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Let’s Look at Housing

Posted by Larry Doyle on August 21, 2009 12:16 PM |

The National Association of Realtors just announced that existing home sales rose to the highest level in the last two years. This is obviously a good sign. What drove the increase and what is going on within the housing market broadly speaking? Can we assign a clean bill of health to the entire housing market based upon this report? Let’s dig deeper.

Bloomberg looks into this morning’s report and highlights the following in writing Existing Home Sales in U.S. Jump to Two Year High:

> Foreclosure-driven declines in prices, government credits for first-time buyers and near-record-low borrowing costs may keep stoking demand, helping the economy recover from the worst recession since the 1930s. Ongoing job losses are a reminder that more Americans will probably lose their homes, indicating a rebound will be slow to take hold.

Sense on Cents commentary: as I attested on August 11th in writing the “U.S. Mortgage/Housing Market has a Split Personality,” the economy has a decidedly different dynamic at work between lower priced homes which can be financed with conforming mortgages (ultimately purchased by Freddie Mac and Fannie Mae) and higher priced homes needing to be financed with Jumbo mortgages (not readily available by our friendly banks!!).

>Purchases of existing homes increased 5 percent compared with a year earlier. The median price dropped to $178,400 from the $210,100 in July 2008.

Sense on Cents commentary: do not look for price appreciation anytime soon. In fact, while home prices on the lower end may begin to stabilize on a relative basis, higher priced homes (those needing Jumbo financing) will remain under pressure.

> The number of previously-owned unsold homes on the market jumped 7.3 percent to 4.09 million in July, a “notable” increase, according to Lawrence Yun, the Realtors’ chief economist. At the current sales pace, it would take 9.4 months to sell those houses, the same as in June.

>About $3.4 trillion worth of houses are at risk of default because the owners owe more than the property is worth, Santa Ana, California-based First American CoreLogic said last week. By putting more homes on the market, foreclosures are keeping inventory higher than levels consistent with stable prices.

Sense on Cents commentary: the increase in unsold homes will keep prices under pressure which will help promote sales activity but will also serve to keep pressure on retail sales as consumers feel a negative wealth effect. Additionally, the supply of homes does not fully address the shadow inventory of homes held by banks but not yet put on the market. This shadow supply will likely increase given what is in the delinquency and foreclosure pipeline.

For further evidence of the ‘split personality’ within the housing market, high five to 12th Street Capital for sharing the Mortgage Bankers Association report, Delinquencies Continue to Climb, Foreclosures Flat in Latest MBA National Delinquency Survey:

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey. The non-seasonally adjusted delinquency rate increased 64 basis points from 8.22 percent in the first quarter of 2009 to 8.86 percent this quarter.

The delinquency rate breaks the record set last quarter.  The records are based on MBA data dating back to 1972.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure.  The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The percentage of loans on which foreclosure actions were started during the second quarter was 1.36 percent, down one basis point from last quarter and up 28 basis points from one year ago.

The percentages of loans 90 days or more past due and loans in foreclosure both set new record highs, breaking records set last quarter.  The percentage of loans 30 days past due is still well below the record set in the second quarter of 1985.

Increases Driven by Prime Fixed-Rate Loans

“While the rate of new foreclosures started was essentially unchanged from last quarter’s record high, there was a major drop in foreclosures on subprime ARM loans.  The drop, however, was offset by increases in the foreclosure rates on the other types of loans, with prime fixed-rate loans having the biggest increase. As a sign that mortgage performance is once again being driven by unemployment, prime fixed-rate loans now account for one in three foreclosure starts.  A year ago they accounted for one in five.  While 41 states had increases in the foreclosure start rate for prime fixed-rate loans, 43 states had decreases in that rate for subprime adjustable-rate loans,” said Jay Brinkmann, MBA’s Chief Economist.

“The states of California, Florida, Arizona and Nevada continue to have a disproportionately high share of foreclosure starts, although the share has fallen slightly from last quarter.  Those four states had 44 percent of all of the nation’s new foreclosures during the second quarter of this year, down from 46 percent in the first quarter.

Again, it is fabulous that home sales are occurring. That said, the fact that delinquencies and foreclosures continue to set new records and that the problem area is now focused in the prime Jumbo fixed rate space means individuals and institutions — and our economy — with exposure to that segment will experience more pain.


Related Sense on Cents Commentary:
The Most Critical Economic Statistic (May 19, 2009)

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