A Global Property Guide report on the US real estate market names several factors that are undermining a recovery in the market. The end of the stimulus, rising foreclosures, a weak rental market and growing interest rates all point to further deflation of US housing in 2010. See the following article from Global Property Guide for more on this.
The optimism of early-2009 has proved premature. US house prices fell by between 1% to 11% in 2009, and even more in inflation-adjusted terms, according to the various estimates based on asking prices, selling prices, and mortgage applications.
The number of new single family houses sold in January 2010 was 309,000 units, 6% down on January 2009, and the lowest monthly sales since data was first collected in 1993.
More bad news:
- Only 4,458,00 new single family houses were sold in 2009, down by 23% from 2008 – a big drop from the average of 11.5 million new single family homes sold annually from 1996 to 2007, which includes around 15 million new homes sold annually in 2004 and 2005. The number of new housing units authorized, constructed and completed in 2009 was the lowest for decades.
- Mortgage delinquencies surged 60% from last year, to 229,139 in Q4 2009, a historic high. The delinquency rate rose to an unprecedented 10.14% in Q4 2009, up 7.05% on the same period in 2008. From 2003 to mid-2006, the delinquency rate was below 2%.
So much for the uptick in the housing market in early 2009, which was propelled by the government stimulus, and by an expectation that the recession would end in 2009.
Why the bad news? Although the U.S. officially exited recession in July 2009:
- Unemployment has remained high.
- The mortgage and loan markets have remained frozen, despite the key interest rate at a historic low of 0.13% since December 2008.
The good news? This could be the bottom or perhaps not.
Year-on-year figures, good trend signals (much used by Case-Schiller) suggest that though prices are still falling, each quarter’s bad news is less bad than the previous quarter’s bad news (i.e., the rate of price-falls is slowing rapidly). This is very clear from the chart:
There are dark clouds, however, down the road:
- Fed MBS are being phased out. The Fed’s mortgage-backed securities (MBS) purchase program expired in March, and is not expected to be extended.
- Fed stimuli will be slashed. Fiscal stimuli implemented in 2008 and 2009 are expected to be drastically reduced or entirely scrapped in 2010.
- Interest rates are rising. With global commodity and fuel prices inching up, interest rates could be hiked to contain inflationary pressures.
Any of these measures could delay the housing market’s recovery.
Is US housing now undervalued?
By 2009, average prices had fallen by around 13% from their 2007 peak, using US Census Bureau data. Federal Housing Finance Agency (FHFA) figures using mortgage data show slightly lower price falls from 2007 to 2009: 6.8% for the all-transactions index and 10.2% for the purchase-only index.
The S&P/Case-Shiller house price indices (SPCS-10) shows the biggest price falls, with 25.4% within the same period. Adjusting for inflation adds 2 to 3 percentage points.
Some say prices are now so low that US houses are now actually undervalued. By the end of 2009, the US was 8.9% undervalued when weighted by market value, and 10.3% undervalued when weighted by housing units, according to IHS Global Insight, an international financial analysis and consultancy firm.
A 9% undervaluation implies that on the average a buyer will pay US$455,000 for a property worth US$500, based on housing fundamentals. The analysis was based on a study of actual house prices in 300 metropolitan areas from 1985 to 2009. The fundamental house price was based on the area’s population density, average household income, accessibility, and other factors. The undervaluation was in sharp contrast to the 16.6% overvaluation in Q4 2005 near the peak of the house price boom.
Undervaluation thesis – contradicted by still-high P/Rs
However the house price-to-rent ratio, the simple measure of house prices fundamentals which the Global Property Guide favors does not suggest that house prices are undervalued. In fact house prices are still above their long-term trend, as is clearly visible from the graphs:
The government has pushed new money at housing
The US has the world largest mortgage market, one of the few countries with a mortgage-to-GDP ratio over 100%. Mortgage debt rose from 61% of GDP in 1994 to 1997, to 103% of GDP in 2007, before falling slightly to 101% of GDP in 2008. Only 4% of new houses are bought for cash.
To replace the vacuum created by the mortgage crunch, government agencies have pumping out more housing loans.
In 2006 and 2007, home financing from government agencies, the Federal Housing Administration (FHA) and Veteran Affairs (VA), had risen to 24% and 9% of loans, respectively. In 2006 and 2007, they were used for only 4% and 3% of new houses sold, while conventional mortgages were used for 90%.
But the stimulus is trailing of
In 2008 and 2009, the housing market received a significant boost. First-time homebuyer credit was provided by the government under the Housing and Economic Recovery Act of 2008. Key features included:
- Credit applied to houses purchased after April 8, 2008, and before December 1, 2008, used as the taxpayer’s principal residence.
