The housing market continues to be sluggish and recent regional upticks in sales spurred by the homebuyer tax credit will decline across the country going forward, according to the latest edition of the Federal Reserve's Beige Book.

In addition, reports on employment conditions — arguably the sector to have the most impact on future growth in the housing market — reported mixed, but moderate improvement.

The Beige Book — formally called the "Summary of Commentary on Current Economic Conditions" — is a report on overall economic conditions, according to comments received from business and other contacts by the 12 Federal Reserve district banks.

While the Boston and St. Louis districts reported increased home sales year-over-year in May and June, the Boston, Philadelphia, Atlanta, and Kansas City districts said future sales will be weak. New construction continues to struggle, particularly in the Atlanta district, where weakened construction dropped even further since the last Beige Book, published in early June.

"Homebuilders in the Cleveland District do not expect a turnaround in new home construction any time this year. Builders in the Chicago District are not introducing new inventory without a signed contract on a home," the report said. "Housing starts were expected to decline for the second half of the year in the Dallas District and to increase slightly over the next three months in the Kansas City District."

Employment reports were mixed, with gradual improvements in most districts. New York, Chicago, Minneapolis, Richmond, and Atlanta all reported improvements, while Boston and Dallas reported steady conditions.

Temporary employment is on the rise in the Philadelphia, Atlanta, Richmond, Chicago, and Minneapolis districts, as employers continue to to rely on temporary staff over permanent hires.

In the commercial real estate sector, contacts reported flat or slightly increased vacancy rates, putting downward pressure on rents. In addition, construction remains weak system-wide. The Philadelphia District reported projects funded with federal stimulus money were near completion, and there are no prospects for additional major construction. The Chicago District reported public infrastructure construction picked up.

Outlook for commercial construction ranged from further declines in activity to slow growth across the districts. Developers reported difficult credit conditions in the Cleveland, Richmond, St. Louis, and Kansas City Districts, the report said, adding that in the Dallas District, a few developers are going out of business.

The banking outlook was mixed, with noticeable but modest increases in activity and demand by the Richmond and Kansas City districts.

"Demand for commercial loans was flat to increasing in the Philadelphia, Cleveland, Richmond, Chicago, and Kansas City Districts," the report said. "In contrast, St. Louis reported a decrease in commercial loans outstanding, while New York, Atlanta, and San Francisco reported restrained or decreasing demand in this lending category."

Credit standards remain tight, but credit quality improvement was observed in the Philadelphia, Richmond and Chicago districts. In the Dallas District, nonperforming loans have stabilized and are not expected to worsen, the report added.

Write to Austin Kilgore.

It's never been cheaper to borrow money to buy a house, but when it comes to refinancing more borrowers are choosing to pay down their mortgage principal rather than increase it by borrowing against their home's equity.

Borrowers that contributed additional cash to pay down their mortgage principal when refinancing tied for the second-highest rate in 25 years, according to the latest Freddie Mac quarterly report.

During Q210, 22% of homeowners that refinanced their first-lien mortgage paid down part of their principal balance during the process. The cash-in rate peaked at 36% in Q409, and the Q210 rate ties Q204 for the second highest since Freddie Mac began tracking the data in 1985. The rate was 19% in Q110 and 16% in Q209.

According to separate monthly volume reports from April to June, Freddie Mac's total refinance volume was $54.6bn during Q210, down nearly 60% from $134.5bn during Q209.

Freddie Mac generates the refinance data by taking a sampling of properties where it has funded two successive loans and the second loan is for refinancing rather than purchase.

The Freddie Mac weekly survey of mortgage rates put the average interest rate for 30-year fixed-rate mortgages (FRMs) at 5.08% at the beginning of Q210. Rates peaked at 5.21% during the second week in April and hit the 5% threshold during the first week of May. Since then, weekly rates have fluctuated, sometimes setting new records, and never topping 5%.

The greatest percentage of borrowers are opting to borrow less by cashing in during their refinance. Freddie Mac vice president and chief economist said there is a logical explanation for the trend.

“Interest rates on fixed-rate mortgages are at 50-year lows, making refinancing attractive if borrowers qualify," Nothaft said. "Similar rates on savings instruments like CDs are also very low, which makes the choice of paying down mortgage principal very attractive to borrowers with extra cash reserves."

“If you pay down your mortgage balance you save the interest you would pay on the loan — about 4.6% at today’s rates," Nothaft said, adding that it's a better option for borrowers compared to earning a percentage point or less in certificates of deposit (CDs) and money markets and lacks the riskiness of stock market investments, which have not performed well in the past couple of years.

Declining property values may be another factor that has more borrowers paying down mortgage principal. A borrower may want to refinance to take advantage of low rates, but need a lower loan-to-value (LTV) ratio or meet other underwriting standards to complete the deal.

In Freddie's sample pool of mortgages, the median change in value of the refinanced properties was a depreciation of 5% in Q210, up from a depreciation of 4% in Q110 and appreciation of 1% in Q209.

Since 2002, the median change has always been appreciation in value, peaking at 34% in Q206. But since the median change was flat in Q309, the rate of depreciation increased every quarter. That decrease in value is decreasing the refinance borrowers on the other end of the market — "cash out" borrowers that increase their loan balance by at least 5%.

The rate of cash-out refinancers reached a record low of 24% in Q409, increased to 28% in Q110 and declined slightly to 27% in Q210. Since 2002, the cash-out rate peaked at 88% in Q206 and Q306, and was 37% in Q209.

With more borrowers paying down their principal during a refinance and fewer borrowing additional funds, the net home equity converted to cash was at its lowest level in 10 years, Freddie Mac said — $8.3bn in Q210, compared to $8.4bn in Q110 and $21.9bn in Q209.

