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The bursting of the housing bubble is at the epicenter of the meltdown of the financial markets, and the primary cause of the current recession. During the '70s, '80s and the first half of the '90s home-ownership rates averaged 64.4% (US Census Bureau statistics on the % of households that owned a home); with few exceptions the rate did not go above 65.5%, or below 63.5% US. Starting in 1995, home-ownership rates increased rapidly from 64.2% to a peak of 69.2% at the end of 2004, and they stayed at high levels until the end of 2006 (68.9%). These figures meant that because of easy credit and government programs to make housing more affordable for previously under-represented groups, close to 6 millions households were able to afford a home for the first time. During this period home prices also increased, the median cost of a house more than doubled from 1995 to the end of 2006; house prices increased over 6% per year every year from 2001 to 2005 (2005 marked a peak with house prices increasing over 12%). The increase in prices, and the availability of easy credit had another side effect: the proliferation of home-equity loans that provided consumers with additional capital, which they use to increase their spending based on the apparent wealth generated by their share of the equity in their now more expensive homes.
Nominal household incomes, did not increase anywhere near as much as home prices (48% over the same 11 year period - real incomes, taking inflation into account, increased much more modestly). Which meant that for the average person homes became less affordable. The magic of unscrupulous securitization solved that problem by providing the subprime and prime markets all sorts of new mortgage instruments, that included no-income verification loans, no money down, negative amortization loans, etc. Since what seems too good to be true generally is, the magic of the housing market came tumbling down, and home sales and prices have seen a significant reduction since 2007.
As prices return to levels more inline with the purchasing power of individuals, and homeownership levels return to a more "normal" level, the housing market is expected to continue seeing pressures to the downside in spite of extremely low mortgage rates (below 5%) and tax incentives from the government. Some would prefer that prices and sales volumes adjust rapidly to the new "normal", so that the sector can start growing again, even if it means that homeowners would see their wealth diminished even further by further reductions in the equity on their homes. The government seems intent on providing a softer cushion to the housing market that may signify a more stable housing environment, but one which will not see a significant upturn in activity for a prolonged period of time. In this page we will be tracking how whether the current incentives are sufficient to provide stability to the market, and hence to the consumer and the economy.
The latest reports from the National Association of Realtors (NAR) and the US Census Bureau showed a very slight recovery in the sale of existing and new homes. Combined with news from the National Associations of Home Builders (NAHB) that after 8 straight months of declines housing starts had jumped 22.2% in February from its worst reading in history in January, it was enough for the stock market to react very favorably perhaps sensing that the housing market is reaching a bottom.
It is worth making a pause before jumping up and down on how great these data are. According to NAR over 40% of existing home sales were distressed and foreclosure sales. This will continue placing a heavy burden on price and may in effect be preventing many non-distressed sellers to place their houses for sale - much like banks do not want to sale their distressed portfolios until they feel the price is "right".
Inventories remain at extremely high levels, close to 9 months for existing homes, and over 12 months for new homes - meaning at the current pace of sales it will take a long time for the market to work out its current surplus. While mortgage rates are low and certainly supportive of the housing market, the new stricter lending guidelines mean that fewer people are able to obtain these loans. Moreover, if we consider that homeownership it is still at levels much higher than its pre-bubble times (67.5% vs. 64.4%), perhaps another 3.5 million homeowners will have to dispose of their homes, which will further increase the inventory.
Most of the jump in the NAHB data was the result of construction starting in the volatile multi-family units sector with single family homes only increasing by 1.1%. Nevertheless, new single-family building permits did increase by 11%, which if we see continue to in the next few months may in fact signal good news for housing.
By in large it is nice to see a small recovery in sales and in construction activity; however, it is hard to believe that housing is stabilizing when the economy has been shedding more that 650,000 jobs every month for the last 3 months with no near term recovery in sight.
These two charts say it all - prices for existing and new homes are down close to 30% and 22% from the peak respectively. Cities such as Miami, San Diego, Phoenix and Las Vegas have seen price decreases of more than 30%. The trends continues to be down, as more people loose their jobs and are underwater on their loans (e.g. they value of their mortgage is higher than the value of their home), foreclosures will increase, which will in turn continue depressing home prices. On the plus side home affordability is making a come-back and more areas of the country have seen good improvements in this metric as home prices are declining - don't tell that to New Yorkers though, according to the NAHB only 13.9% of New York metropolitan area residents could afford the median home price in the area.
The number of people falling behind on their mortgage payments continues to increase as is the one of those heading to foreclosure. According to the Hope Now Consortium, close to 5.6% of all loans were 60 days of more delinquent - just one year ago that rate was less than 3.2%, highlighting the great deterioration experienced over the course of the year.
In addition, according to the Office of the Comptroller of the Currency (OCC) which supervises the largest financial institutions and thrifts, the 2% of all loans held by the banks it supervises were undergoing foreclosure proceeding. The Mortgage Bankers Association (MBA) puts that number at 3.3%. Therefore, approximately 8-9% of all loans are either seriously delinquent or in the process of being foreclosed. Another 3.5% of the loans is simply delinquent (30-59 days overdue).
Across the board we find that subprime mortgages are by far more likely to be delinquent or in default, but a worrisome trend caused by the deepening recession is the rapid increase in loan delinquency by prime borrowers, who have seen their seriously delinquent rates (more than 60 days past due) more than double over the course of 2008, to 3.74% from 1.67% (MBA figures, the OCC figure for 4Q08 is 2.4%).
To understand why these high levels of delinquency in the housing market are so dangerous for our financial system, we need to remember that most commercial banks used to lend $10 dollars for every $1 in capital they held. In practice these means that if the value of their assets falls by 10% or more they are insolvent - somewhere in between forces them to raise more capital, which these days is a gargantuan feat unless, of course, the government through the TARP is the one providing. And yes, mortgage loans and securities make up a large chunk of their investments.
The bright spot in a rather bleak picture. The Fed's efforts to reduce mortgage rates is working, as the current 30-year mortgage rate of 4.87% is at historical lows. To the very least low mortgage rates have are helping homeowners keep more of their money by refinancing, and should induce individuals predisposed to buy a home to go ahead and take advantage.
Information on this page is provided courtesy of TrackTheStimulus.com. More detailed information on the stimulus can be found on that site. All rights reserved.