- The credit amount (up to US$7,500) was an interest-free loan, repayable over 15 years.
In early 2009 several extra measures were credited for the improved housing market conditions, but their effects quickly fizzled as these programs started running out. Under the American Recovery and Reinvestment Act of 2009, the first-time homebuyer credit was extended until December 1, 2009 and the amount increased to US$8,000. Under the new scheme, the credit only needed to be repaid if the home ceased to be the owner’s principal residence within a three-year period following the purchase i.e., the credit become a gift, though the term credit was still used.
However, this scheme expired at end-2009. In March 2010, a US Fed program keeping mortgage rates low by buying MBS also expired. The Fed purchased a total of US$6.074 agency MBS during the last week of the program to exhaust its US$1.25 trillion allocation.
Another government program aiming to prevent foreclosures has been largely ineffective. Out of the 1.1 million homeowners participating last year, only 170,000 had completed the loan modification process by February 2010.
The US is still stuck in a liquidity trap
After the Fed slashed its key rate to just 0.13% in December 2008, it remained unchanged for the rest of 2009 and Q1 2010. The rate can hardly fall further.
Despite the decline, effective mortgage rates remain stubbornly high. As of February 2010, the average interest rate for 30-year Fixed Rate Mortgages (FRMs) was 4.99%, while the average rate for 15year FRMs was 4.37%. Average lending rate for one-year adjustable rate mortgages (ARMs) stood at 4.23%.
In 2009 and early-2010, interest margins ranged from 4 to 5 percentage points, up from 0.2 to 1.5 percentage points from June 2006 to August 2007. So despite the drop from the key rate of 5.25% in August 2007, actual mortgage lending rates have changed little.
Delinquencies and foreclosures are rising
Delinquency rates are rising, and this is likely to further weaken the housing market. Most delinquencies end up in forfeiture, so the supply of housing is expected to increase, further dampening property prices.
After staying at 3% or below from 1994 to 2007, seasonally adjusted delinquency rate rose quickly in 2008, and reached 6.58% by end-2008 and 10.14% by end-2009. Loans are considered delinquent when they are past due for thirty past days or more.
Foreclosures filings reached 308,524 in February 2010, up by 6% from a year earlier. February saw the lowest y-o-y increase since January 2006, but still marked the 50th consecutive month of annual foreclosure activity increases, according to RealtyTrac.
This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, says James Saccacio of RealtyTrack, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity albeit at a historically high level that will likely continue for an extended period.
Construction is falling
In response to falling demand, construction of residential properties has fallen to historic lows. In 2004 and 2005, the number of housing units authorized for construction based on building permits exceeded 2 million. Since then, dwellings authorized declined. It was down to 572,000 units in 2009, far from the average of 1.5 million units dwellings authorized from 1990 to 2007.
A mere 554,000 dwellings were started in 2009, down from an average of 2 million dwellings in 2004 and 2005. Completions likewise dropped to 794,000 units in 2009 from an average of 1.9 million from 2004 to 2006.
Weak construction activity will likely drag the economy further. The National Association of Home Builders estimates that each new home built creates 3 jobs for a year and US$90,000 in local and federal taxes.
The rental market is weak
Some observers hoped that the rise in foreclosures might boost demand for rental housing. But higher vacancy rates and lower rents show that this is not happening.
In the fourth quarter of 2009, the median rent was US$680; down by 3% on a year earlier and down 5% on the previous quarter.
Vacancy rate are high, too. Nationwide rental vacancy rates were 10.7% in 4th quarter of 2009. Although down from 11.1% in Q3, this is higher than the average 2005 to 2007 rate of 9.7%. From 1990 to 1997, the average rental vacancy rate was only 7.5%.
Unemployment is high
The Obama administration’s massive stimulus programs, coordinated with the actions of the US Fed, prevented the recession from escalating into a depression. From peak to trough, GDP contracted by 3.9%, the highest decline since the Great Depression yet a relatively happy outcome, a tribute to the salutary effect of Keynesian policies.
Yet despite the resumption of growth, unemployment is expected to remain high, at around 9.6% by end-2010 and 9.1% in 2011. Unemployment in February 2010 was 9.7%, slightly down from the 10.1% in October 2009.
From 2006 to 2007, unemployment was 5% or lower.
A few housing market forecasts:
- Capital Economics expects house prices to fall by 5% this year, unless the government extends homebuyer credit.
- Barclays Capital predicts house prices will drop by 4% or 5% before finally stabilizing. They note, however, recovery and stabilization are two different things. They do not see house price increases anytime soon.
This article has been republished from Global Property Guide. You can also view this article at Global Property Guide, an international real estate analysis site.