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 66.9% (Census Bureau estimate for the third quarter 2010), the housing market is expected to continue seeing pressures to the downside in spite of extremely low mortgage rates (4.23% in October), in particular with the expiration of tax incentives from the government.  Some would prefer that prices and sales volumes adjust more 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 more reductions in the equity value 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 September 2010 show that housing is still in a deep recession with no near term fix, although sales have recovered a bit since July.  The expiration of the of the $8,000 first-time homebuyer tax credit, which was extended to June 2010, was followed by a steep reduction in the number of sales of existing and new homes.  Sales of existing homes are at levels not seen since the mid 1990s.  Not even record low mortgage rates are enticing qualified buyers to the market - the high unemployment rate, more stringent qualification criteria for potential homeowners by banks and the FHA, and an expectation of continued deflation in the housing market are keeping buyers away. 
 

September's annualized existing home sales rate improved 10% from August, but it is 18% lower than last year and now sit at an annualized rate of 4.53 million homes. 

New home sales also improved slightly but they are still sitting near the lowest levels on record.  At a 307,000 units per year pace, they only look good with respect to July's record low annualized sales rate (the lowest rate of sales since records have been kept). 

First time buyers accounted for 32% of existing home sales, up from 31% in August.  Perhaps as a reflection of more stringent bank requirements to qualify for mortgages, 29% of all sales were for all-cash transactions, up from 28% in August.

35% of existing home sales were distressed and foreclosure sales.  We expect that distressed and foreclosure sales will continue placing a heavy burden on prices (NAR estimated distressed sales go for prices 20% below regular sales) and may continue 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.  Problems with foreclosure papers forced Bank of America, JP Morgan Chanse and others to halt foreclosures; some of them have resumed the process, but litigation is expected to increase.  While potentially a positive development for homeowners facing foreclosure, it risks creating further uncertainty in the housing market and slowing the pace of sales even further.

Inventories for existing and new homes, after a steep reduction in the months leading to the end of the tax incentive, made an equally dramatic comeback in July.  August and September saw inventories come down, but they are still very high 10.7 months of sales for existing homes and  8.0 months worth of new homes.  Furthermore, there are significant concerns that there is a large "shadow" inventory from banks that are choosing to delay the sale of foreclosed homes to avoid swamping the market and reducing prices further.  In addition, 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.

The government's tax incentives for home-buyers (in particular first-time home-buyers) did create demand, and provided a floor to steep price declines; however, their expiration and paltry sales in the aftermath has placed the housing market back under a cloud of uncertainty.  Very high inventory levels, and the fear of a large "shadow" inventory are likely to depress prices even further - a strong disincentive to prospective buyers.  Moreover, 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.  If we consider that homeownership it is still at levels much higher than its pre-bubble times (66.9% vs. 64.4%), perhaps another 3 million homeowners will have to dispose of their homes, which will further increase the inventory (the New York Fed came up with a very interesting report that makes the case that underwater homeowners should be treated like renters, thus the homeownership rate would actually be much lower than the Census figure; they estimate it at 61.6% at the end of 2009).