 30-year conforming fixed-rate mortgages have mortgage rates of 5.75% or higher and could reduce their rates by a full percentage point if they refinanced at current rates, according to investment bank Credit Suisse.

Many of those borrowers may have tried to refinance last year, only to find that they couldn’t qualify. When rates fell to similar lows in 2003, refinance activity hit a record $2.9 trillion, compared to $1.2 trillion last year, according to Inside Mortgage Finance, a trade publication.

Now, more private investors are coming into the market for loans, offering better prices for securities containing mortgages with low rates than they were one year ago. That could lead banks and brokers to cut upfront origination fees, and borrowers who are able to refinance could find it cheaper to do so than last year.

“I’m calling people back and saying, ‘Now it’s worth it,’” says Michael Menatian, a mortgage banker in West Hartford, Conn.

WSJ.com

By NICK TIMIRAOS

—Prabha Natarajan contributed to this article

What’s your drinking pleasure today — glass half-empty? Or half-full?

For those of you who are betting that our housing headache ain’t nearly over (I’m afraid that would include me), consider this little-reported prognostication from Freddie Mac: When the mortgage giant recently made an official request for more money from Congress because it’s wrestling with a gigantic shortfall, it said it expects home prices nationwide will decline still further in the coming months.

Freddie sees four contributing factors putting downward pressure on prices: more foreclosures adding to the oversupply of properties that are in the hands of banks; the expiration of the homebuyers’ tax credit, which removes a major incentive to buy; its expectation that mortgage interest rates will rise; and continued high unemployment.

Or, if you’re in the mood for a cup of cheer, there’s this: The Chicago area got a decent report card on a recent analysis of housing markets around the country. It landed on the list of “most improved” among the nation’s top 50 metropolitan statistical areas, known as MSAs, in the fourth quarter of last year by PMI Group, a provider of private mortgage insurance.

We have a lot of company, according to the insurer, which said that of the 384 MSAs it studied, 356 had declining “risk scores,” as Chicago did.

PMI’s risk-score index measures the probability that house prices will be lower in two years. Chicago, by PMI’s measure, squeaked in under the wire in this report, scoring 47.6 on the index. A score of less than 50 suggests better-than-even odds of seeing higher housing prices in two years. In the third quarter of 2009, Chicago scored 60.8 on the index.

The price report

If predicting home price declines is a crapshoot, I can tell you at least two places where the asking prices are definitely down:

•Only a month after he listed his Manhattan penthouse, radio pundit Rush Limbaugh has cut his price substantially, by $1 million. But don’t reach for your checkbook too hastily — the price has dropped from $13.95 million to $12.95 million. The 10-room condo, with about 4,600 square feet, has expansive views of Central Park. It also seems to have been decorated by Marie Antoinette, being as it’s encrusted with all manner of gilt, ornate murals and room after room of froufrou. Limbaugh says he wants to leave New York because taxes are too high.

•Federal marshals have been trying to sell jailbird Bernie Madoff’s Palm Beach, Fla., home since late last year, and the lack of success seems to have surprised some local real estate obsessives, but not all. The original asking price was $8.49 million, but it’s now down to $7.25 million. A real estate agent tells the Fort Lauderdale Sun-Sentinel that a more realistic price might be $5.5 million.

But back to Freddie Mac

Maybe we’ve learned something in the aftermath of the housing boom, after all. Separately from asking for more money, Freddie Mac reports that 95 percent of people who refinanced their mortgages in the first quarter of this year chose fixed-rate mortgages.

More interestingly, one in four of them who were refinancing a 30-year mortgage chose 15-year terms for their new loans instead, the largest percentage since 2004. One reason, apparently, was that 15-year mortgages were offering somewhat lower rates, on average. But another, according to a Freddie spokesman, was that consumers want to pay down their debt faster.

Wouldn’t it be loverly?

What price would you put on having good neighbors? How about $4,488, give or take a few pence?

That’s the premium in the mind’s eye of homebuyers in the United Kingdom. Lloyds TSB Insurance surveyed residents of the U.K.’s 20 largest cities on five standards of neighbor “niceness” — consideration, tolerance, friendliness, tidiness and vigilance — and concluded that people would pay an extra 3,100 pounds, or $4,488, for a house where they got neighbors who scored best within those attributes.

Maybe it’s the neighbors

The University of Nevada, surveying the residents of recession-walloped Las Vegas, found that 40 percent of them say they want to live somewhere else.

