Housing's Shaky Foundation

One-quarter of American home borrowers owe more on their homes than the homes are worth.

December 7, 2010

Looking for the bottom in the housing market? Don’t hold your breath. This seems to be the message underlying a handful of statistical releases during the past month or so.

On Nov. 1, Fiserv—a Fortune 500 information management and e-commerce systems company—announced a big downward revision in its home price projections. As recently as February, the company forecasted national home price increases of about 4% through the end of 2011. Fiserv’s updated prediction is for a 7.1% drop in prices in the year ending June 2011.

Why the dire outlook? Ask real estate analyst Kyle Lundstedt of LPS Applied Analytics, who predicts serious delinquencies will continue to spike and delinquency rates won’t return even to current, already peak, levels until late 2012 or early 2013.

That’s not altogether surprising. One-quarter of American home borrowers owe more on their homes than the homes’ current value, according to CoreLogic, an analytics and business services firm. Furthermore, the company estimates a whopping 4 million households now owe at least twice as much as their homes are worth. This all means foreclosure activity is likely to remain high.

Indeed, RealtyTrac, a firm that tracks real estate foreclosures, recently released its U.S. Foreclosure Market Report for third-quarter 2010. It showed that foreclosure filings—default notices, scheduled auctions, and bank repossessions—were reported on 930,437 properties in the third quarter. That’s an annualized rate of 3.7 million filings and nearly a 4% increase from the previous quarter.

The “robo-signing” issue and subsequent moratoriums on foreclosures could cause a notable foreclosure slowdown, which could buoy prices in the near-term. But the moratorium will only push the day of reckoning into the future.

The number of homes in danger of eventual foreclosure is a whopping 11 million, estimates Amherst Securities. The Census Bureau reports there are now 1.9 million vacant housing units on the market, roughly double the long-term norm. More foreclosures will mean more vacant homes, and continued substantial downward pressure on prices.

While supply is increasing, demand is soft. New-home sales continue to languish around historic lows, barely exceeding an annual 307,000 and about one million below the peak when the housing bubble formed. And while existing-home sales increased 10% over month-earlier levels, the 4.5 million annualized sales rate in September was nearly three million below sales levels at the peak.

Note, however, a few good signs:

• Home affordability is high. Prices for homes financed with conforming mortgages have declined by 13% from their midyear 2007 cyclical peak, according to the Federal Housing Finance Agency. Prices in some markets have declined by more than 50%.

• Rates remain near record lows. In early November, the rate for 30-year, fixed-rate mortgages was below 4%—a point lower than one year earlier and more than two percentage points lower than the average in November 2008. Thanks to the Federal Reserve’s recently announced $600 billion in additional quantitative easing, mortgage rates should decline further in the coming months. The Fed bids up prices when it purchases midterm and long-term securities. Mathematically, those price increases will translate into lower yields. At this point, the only question is how much lower rates will go.

• Labor markets should continue to improve, and the improvements should become more dramatic in the near future. Corporate earnings have spiked recently, and significant job growth typically lags the corporate earnings spike by eight to 10 months. Employment gains should translate into income gains, which bodes well for future home sales.

When the U.S. housing market hits bottom, it will be good news for credit unions and their members. Unfortunately, we’ll probably have to wait a bit longer for that to happen.

MIKE SCHENK is vice president, economics and statistics, for the Credit Union National Association. Contact him at 608-231-4228.