Strong new home sales brighten housing picture

New U.S. single-family home sales surged in September to the highest level in nearly 2-1/2 years, further evidence the housing market recovery is gaining steam.

The Commerce Department said on Wednesday that new home sales increased 5.7 percent to a seasonally adjusted 389,000-unit annual rate — the fastest pace since April 2010, when sales were boosted by a tax credit for first-time home buyers.

Although sales in August were revised down to a 368,000-unit rate from the previously reported 373,000 units, the tenor of the report was relatively strong, with the median price of a new home rising 11.7 percent from a year ago.

The quickened pace in the housing sector is good news for the economy, but it remains one of the few bright spots.

“Housing is now a positive for the economy after years of being a drag, but it’s not enough to counteract the slowdown in manufacturing, which was the star,” said David Berson, chief economist at Nationwide Insurance in Columbus, Ohio.

A second report showed only a modest pick-up in factory activity this month amid a darkening cloud of economic uncertainty at home and slower growth abroad.

The home sales data was the latest to show the housing market on the mend from its brutal collapse in 2006, which dragged the economy through its worst recession since the Great Depression.

Rising sales are pushing down the stock of unsold properties on the market, lifting prices and giving builders more confidence to take on new projects.

Demand for housing is being driven by a steady rise in the number of U.S. households, which had declined during the recession as financially strapped Americans moved in with family and friends. Modest job gains, increased job security and record low mortgage rates are encouraging many to seek home ownership.

The U.S. Federal Reserve has targeted housing as a channel to boost growth, announcing last month that it would buy $40 billion in mortgage-backed securities per month until the outlook for employment improved substantially.

The action helped push already low mortgage rates even lower. However, mortgage rates rose last week, dampening demand for loans to purchase homes during that period.

The Fed’s monetary policy committee on Wednesday stuck to its ultra accommodative stance even as it acknowledged that some parts of the economy, including the housing market, were looking a bit better.

MANUFACTURING SLUGGISH

While the Fed’s stimulus is supporting the consumption side of the economy, concerns about domestic fiscal policy and slowing global demand are hobbling the production side.

In a separate report, financial information firm Markit said its U.S. “flash,” or preliminary, Purchasing Managers Index for the manufacturing sector edged up to 51.3 this month from 51.1 in September. A reading above 50 indicates expansion.

A modest rise in output helped boost business conditions in the sector, which suffered its weakest quarter in three years during the July-to-September period.

But fewer orders from domestic clients and a fifth straight monthly decline in overseas demand for U.S. goods indicated manufacturing was acting as a drag on growth and employment, said Markit Chief Economist Chris Williamson.

“Purchasing managers report that the key to the ongoing weakness remains uncertainty among customers in export markets, notably Europe and Asia,” he said.

The slowdown in factory activity is largely the result of fears that the U.S. Congress might fail to avoid the automatic tax hikes and government spending cuts that will suck about $600 billion out of the economy next year.

The housing data, however, showed no signs yet that the so-called fiscal cliff has crossed the radar of ordinary Americans.

The inventory of new homes on the market remained near record lows in September, although some economists worry a pick-up in building activity could undercut the market if sales do not rise significantly further.

At September’s sales pace it would take 4.5 months to clear the new homes on the market, the fewest since October 2005 and down from 4.7 months in August.

Sales last month were up in three of the four regions. They tumbled 37.3 percent in the Midwest.

Tight mortgage lending standards have dashed the hopes of many would-be homebuyers, but the developers of the most popular credit risk score today revealed some habits and behaviors of “high achievers” with FICO scores above 785.

More than 50 million people — about a quarter of all people with credit scores — are considered high achievers and tend to have “strikingly similar” credit habits regardless of background or life experience, San Jose, Calif.-based Fair Isaac Corp. said.

Some of these habits are fairly predictable: They keep low revolving balances relative to their available credit, don’t max out their credit cards, and consistently make payments on time.

But high achievers are not debt-free. They have an average of seven credit cards, including open and closed accounts, and carry balances on an average of four credit cards or loans. One-third have balances of more $8,500 on nonmortgage accounts.
Nevertheless, almost none — less than 1 percent — have an account past due. The overwhelming majority, 96 percent, have no missed payments on their credit report. Those who do have long since mended their ways — their last missed payment happened an average of four years ago.

The FICO score ranges from 300 to 850, and is used by virtually all lenders to gauge credit risk and the likelihood a borrower will repay a loan. The credit score can affect how much money a lender will offer and at what terms; higher credit scores mean borrowers can potentially save thousands of dollars over the life of a loan, FICO said.

Ellie Mae Inc., which provides mortgage origination software to lenders, reports that the average FICO score for mortgages approved in September was 750, with borrowers making down payments averaging 22 percent, having front-end debt-to-income ratios of 23 percent and back-end DTIs of 34 percent.

Those whose applications were denied had an average FICO score of 704, with borrowers willing to make down payments averaging 12 percent. The average front-end debt-to-income ratio was 27 percent; the average back-end DTI was 44 percent.

The average FICO scores for purchase mortgages eligible for purchase and guaranteed by Fannie Mae and Freddie Mac was 762 (compared with 729 for denied applications), while FICO scores on FHA-backed purchase loans averaged 701 (compared with 665 for denied applications).

Because payment history makes up the biggest chunk of how a person’s FICO score is calculated — 35 percent — managing credit responsibly over time plays a large part towards improving one’s credit score, FICO said. This includes paying at least the minimum amount on all credit cards every month, the company added.

“Missing payments will lower a person’s FICO score, but if that happens, establishing or re-establishing a good track record of making payments on time will generally improve a person’s score,” said Anthony Sprauve, credit score adviser for myFICO, the company’s consumer division, in a statement.

By law, most negative information, including missed payments, is removed from credit reports after seven years. This does not apply to tax liens or Chapter 7 bankruptcy. About 1 in 100 high achievers had a collection on their credit report, and about 1 in 9,000 had a tax lien or bankruptcy.

“While people with a high FICO score are not perfect, their consistently responsible financial behavior usually pays off over time,” Sprauve said. “In a challenging economic period, the fact that we all have a chance to be high achievers is very good news. The lesson from these high achievers is that it’s never too late to rebuild and score high.”

FICO high achievers typically have long, well-established credit histories and rarely open new accounts, FICO said. They opened their oldest credit account 25 years ago, on average, and their most recent credit account more than two years (28 months) ago. In general, their average credit account is 11 years old.

Their balances are often low and they use only an average of 7 percent of their available revolving credit, i.e., $70 on a credit card with a $1,000 maximum.

FICO considers both positive and negative credit report information within five general categories, the company said: payment history, amounts owed, length of credit history, new credit, and types of credit used.

Source: FICO

The FICO score does not take into account attributes such as race, gender, age, marital status, salary, employment history or address, the company said. FICO’s consumer website, myFICO.com, offers tips and tools to help people make decisions about their credit.

“Because a high FICO score is typically achieved over time and takes into account dozens of variables, there are no ‘quick fixes’ for rapidly improving scores or repairing bad credit,” Sprauve said.

“Practicing good credit behavior consistently over time and regularly checking your credit report for errors can be instrumental for achieving a high credit score, which can lead to better loan terms and lower interest rates. Achieving good credit health is a long-distance event, not a sprint.”