Why FHA Loans?

First-time homebuyers often have trouble gaining loan approval due to marginal credit scores and/or the need for a large down payment. To help low- and middle-income families purchase a home, the Department of Housing and Urban Development (HUD) offers FHA loans. FHA loans have been growing in popularity in recent years because they provide numerous benefits when compared to other options for first-time homebuyers struggling to obtain approval for traditional home mortgage loans.

What is an FHA Loan?

An FHA loan is a mortgage loan that is insured by the Federal Housing Administration (a division of HUD). It is specifically designed to help families that do not meet the down payment requirements of traditional loans. To apply for an FHA loan, you simply need to apply to a HUD-approved mortgage lender. If you have a decent credit record, enough money to purchase the loan and a high enough income to cover the monthly loan payments, then you should be able to gain approval for an FHA loan.

Comparing an FHA Loan to Other Options

An FHA loan is often the most cost effective way to buy a home for individuals who cannot afford or gain approval for a traditional mortgage loan. Interest-only loans, sub-prime loans and other non-traditional loans will typically end up costing you much more than an FHA loan due to high interest rates. Since the FHA underwrites an FHA loan, you can typically obtain a better interest rate than you could otherwise.

Requirements of an FHA Loan

Many homebuyers find FHA loans to be favorable because of the relatively flexible approval requirements. A less-than-ideal credit history is acceptable to the FHA as long as your credit score has not been negatively impacted by large amounts of debt or bankruptcy. Typically, the maximum ratio of total debt that will allow you acquire an FHA loan is 41 percent — well above the standard for traditional mortgage loans.

An FHA loan also requires a down payment of at least three percent of the home’s sale price. This is dramatically lower than the typical 20 percent required for a traditional mortgage. There are also maximum limits set on the amount you can borrow through an FHA loan. This limit varies from county to county, but a general range you can expect to receive is from about $204,000 to $729,000.

Growing Popularity of FHA Loans

Mortgage experts are anticipating a resurgence in popularity for FHA loans in the coming years. Since the mid-1990s, the growing availability of interest-only loans and relaxed requirements of sub-prime loans had caused the volume of FHA loans purchased to decrease. As foreclosures have increased due to these expensive loans, tougher requirements are beginning to be enforced.

Educating new homebuyers about the benefits of FHA loans is also expected to increase their popularity. Many borrowers simply do not know the benefits of an FHA loan over a sub-prime loan. An FHA loan will likely provide borrowers with a lower interest rate, more mortgage options and no prepayment penalties when compared to a sub-prime mortgage loan. As the knowledge of these benefits becomes more apparent, more and more people will turn to an FHA loan to fund the purchase of their new home.

AM Market Update Friday 8/15

The markets are volatile again today. The economic data released this morning was slightly stronger than anticipated and oil prices are down. Both of these developments are stock-friendly, but following an opening surge, the major indices fell into the red before bounced back into positive territory, and gains are currently modest. 

The New York Fed index of the region’s manufacturing activity for August reflected the first expansion since April. The report on industrial production also revealed an unexpected increase last month. And the initial consumer sentiment index of the month showed a bit more optimism than last month’s final index reading. Despite the bullish flavor of the news, the figures were unimpressive and suggested only mild improvements.Oil prices were volatile again today, with the September contract for crude falling at one point as much as $3.67 to $111.77 per barrel. But by the end of trading on the New York Mercantile Exchange, the price was down by $1.24 to $113.77. Tuesday’s close was lower ($113.01) but today’s was the second lowest for a front-month contract since May 1.

By the end of stock trading, the Dow had gained 0.38% and the S&P 500, 0.41%. The Nasdaq slipped by 0.05%. There was little change this week for the Dow and S&P 500. The Dow lost 0.63% and the S&P 500 gained 0.15%. The Nasdaq outperformed with a gain of 1.59%, the fifth weekly advance for the index.

The yield of the benchmark 10-Year Bond fell by 10 basis points this week (yield moves inversely to price). It was unchanged last week but in the last three weeks, it has fallen by 27 basis points.

Next week’s economic calendar is extremely light. There are no major releases on Monday but Tuesday brings a couple of important reports. One is the Producer Price Index (PPI), a gauge of inflation at the wholesale level. In the report for June, the Labor Department said the overall index rose by 1.8%. This followed another large gain in May of 1.4% and was well above analyst predictions. In fact, it was the largest increase since last November.

As expected, a major contributor to the increase was higher energy prices. They rose by 6.0% in June — also the largest jump since November. Excluding both the energy and food categories, the so-called core index rose by just 0.2% last month. This tied with May’s increase as the smallest since last December.

Price changes further down the production pipeline saw a bit of improvement. At the intermediate stage of production, prices rose by 2.1% — a deceleration following a 2.9% increase in May. At the intermediate core level, prices rose by 1.3% following a 2.0% increase in May. At the initial or crude stage of production, prices rose by 3.7% after a 6.7% jump in May.

Despite a few better than expected numbers, the report contained several inflation alarms. The overall index rose on a year-over-year basis by 9.2%, the biggest increase in twenty-seven years. The core index was up by 3.0%, tying the previous two months as the largest Y/Y gains since December of 1991.

For July, forecasters predict that the overall index rose by 0.6% and that the core index increased once again by 0.2%.

The other release on Tuesday morning is the report on housing starts for last month. In June’s release, the Commerce Department said the seasonally adjusted, annualized pace rose by 9.1%. The increase was the largest since January of 2006 and the pace was the highest since last February. But the rise was attributable to a 102.6% jump in the pace in the Northeast. A change in New York’s building codes triggered a surge of starts on apartment buildings.

