Track the Stimulus

The bursting of the housing bubble is at the epicenter of the meltdown of the financial markets, and the primary cause of the current recession.  During the '70s, '80s and the first half of the '90s home-ownership rates averaged 64.4% (US Census Bureau statistics on the % of households that owned a home); with few exceptions the rate did not go above 65.5%, or below 63.5% US.  Starting in 1995, home-ownership rates increased rapidly from 64.2% to a peak of 69.2% at the end of 2004, and they stayed at high levels until the end of 2006 (68.9%).  These figures meant that because of easy credit and government programs to make housing more affordable for previously under-represented groups, close to 6 millions households were able to afford a home for the first time.  During this period home prices also increased, the median cost of a house more than doubled from 1995 to the end of 2006; house prices increased over 6% per year every year from 2001 to 2005 (2005 marked a peak with house prices increasing over 12%).  The increase in prices, and the availability of easy credit had another side effect: the proliferation of home-equity loans that provided consumers with additional capital, which they use to increase their spending based on the apparent wealth generated by their share of the equity in their now more expensive homes.

Nominal household incomes, did not increase anywhere near as much as home prices (48% over the same 11 year period - real incomes, taking inflation into account, increased much more modestly).  Which meant that for the average person homes became less affordable.  The magic of unscrupulous securitization solved that problem by providing the subprime and prime markets all sorts of new mortgage instruments, that included no-income verification loans, no money down, negative amortization loans, etc.  Since what seems too good to be true generally is, the magic of the housing market came tumbling down, and home sales and prices have seen a significant reduction since 2007.

As prices return to levels more inline with the purchasing power of individuals, and homeownership levels return to a more "normal" level from the current 67.2%, the housing market is expected to continue seeing pressures to the downside in spite of extremely low mortgage rates (below 5%) and tax incentives from the government.  Some would prefer that prices and sales volumes adjust rapidly to the new "normal", so that the sector can start growing again, even if it means that homeowners would see their wealth diminished even further by further reductions in the equity on their homes.  The government seems intent on providing a softer cushion to the housing market that may signify a more stable housing environment, but one which will not see a significant upturn in activity for a prolonged period of time.  In this page we will be tracking whether the current incentives are sufficient to provide stability to the market, and hence to the consumer and the economy. 

Home Sales and Inventory

The latest reports from the National Association of Realtors (NAR) and the US Census Bureau for February 2010 showed the third month in a row of reductions in the number of home sales after a very strong showing in the previous months.  The latter was in large part driven in large part by the expiration of the $8,000 first-time homebuyer tax credit which was originally due at the end of November, but which has now been extended to June 2010.  The decline in February was less pronounced than what was anticipated, however it followed steep declines in December and January resulting in renewed concerns over the health of the housing market.
 

February annualized existing home sales rate decreased 0.6% over the previous month to an annualized 5.02 million homes.  While 12% better than the 4.49 million rate observed in January 2009, it is by no means a strong showing.  New home sales also saw a sharp drop from the previous months, and now sit at a 308,000 units per year pace - the lowest rate of sales since records have been kept (6% below the lows earlier in the year, and 73% lower than the peak seen in 2005).  While low prices due to foreclosures, and government incentives for first time buyers continue creating demand, the spike in sales prior to the old tax-incentive deadline took a lot of the wing out of the December and January numbers, and may be an indicator that the expected upsurge of sales in the Spring as the tax credit expires (again) will be more subdued than now anticipated.

First time buyers continue taking advantage of the government's program to provide a $8,000 tax credit for the purchase of a new home.  NAR indicates that 42% of existing home sales in February were to first-time buyers; it is up from 40% in January and slightly down from the 43% seen in December.  For the 25% of so of buyers purchasing a home using FHA guarantees, they can access the $8,000 stimulus immediately and use it as additional down-payment for their homes.

35% of existing home sales were distressed and foreclosure sales.  We expect that distressed and foreclosure sales will continue placing a heavy burden on price (NAR estimated distressed sales go for prices 20% below regular sales) and may in effect be preventing many non-distressed sellers to place their houses for sale until they feel the price is "right".  Because the number of foreclosure notices remains very high, we expect that inventory to continue keeping prices down. 

Inventories for existing and new homes have come down rather dramatically from the highs of over 12 months of inventory seen in February 2009.  Nevertheless they went up in February to 8.6 months and 9.2 months worth of sales for existing and new homes respectively.  There are concerns that there is a significant amount of pent-up inventory from banks that are choosing to delay the sale of foreclosed homes to avoid swamping the market and reducing prices further.  Furthermore, an estimated 24% of homeowners owe more on their mortgages than the current market value of their homes; these homeowners are unlikely to move to another property in the near term, thus reducing demand.

 

Furthermore, while mortgage rates are low and certainly supportive of the housing market, the new stricter lending guidelines mean that fewer people are able to obtain these loans.  Moreover, if we consider that homeownership it is still at levels much higher than its pre-bubble times (67.2% vs. 64.4%), perhaps another 3.5 million homeowners will have to dispose of their homes, which will further increase the inventory.

We continue to believe that while it is nice to see that the housing market decline is not getting worse, it is still supported almost exclusively by the federal government through the purchase of housing securities, the expanded use of FHA mortgage insurance, and the provision of tax incentives.