When borrowers refinanced in Q210, they got a median interest rate reduction of 90 basis points (bps), a 16% discount that will save borrowers more than $1,300 over the life of a $200,000 loan, Freddie said. That's unchanged from Q110, but less than the median discount of 125 bps in Q209.

Write to Austin Kilgore.

Flagstar Bancorp, Inc. (FBC: 0.68 +3.03%), the holding company for Flagstar Bank, reported Wednesday a net loss of $97m, or $0.63 per diluted share, for Q210.  This follows a Q110 net loss of $81.9m or $1.05 per diluted share.

The company reported a decrease in non-performing assets to $1.2bn, down from $1.3bn in last quarter.  According to the earnings statement, the reduction in non-performing loans was offset by an increase in real estate owned properties (REOs). The allowance for loan losses equaled 7.2% of loans held for investment and 52.3% of non-performing loans, up from 7.1% of loans healed for investment and 47.4% of non-performing loans.

REO assets increased to $198.2m in Q210 from $167.3m in Q110.  Flagstar attributed this rise to increases in commercial REO as "legacy loans cycle through the loss mitigation process."

Flagstar reported a gain on loan sales to $64.3m or 1.53%, up from $52.6m or 1.05% in Q110. Loan production, comprise mostly of residential first mortgage loans, increased to $5.5bn from $4.3bn while loans serviced increased to $50.2bn (average servicing fee of 32.4 basis points) from $48.3bn (average servicing fee of 33 basis points.).

Despite quarterly losses, chairman and CEO of Flagstar Joseph Campanelli said the company is "encouraged by a number of positive results in our core business."

He said Flagstar experienced a 26% increase in mortgage originations, a 16% increase in gain on sale margin, a 2% increase in core deposits, an 8% increase in Bank net interest margin, and a 14% reduction in total delinquent loans from the prior quarter.

Write to Christine Ricciardi.

Texas joined the West Coast in the complete conversion of Wachovia bank branches to Wells Fargo (WFC: 29.60 +1.89%) this month. The bank now has over 700 banking locations and 1,000 ATMs across the state making the brand the largest network of retail banks in Texas supporting an estimated 1.91m households.

The ongoing Wells Fargo/Wachovia integration is the largest in modern banking history.

This upcoming weekend Kansas will start by converting eight Wachovia financial centers as well as eight ATMs and will support an estimated 204,000 households throughout the Sunflower State.

The integration proved a worth strategy yet again during Q210 boosting profits from the merger to a total of $17.9bn over the six quarters the merger has been in process. Full integration of California's Wachovia branches was finished in Q210 in addition to the transfer of all credit card, mutual funds and trust businesses to Wells Fargo. Arizona, Colorado, Illinois and Nevada are also complete.

Conversion of Eastern markets, including Mississippi, Alabama, Tennessee, Georgia, Florida, South Carolina, North Carolina, Virginia, Pennsylvania, Connecticut, Deleware, Washington D.C., Maryland, New Jersey and New York is scheduled to begin in Q310.

"The merger integration activities are proceeding on track," said chairman and CEO of Wells Fargo John Stumpf. "[T]he combined company continues to produce financial results including revenue synergies better than our original expectations."

Write to Christine Ricciardi.

The governor of West Virginia announced an unparalleled housing strategy, and is now offering the best mortgage rates the state has ever seen — a 30-year fixed-rate of only 3.5%.

Not only that, but the program includes a 0% down payment policy and families are still eligible for closing cost assistance loans.

This program, run by the West Virginia Housing Development Fund, is able to achieve the rate through a $35m bond issue.

The mortgage does come with a few stipulations. The mortgage deal is available on a first-come, first-serve basis to only 280 qualified West Virginian families. The WV Housing Development Fund will move anyone into a targeted county, but any applicant wanting to move to a non-targeted county must be a first-time homebuyer.

"I am so pleased with the diligent work that the West Virginia Housing Development Fund has done to bring this tremendous housing opportunity into fruition for so many West Virginians," said governor Joe Manchin in a press release. "I am confident that this new mortgage program will be a win-win for both our citizens and the state's housing industry."

The West Virginia Housing Development Fund said they will start taking applications for loans immediately.

Write to Christine Ricciardi.

According to figures released by the research department of the Bank of Federal Reserve Philadelphia, June housing permits in Delaware and New Jersey show new builds well above the national average, up 26.6% and 43.5% respectively.

According to the June 2010 Census Bureau release, residential units authorized by building permits from May to June also increased in Pennsylvania by 11.4%, below the national housing permits increase of 15.4% for the month.

The Philly Fed monitors permits in the three-state region. Over the past 12 months, permits in the nation declined 1.1 percent. Year-over-year, housing permits in the three states also increased; in Delaware by 24.1%, New Jersey, 43.2%, and Pennsylvania 27.6%.

"To remove the seasonality and monthly volatility in permits, we apply a seasonal adjustment and a three-month moving average to total permits," according to a statement by the Philly Fed.

"According to our seasonally adjusted moving-average series, total permits fell in all three states and the nation from May to June. Residential construction remains weak compared with the past decade, and the modest pace of growth present in the early part of 2010 faltered somewhat in June."

The multifamily sector experienced a sharp swing in June, with a double-digit drop in starts and a double-digit increase in new permits. Some have questioned the future performance of the sector, including a Credit Suisse report that said while real estate investment trusts (REITs) that specialize in apartment buildings are far exceeding other types of REITs in 2010, a number of headwinds may slow the sector's continued momentum for the rest of the year. In addition, Fitch Ratings reported that in June, the multifamily delinquency rate for commercial mortgage-backed securities (CMBS) rose to 13.82%, from 13.65% in May.

Write to Jacob Gaffney.

The author holds no relevant investments.