In other respects, the report was bearish. The pace fell by 10.5% in the Midwest and by 8.2% in the West. The South saw a slight gain of just 0.4%. The overall gain was confined to multi-unit structures. The starts rate for single unit structures fell by 5.3% to the lowest level since January of 1991.

The rate of building permit issuance reportedly jumped by 11.6% to 1.091 million and this was subsequently revised to a leap of 16.4% to 1.138 million. But once again, it was the Northeast that skewed the overall picture. The issuance rate rose by 115.3% there while it rose by just 0.9% in the West and 0.7% in the Midwest. It edged down by 0.2% in the South.

June’s exceptional spike in starts is expected to be followed by a sizeable decline of about 9.5% to a 965,000 pace. The permit issuance rate is also expected to have dropped steeply.

On Wednesday, there are no major releases but traders will be watching the weekly mortgage application data from the Mortgage Bankers Association and the weekly oil inventories report from the Energy Department.

On Thursday, the jobless claims report will highlight the employment situation once again. In yesterday’s report, the Labor Department said the seasonally adjusted level of initial claims for state unemployment benefits fell last week by 10,000 to 450,000. But an even larger decline had been anticipated following four weeks of increases that had totaled 100,000 (revised in yesterday’s report to 112,000).

In addition, despite the latest decline, last week’s level was the second highest since March of 2002. The four-week moving average, which smoothes out some short-term volatility, rose by 19,500 to 440,500, the highest reading since April of 2002.

For the first thirty-two weeks of the year, the average weekly initial claims reading has been 372.313. For the same period last year, the average was 315,063.

Today’s report said that the level of continuing claims for the week ending August 2 (continuing claims must be at least a week old) rose by 114,000 to 3.417 million. This was the highest reading since November of 2003. The four-week average rose by 75,250 to 3,273,750, the highest reading since December of 2003.

For the first thirty-one weeks of the year, the average continuing claims reading has been 2,984,484. For the same period last year, the average was 2,516,161.

Another decline is anticipated for this week’s initial claims reading. However, if the level increased or only dropped slightly, this would raise worries that the next employment report will show a large drop in payrolls. This would hurt stocks and send some investment flows into Treasuries.

A little later on Thursday, the Conference Board, an independent research firm, will release its Index of Leading Economic Indicators for last month. The index declined in June by 0.1% following a 0.2% decline in May. Since the beginning of 2007 (eighteen months), the index has fallen twelve times and was flat (0.0%) one month. Another negative reading is predicted for July with a consensus forecast of -0.2%.

And Thursday brings the Philadelphia regional report on manufacturing. In the report for July, the Philadelphia branch of the Federal Reserve said that its index on the sector came in at -16.3. Like the New York index, any reading below 0.0 reflects a contraction of activity relative to the preceding month. July’s reading was a seventh consecutive contraction indicator and analysts anticipate another of about -14.0 for August.

10:30 AM EDT : The markets are volatile again today. The economic data released this morning was slightly stronger than anticipated and oil prices are down. Both of these developments are stock-friendly, but following an opening surge, the major indices fell into the red before bounced back into positive territory, and gains are currently modest.

Despite the economic news Treasuries have been drifting higher. Scheduled payouts on securities today are helping to fuel the buying.

In the first regional manufacturing news of the month, the New York branch of the Federal Reserve said that its Empire Survey of business activity in the district produced an overall index of 2.77.

Any reading over 0.0 generally reflects an expansion of activity relative to the preceding month and August’s reading was the first growth indicator in four months and the strongest reading since January. Forecasters had predicted a reading near June’s -4.9.

But the New York region is relatively small and August’s index reading was only slightly positive. Next Thursday, the Philadelphia index will provide more insight on this month’s manufacturing activity.

In a more influential release, the Federal Reserve reported that industrial production — a gauge of output from the nation’s factories, mines, and utilities — rose last month by 0.2%. Though June’s originally reported increase of 0.5% was trimmed to 0.4%, the latest rise was a surprise for analysts who were expecting no change (0.0%) in July.

Of particular interest was a 0.4% increase in manufacturing output, the largest in ten months. Mining output rose by 0.9%, matching June’s as the largest rise since last November. In the volatile utilities category, output actually declined by 1.9% following a 2.3% rise in June.

The report said that capacity utilization, the ratio of output to potential output, came in at 79.9%. June’s originally reported reading of 79.9% was trimmed to 79.8%, making the latest reading the highest in four months. The reading for the manufacturing sector rose to 77.7% from June’s 77.5%.

The higher than expected utilization figures were bullish and indications of increasing inflation pressure: both aspects are negative influences for bonds. Reduced slack in the production process can lead to backups that prevent demand from being met and, therefore, driving up prices.

The final release of the day was the preliminary read on consumer sentiment for the month from the twice-monthly surveys conducted by the University of Michigan. The overall index came in at 61.7, up slightly from July’s final reading of 61.2 and in-line with predictions. The expectations index rose to 56.8 from 53.5 but the index of current conditions fell to 69.3 from 73.1.

A decline in gasoline prices is said to be a major contributing factor to the latest improvement in sentiment, though the index is still extremely weak by historical standards. In August of last year, the final index reading for the month was 83.4.

Traders in both markets will be keeping a close watch on oil prices. In recent action the price of a barrel of crude oil for next month delivery was down by $2.52 to $112.49. Lower energy costs leave businesses and consumers with more to spend on other things, so, with the exception of the energy sector, this is a plus for stocks. Bonds can also benefit, however, since lower energy prices reduce production and transportation costs, thereby reducing inflation pressures . . . .