Back in December, the Obama administration announced another housing reform, as the Federal Housing Administration agreed to reduce yearly mortgage insurance premiums from 1.35 percent to 0.85 percent. This has been a very interesting topic for the number-crunchers of the mortgage analysis scene, as they have been offering their predictions on how this premium reduction will affect the broader housing market as we know it.
According to the FHA, consumers can save up to $900 per year on an average, but what the agency did not say is that savings may vary depending on the market. New data from RealtyTrac had backed this up earlier in January; while there are some parts of America, such as Nantucket, Mass., San Francisco, Pitkin, Colo., New York, N.Y., and Marin, Calif., where the savings can be in the thousands, there were also several counties, mostly in the rural part of the United States, where the FHA premium cut would redound to savings of less than $200. For those who are curious, consumers in Nantucket can save up to $7,961.25 per year on their premiums, while consumers in Nash, N.C., only stand to save an average of $118.21.
Apart from the RealtyTrac study, Department of Housing and Urban Development Secretary Julian Castro told The Daily Show host Jon Stewart that the premium reduction could be beneficial to as many as two million consumers in America. But up until now, there has not been any analytic study indicating how many additional homes will actually be sold due to the reduction in insurance premiums.
According to Moody’s Analytics, the new premium cuts will result in approximately 45,000 more homes sold, may they be new or existing, in 2015. Single-family housing starts, on the other hand, are forecasted to improve by 20,000, also due to the FHA’s move. That does not sound too impressive, but Moody’s report continues that the premium cut will be at its peak of efficacy by mid-2016, which is when annualized home sales may be up 100,000 directly due to the premium cut, and single-family housing starts may improve by 40,000 or so.
Further, Moody’s also added that increased housing market activity due to the reduced premiums will help create 140,000 new jobs, thereby reducing unemployment figures by about a tenth of a percentage point.
In all, Moody’s Analytics believes that while the FHA’s decision to reduce premiums is good, it might not have that big an effect on broader mortgage activity as expected. Chief economist Mark Zandi and senior director of Consumer Credit Analytics Cristian deRitis said in a jointly prepared statement that the benefit will be “small,” and will largely be driven by refinances.
“This may be especially potent now with the recent sharp decline in long-term interest rates,” Zandi and deRitis added. “Mortgage rates broadly have declined by nearly a percentage point since this time last year and are low enough that hundreds of thousands of FHA borrowers are in the money. That is, current FHA loan rates are low enough that it makes financial sense for these homeowners to refinance, particularly with the lower insurance premiums.” The Moody’s analysts also acknowledged that the White House should continue supporting the housing market recovery, as the market remains “far from normal” at the moment.