Homebuyer Contracts Plunge as Interest Rates and House Prices Rise

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By CHRISTOPHER S. RUGABER

WASHINGTON -- The number of Americans who signed contracts to buy existing homes fell in September to the lowest level in nine months. The decline reflects higher mortgage rates and home prices that have made purchases more costly.

The National Association of Realtors said Monday that its seasonally adjusted pending home sales index dropped 5.6 percent last month from August to a reading of 101.6. That also pushed the index below its year-ago level, the first time that's happened in nearly 2½ years.

There is generally a one- to two-month lag between a signed contract and a completed sale. The drop suggests final sales will decline in the coming months.

Contracts to buy homes have slowed in recent months as mortgage rates reached a two-year high over the summer. Rates rose in response to speculation that the Federal Reserve would reduce its stimulus later this year.

But the Fed held off taking any action during its meeting in mid-September and rates have fallen since then. The decline could help boost contract signings in October. The average rate for a 30-year mortgage was 4.13 percent last week, according to mortgage buyer Freddie Mac.

Many economists say the housing recovery should continue, albeit with slower gains in home sales. They note that home prices and mortgage rates remain low by historical standards.

Monday's report "is in line with other housing indicators ... that suggest the pace of improvement in housing markets has slowed," Cooper Howes, an economist at Barclays Capital, said in a note to clients.

Home prices have also jumped 12.4 percent in August compared with a year earlier, according to real estate data provider CoreLogic. That's near the fastest pace in seven years.

Last week, the Realtors' group said final sales of existing homes fell 1.9 percent last month to a seasonally adjusted annual rate of 5.29 million in September. That's down from a pace of 5.39 million in August, which was revised lower. The sales pace in August equaled July's pace. Both were the highest in four years and are consistent with a healthy market.
The September decline in pending home sales was reported a day before the Fed begins a two-day policy meeting. Fed policymakers are unlikely to reduce their efforts to stimulate the economy, which includes $85-billion-a-month in bond purchases. Those purchases are intended to lower longer-term interest rates and spur more borrowing and spending.

Fed Chairman Ben Bernanke had suggested in late May that the Fed might slow the bond-buying program by the end of the year. But in September, the Fed held off after expressing concerns that rising mortgage rates were slowing economic growth.

The impact of the 16-day partial government shutdown is likely slowing growth in the final three months of the year. As a result, many economists expect the Fed will continue its current level of bond-buying until next year.

12 PHOTOS
Which Is the Best Mortgage for You?
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Homebuyer Contracts Plunge as Interest Rates and House Prices Rise

With the subprime mortgage mess unfolding all around us, there's never been a better time to make sure you make the right mortgage decision.

Of course, no single loan is best for all circumstances, but the following eight loan types work better than most when matched to your individual situation and lifestyle.


Next: For the Long Haul

Loan to consider: 30-year fixed rate

Why: Financial peace of mind can be worth the higher interest rate that won't change for three decades.

Next: Refinancing
(15-20 yrs before retiring)

Loan to consider: 15- or 20-year fixed or ARM

Why: You can retire the loan before you retire from your job. A fixed rate generally costs more than an adjustable, but will give you more certainty in budgeting. However, if ARMs are a lot cheaper and your income can handle possible payment increases, you could save with the adjustable rate.
Next: Recent Graduate
(With strong potential for increased earnings)
Loan to consider: 1-year ARM Why: Stretch your dollars with low interest rates during the years when your income is at its leanest. Your rate can go up (or down) each year, but rate caps will limit that change to a predictable amount, and your rising income should be able to handle it. Watch out for loans that cap your payment instead of your rate. They could cause your indebtedness to grow.
Next: Self-Employed

Loan to consider: No- or low-documentation loan

Why: Though you'll pay a higher interest rate, not having to produce paycheck stubs or employer references, as you would be expected to supply when applying for a traditional loan, can be a huge help to those with variable incomes.



Next: 4-5 Year Plan

Loan to consider: A 5/25 hybrid loan

Why: If you won't keep the loan longer than five years, why pay extra to lock in an interest rate for a longer period? If you do end up staying longer, you can either refinance or live with an interest rate that adjusts every year.


Next: Good Income, but ...
Loan to consider: Option ARM
Why: With these very risky loans designed for people with incomes that vary monthly, each month you have a choice of payments: the full amount needed to pay off principal and interest, an amount that covers only the interest, or an even smaller amount that doesn't even cover interest owed. Over time, however, your required payments could rise significantly if you often choose the smaller payments.
Next: Job Relocation
(With good income, savings)
Loan to consider: Interest-only
Why: While these loans can be risky for novice borrowers or those stretching to afford a home, they can be a smart tool for savvy borrowers who already have assets built up. Monthly payments are low because you're not repaying principal, so you can afford a larger loan. If you sell the home for less than you paid, however, you have to come up with the difference.
Next: Military or Veteran
Loan to consider: VA loan

Why: The U.S. Department of Veterans Affairs offers loan guarantees that allow qualified military personnel and veterans to take out mortgages for as much as $417,000 with zero down payment. In Alaska, Hawaii, Guam and the U.S. Virgin Islands, that loan amount goes up to $625,000.


Next: More on Mortgages
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