mortgages

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Home Sales Bounce Up

Committed as I am to the spirit of balance, I have to report briefly on today’s good news. Sales of existing homes rose 7.7% in August. Of course they are still way below the unsustainable pace reached at the peak of the bubble – they are pottering along at an annual rate of about 4.9 million units, compared with the white hot 7.08 million of 2007. Still a bounce up is a bounce up. We should cheer.

What happened?

Well nothing fundamental. Rents have risen a little making the monthly cost of purchasing more competitive; mortgage rates are near all time lows, for those who qualify; and there seems to have been a push to buy before the top level for a conforming loan is dropped from its temporary high. For those of you who don’t know what that is: a conforming loan is one that meets the FHA underwriting requirements, one of which is the amount of the loan. As a temporary, and ill-fated, attempt to boost real estate the FHA raised the ceiling on the amount considered as acceptable. That temporary ceiling fell victim to the Republican desire to cut government intervention and so is about to drop. The problem is that in some parts of the country home prices ensure that pretty mush all loans violate the conforming ceiling even with a healthy downpayment. With the ceiling about to drop it appears many buyers rushed to buy and thus qualify for the larger loans, thus boosting sales. We will have to wait to see by how much.

And, of course, another factor in boosting sales was the steady drop in prices that now seems to be continuing beyond levels suggested by market conditions. The median price of a home was $168,300, down a little over 5% from last year.

Lastly we should recognize the pressure on sales created by the influx of foreclosed homes. Distressed sales accounted for 31% of all sales in August, slightly up from July, and led to a wider gap between the price of new homes and existing homes. That gap is now about $50,000, much larger than normal, and reflects the downward pressure on prices that the unwinding of the bubble is still exerting.

So, all in all, I cannot argue that this bounce up in sales looks sustainable. There were too many oddball contributions to it, and the backlog of foreclosed homes will weigh down on the market for a while longer. The unsold inventory of homes is roughly equivalent to 8.5 months of sales. In the past – no guarantee of the future as we all know – an unsold inventory of closer to 7 months has been the point at which prices start to firm up and bidding on homes pushes up rather than down. At current sales rates, and with a huge shadow inventory of homes not officially for sale but with owners keen to sell anyway, I cannot see prices settling or rising any time soon. Indeed the downward pressure could linger well beyond next year and into 2014/2015.

One interesting side note: there is considerable indication that we have now overshot the bottom in real estate. This means sales and prices, while still weak and trending down, are not fully reflective of long term trends, but are being established by short term adjustments. If – a huge if I realize – we arrive at a more stable economic pattern of growth, prices are likely to rise to take this overshoot into account; plus we will need to have a rapid climb in construction to overcome what appears to be a shortage of housing. This sounds peculiar in our current circumstances, but makes sense with respect to the longer term trends and demographic pressure. Caution: even when those increases show up – if they show up – we will not be caught in a bubble like rise. Your return will be higher from other investments, so don’t go speculating in real estate!

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The Mortgage Crisis

In my post earlier today I argued that the recovery would be constrained by the state of the job market and that we may well have two parallel economies for a while until the employment situation improved and sparked an increase in consumer confidence.

The latest data on home mortgages seems to support that view.

One in eight home mortgages is now one or more payments in arrears. And the trend is worsening. Foreclosures are also picking up steam despite the administration’s efforts to encourage renegotiation.

The states most affected are the usual suspects with Florida being the leader in both foreclosure and arrears: 12% of the state’s mortgages are in foreclosure proceedings and 23% of mortgages are in arrears. Those are awful numbers. Next on the list come Nevada, Arizona, and Michigan. There is nothing really new about the fact these states have real estate markets that have collapsed.

What is new is that the cause of arrears and foreclosure has shifted. At the beginning of the crisis the collapse was sparked by sub-prime borrowers failing to pay as their interest rates shot up from the original teaser rates. Now the bulk of the new problems stem from unemployment: people who have lost their jobs and are now unable to maintain their home payments. A consequence of this is that the kind of mortgages now in trouble has shifted: at the onset of trouble it was those sub-prime borrowers accounting for the bulk of the failures. Now prime loans account for over a third.

The conclusion is obvious: unemployment is beginning to bite hard. Even well constructed and sensible loans are falling into arrears as the job market takes its toll on worker incomes. This will, with certainty, limit the upside of the recovery until jobs once again become abundant.

Meanwhile consumers will remain very conservative and save more than usual. And the more they save rather than spend the more likely we will run into difficulty next year.

Excessive thrift may well be our biggest problem in 2010.

How odd is that?

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Fed Slowing Economy

Watch out everyone. The chances of recession have risen recently. Here’s the New York Times on the Fed minutes in which a slowdown was discussed: Fed Minutes Show Fears of Slowing Economy

The odds of a recession next year sometime have increased. The biggest source of danger is the over-extension of bad mortgage loans by banks during the housing bubble. With house prices beginning to fall year on year, and unsold home inventories rising rapidly the housing market looks very weak for the first time in years. The problem is that house price appreciation was a significant source of spending power for consumers who took our home equity loans to fuel consumption. The rate of draw down of those types of loans is now fading away. With wages weak there is little other than a run up in credit card debt to keep consumption rising.

That’s a recipe for a decline. Looks like choppy water ahead … just in time for the next presidential election.

Another thing for Bush’s successor to clean up.