Saturday, July 19, 2008

Do Not Enter: US housing market still under duress

The collapse of the housing market is the main centerpiece of the U.S. economic duress. What originally was a crisis limited to sub-prime lenders has turned into a full-fledged financial panic. Home values have declined 15% since last year, U.S. household wealth fell 2.9% in 3 months, -257,000 construction jobs have been slashed since June 2007, and the Dow recently hit levels not seen since 2006. This could all change if the housing market would just rebound.

Others say that the path to recovery is afoot…

In the article, On the Path to a Housing Rebound, Shawn Tully argues that the housing market is on a path to recovery:

“The news that housing starts have fallen to their lowest level in 17 years sounds like one more reason to be depressed about the shrinking value of your home. In fact, it's an almost certain sign that the path to a housing recovery is finally in sight.”

In sum, he argues that as affordability rises (falling prices and interest rates), new buyers will get into the market and drive down the supply of homes for sale. Prices will start to rise, new homes will be built, and “things will get better.”

Others note that the onslaught of sub-prime lending has slowed in 2007. “Looking forward, this correction suggests a future mortgage and housing market that will be much better than today's.” This may be true, but the future mortgage market is still a long way off.

…But that path is long and windy

I see a housing crisis that is far from over. It is certainly relieving to see that sub-prime mortgage lending has been curtailed, and that the Federal Reserve Bank took action to reduce questionable lending practices. However, home prices are falling at unprecedented rates and according to the Fed, “house prices seem likely to continue to fall well into 2009”. There is simply too large and still growing a supply of homes for sale to predict any near-term recovery in the housing market.

Some data is encouraging. Home sales (pending, existing, and new) are down significantly over the year, but the rates at which they are falling is falling. As home prices fall and interest rates stay low for historical standards, affordability remains high. And according to many, buyers will not be able to ignore the 15%-off sale on housing. They will swoosh in and save the day.

Other housing data paints a very dreary picture. According to the Mortgage Bankers Association (MBA), mortgage delinquency rates (% of mortgages that have not been paid for 30, 60, or >90 days) have precipitously risen to their highest levels in 40 years. There are a rising number of prime and sub-prime customers that are simply not paying their mortgages.

The graph below shows the total delinquency rates for all mortgages, prime mortgages, and sub-prime mortgages (the data for prime and subprime start in Jan 1998). As expected, sub-prime delinquency rates skyrocketed as prices started to fall, but the sub-prime borrowers are not alone. Prime delinquency rates are concurrently rising. Customers with bad credit scores and those with good credit scores are walking away from their responsibilities….the mortgage.

As if that wasn’t bad enough. Banks are having difficulties unloading the delinquent properties, and vacancy rates have risen to unprecedented levels. Even with rock-bottom prices, the customer base in the housing market is seriously short; there are not enough homebuyers to keep up with the rate at which delinquent properties are coming on the market.

Given these troublesome statistics, it is hard for me to imagine how the housing market is going to recover in 2008. The delinquency and vacancy rates need to fall in order to see a dent in the reduction in the supply of housing.

Don’t forget the light at the end of the tunnel

Don’t’ worry, it’s not all doom and gloom. As long as there are bigger markets to counteract the struggling housing market, the U.S. economy will survive as the housing crisis runs its course. Exports are growing over 4 times the rate of the U.S. economy and are 3 times more important to U.S. economic growth than is total housing. Export growth alone can easily compensate for the negative economic impacts from the housing market. Good thing is that export growth is expected to remain strong with continued weakness in the value of the U.S. dollar.

A little bit of advice: If you own a home, stay in it and pay your mortgage; if you are buying a home, buy now for the good of the economy, but maybe wait a little while as home prices will likely fall further; if you are underwater (higher mortgage than your home is worth), well, you are not alone.
Please leave comments. Best, Nontruths

1 comment:

  1. Another sidebar may be that people who want to buy are having a lot of trouble selling the home they are in, even if they either have no mortgage or are well able to pay it. Examples are our children; one family would like to get a bigger home but can't sell theirs; another will buy but is waiting until the market seems to be shaken out. Patience is a virtue now. Real estate experts are still saying there are a lot more defaults coming which could put this thing out to 2010 or later. Can you time the real estate market? janie


Note: Only a member of this blog may post a comment.