Many times, I outlined that the crisis started with the imploding housing bubble and will end with it. We are no entering into the 3 rd year of implosion according to the Case-Shiller Index. So, where are we now? Are data for the past 6 months showing the beginning of a real improvement or are they just noise?
1. The Housing market in perspective
It is during the summer 2006 that prices started to decline according to the Case-Shiller Home Price indices. The fall has been steep and deep, and in some places dramatic, with falls running in the region of 50% in Nevada or Arizona for example.
Last year the US experienced the largest annual fall in real estate prices, hit the highest number of delinquent mortgages measured, witnessed a record 918,000 homes taken in foreclosure, and 11.3 million home owners now own negative-equity.
Every element — falling prices, mortgage delinquencies, repossessed homes, negative equity — they all hit records in 2009.
Absolute data are still bad, but trends look better. Case-Shiller data through January 2010 show that the annual rates of decline of the 10-City and 20-City Composites improved in January compared to December 2009, and are flat compared to a year ago. Annual rates for the two Composites have not been this close to a positive print since January 2007, three years ago. However, the rebound in housing prices seen last fall is fading and prices have experienced small price decrease for the past 4 months.
The report adds: “Other recent data on housing also paint a mixed picture. Housing starts continue at extremely low levels, recent reports of home sales suggest the market remains difficult, and concerns remain about further foreclosures and a large shadow inventory of unsold homes. We are in a seasonally weak part of the year, but given the S&P/Case-Shiller Home Price data reported today, we can’t say we’re out of the woods yet.”
Whilst the picture is at best mixed, one interesting graph is the Residential Property Affordability Index which shows that affordability is at its best for 20 years. This is consistent with falling house prices and improving household’s balance sheets as showed via several Q4 2009 indicators like the household debt service payments as a percent of disposable personal income à 12.6% or household total financial obligations down to 17.5%, both back to 2000 levels.
Housing starts and new private building permits (which is more forward looking) whilst slightly recovering remain subdued and well below historical average: this will not add pressure onto the market.
2. Foreclosure
Mortgage delinquencies are at a record high 15.02 percent (Q4 2009) according to the Mortgage Bankers Association — meaning an estimated 8.4 million families do not pay their most important bill. Foreclosure has therefore been a dominant feature during this housing crisis, reflecting (1) the low credit quality of mortgage borrowers and (2) the depth of the financial meltdown and unemployment surge.
However, the delinquency rate for mortgage loans on one-to-four-unit residential properties fell to a seasonally adjusted rate of 9.47 percent of all loans outstanding as of the end of the fourth quarter of 2009, down 17 basis points from the third quarter of 2009, and up 159 basis points from one year ago when the market was melting.
The percentage of loans on which foreclosure actions were started during the fourth quarter was 1.20 percent, down 22 basis points from last quarter and up 12 basis points from one year ago.
“We are likely seeing the beginning of the end of the unprecedented wave of mortgage delinquencies and foreclosures that started with the subprime defaults in early 2007, continued with the meltdown of the California and Florida housing markets due to overbuilding and the weak loan underwriting that supported that overbuilding, and culminated with a recession that saw 8.5 million people lose their jobs,” said Jay Brinkmann, MBA’s chief economist.
He added: “The other apparent good sign is a drop in the rate of new foreclosures started. This drop may be temporary, however, because we continue to see large increases in loans 90 days or more past due… The pattern of mortgage delinquencies now very much follows the pattern of unemployment.” [emphasis mine]
I am of the opinion that despite the end in June of the $8,000 tax credit given to first-time buyers will not result in a double dip for the housing market at a time when the nascent economic recovery developing across the US, as per the recent data published over the past few weeks, and low interest rates.
Finally, Friday’s jobs rather positive report is important to the housing market for two main reasons: people are not buying homes if they are worried about losing their job and, more importantly, more borrowers fall behind as they lose their jobs, especially when they owe more than their homes are worth. Indeed, the surest way to stem foreclosures at this point is to reverse job losses
Conclusion
I believe that we have reached (or are near) the trough of the US residential real estate market. The falling spiral is no longer self-fulfilling and the economic environment is improving. Low interest rates, better employment data and rebuilt household balance sheets are keys to the recovery and are all going the right way.
Sources:
http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----
http://www.research.stlouisfed.org/
http://www.mortgagebankers.org/NewsandMedia/PressCenter/71891.htm
http://www.businessinsider.com/record-drops-in-home-value-peak-foreclosures-and-millions-underwater-and-now-home-values-are-rising-2010-3?utm_source=Triggermail&utm_medium=email&utm_campaign=MoneyGame_Select_030810#ixzz0jpp8ICYH
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