Mary Umberger

chicagotribune.com

By GREG HITT And DAMIAN PALETTA

Getty Images

Sen. Scott Brown stands outside of the Senate chamber before voting on Thursday.

WASHINGTON—The Senate on Thursday approved the most extensive overhaul of financial-sector regulation since the 1930s, hoping to avoid a repeat of the financial crisis that hit the U.S. economy starting in 2007.

The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law.

The controversial measure, supported by the Obama administration, sets up new regulatory bodies and restricts the actions of banks and other financial firms. It is designed to try to make order of the cascading regulatory chaos that ensued in 2008 when mammoth banks and some unregulated financial firms collapsed, and public funds were used to save them. Among other things, the legislation would:

• Establish a new council of “systemic risk” regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming, such as the one that led to the housing crisis.

• Create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.

• Empower the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.

• Allow the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.

• Give regulators new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers. Derivatives, which are complex financial instruments, are often used to hedge risk. Speculative trading in the contracts led to losses at many banks in the 2008 crisis.

“Simply, the American people are saying, ‘you’ve got to protect us,’ and we didn’t back down from that,” said Senate Majority Leader Harry Reid (D., Nev.). “When this bill becomes law, the joyride on Wall Street will come to a screeching halt.”

Opponents of the bill worry that the government is overreacting, and over-regulating the financial industry. They worry the measures will crimp the free flow of capital in the U.S. economy.

“It will inevitably contract credit,” said Sen. Judd Gregg (R., N.H.), who says the Senate bill “is probably undermining the system…probably making for a weaker system.”

Sen. Gregg was one of 37 Republicans to vote against the 1,500-page bill. But the legislation ultimately passed with a narrow bipartisan majority. Four Republicans joined with 53 Democrats and the Senate’s two independents in support of the package. Two Democrats voted against the bill, and two senators weren’t present for the vote.

Now Congress will need to reconcile the Senate bill with a companion House package adopted in December on a 223-202 vote, with 27 Democrats joining unanimous Republican opposition.

The outlines of the two bills are largely the same. But there are more than a dozen notable differences that will need to be reconciled during negotiations that are expected to start within days. Despite the differences, the Senate passage virtually ensures that some type of financial regulatory reform will be finalized by this summer.

Leading the negotiations will be House Financial Services Chairman Barney Frank (D., Mass.), who has said he would like to have a compromise package by the end of June.

One flashpoint will be over the Federal Reserve. The House bill includes a provision that would allow the Government Accountability Office, the investigative arm of Congress, to audit emergency lending and some monetary policy decisions made by the Fed. The Senate bill would allow the GAO to study the emergency lending that occurred during the financial crisis, but it would not be authorized to audit decisions made in the future.

Another area of conflict is how to regulate trading of derivatives. Both bills require most derivatives to be traded through third parties, with the intent of increasing transparency. But the Senate bill goes farther by making it more difficult for companies to be exempt from the new rules. There’s also a provision in the Senate bill that could force big banks to spin off their derivatives operations.

Both bills would create a new council of federal regulators with broad authority to protect the financial system from the sort of “systemic” risk that spread rapidly through the economy in 2008. The House bill would let the council impose several forms of restriction, including requiring companies to set aside additional capital, if the council believes a firm has taken on too much risk. The Senate bill leaves that power to the Federal Reserve.

The House bill also includes a provision that would empower the government to force any bank to stop certain practices, or even divest certain operations, if regulators fear there is a risk posed to the broader economy.

The Senate bill, meanwhile, includes a provision that would essentially force banks to stop “proprietary trading,” or making market bets with their own capital. It would also make it more difficult for big banks to grow, by setting new limits on the amount of liabilities they can control.

If a bank does fail, both bills would give the government more power—and resources—to break up the collapsing companies. Among other things, the House bill would create a $150 billion fund, financed by big financial companies, which would be used to unwind failed firms. The intent is to prevent taxpayers from having to pay the tab.

But opponents of the measure worry that regulators might be tempted to use the fund to prop up a failing firm. So the Senate bill has provisions under which a company would be liquidated and the bill for the work would be subsequently paid by a levy on large financial companies.

The Senate bill would also try to force almost all failing financial companies through a bankruptcy-type process, while the House bill would make it easier for regulators to take over and bust up a failing firm without going through the courts.

For consumers, the House and Senate bills would expand protections, creating a new regulator with the autonomy to oversee a range of financial companies, from federally regulated banks to small finance companies. Under the House bill, the agency would be independent, while the Senate bill would place the consumer agency within the Federal Reserve.

WSJ.COM