For any borrowers out there who are currently “underwater” on their home loan, our title may be a little tough to read. But the truth is, low homes prices have contributed to the increased levels of affordability in today’s housing market.

The market’s improving affordability conditions (cheaper sales price and financing costs) have led to another monthly increase in existing-home sales. According to the National Association of Realtors (NAR), existing-home sales increased 9.4% in September — their highest level in over two years.

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But I thought the housing market was improving? If you were under the assumption that housing had hit bottom, chances are you’re not alone.

The ever-changing monthly numbers and future projections have created a lot of back and forth expectations from consumers over the state of the housing market. The problem has been that the numbers themselves have flip-flopped from month to month. One month they look good, the next they look bad.

Falling Home Prices

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What do banks do once they foreclose on a property? There has been a lot of controversy recently whether banks are holding onto foreclosed properties in order to keep home prices from dropping even lower. Diana Olick of CNBC wrote an interesting post on her blog “Realty Check” on Monday, in which she reached out to a representative from Bank of America (BofA) to get some answers.

The answers turn out to be quite interesting indeed because BofA highlights some of the exact same reasons we have detailed in past posts why the Making Home Affordable program will likely never generate the type of results the president has hoped for.

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The plight in which falling home prices has had on the housing market and the economy as a whole has been well documented in this blog. However, some homeowners are using the misfortune of lower home values in their favor. All across the country homeowners are appealing their property tax assessments in an attempt to save some money:

Many homes nationwide were last appraised prior to the housing crash and are valued for tax purposes at levels higher than today’s home prices. “If you have a three-year period between assessments and the last one was in 2007, your assessment is still at the top of the market,” says Jacqueline Byers, director of research for the National Association of Counties in Washington, D.C.

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Even just a few years ago short sales were a widely unused practice; the state of the marketplace didn’t call for it. However, as falling home prices, massive waves of foreclosures, and unemployment cripple today’s real estate market, short sales have jumped to the front of the line. But since the practice has become so popular, lenders are beginning to change the rules in their favor:

The rising tide of “short sales” by troubled home owners facing foreclosure is prompting lenders to become more aggressive in their attempts to pursue former homeowners for their loan losses in a short sale. In a short sale, a house is sold, with a lender’s approval, for an amount that won’t pay off the mortgage on the property.

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The current real estate market is saddled with many problems — falling home prices being one. As we’ve before, while falling home price do attract buyers looking for a bargain, they hurt the seller by limiting the profit they can make — if any — on the sale.

HUD’s announcement that the first-time homebuyer tax credit can be used as a downpayment has been big news the past two weeks. The inability of many first-time homebuyers to comply with today’s stringent downpayment requirements (usually 20%) has kept many from home ownership. According to the National Association of Realtors, the average first-time homebuyer has only saved enough to make a four percent downpayment.

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It occurred to me this morning that the years 2005 and 2008 have a lot in common. Last year seemed to be the time that several of the fears, predictions, and long-awaited reforms originally discussed in 2005 came to fruition.

Just this morning, I was handed a couple issues of National Mortgage News (NMN) dating back to 2005. It was like looking into a crystal ball. Flipping through the issues, I read stories written on the predictions that home prices will fall in the years ahead, the goals outlined for a RESPA and GSE reform, and warnings from Countrywide’s own Angelo Mozilo that borrowers and lenders should take the increase in subprime lending more seriously. A lot has changed, and many predictions have come true since 2005.

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One of the major hurdles that has (so far) stymied a turnaround in the housing market has been falling home prices. Yet, one report documents something partially to the contrary.

The 2008-09 Remodeling Cost vs. Value Report says, “instances of steep home-value depreciation occurring in some parts of the country, particularly those with widespread foreclosures, have led to conclusions about the weakening of the overall existing home market that, while certainly not unfounded, could be exaggerated.” [emphasis added]

The report found that the “average cost-value ratio across all projects” dropped 8.02% in 2007, while declining by only 3.86% in 2008. “Even with a mild (2.67%) increase in 2007 construction costs, it seems likely that if house values were plummeting as far and as fast as media reports would have us believe, the Cost vs. Value results [in 2008] should have been much worse.” [emphasis added]

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