Deciphering The Good And Bad In US Housing

Deciphering the often conflicting data coming out of the housing market can be difficult. The abundance of good and bad reports released on a daily basis can lead …

Deciphering the often conflicting data coming out of the housing market can be difficult. The abundance of good and bad reports released on a daily basis can lead to mixed signals and confusion for the average investor. The following article from Global Property Guide breaks down the positive and negative factors that are currently affecting the housing climate.

After three years of sharp house price falls, the US housing market seems to be finally stabilizing.

Property prices in ten major US cities rose by 0.4% in May 2009 from the prior month, according to the S&P/Case-Shiller® Composite 10 (SPCS-10) house price index. The broader SPCS-20 rose by 0.5% over the same period.

A rise of 0.9% from the previous month in May 2009 was announced by the Office of Federal Housing Enterprise Oversight (OFHEO ), using a purchase-only house price index. The Pacific region registered average price rises of 2.7%.

Cheaper house prices and low interest rates are driving homebuyers back to the market. In addition, demand for residential houses has been boosted by aggressive government incentives and tax credits.

“Overall, the housing sector is showing signs of continued improvement,” says Win Thin of Brown Brothers Harriman. “Though the housing market remains weak compared to the peaks, the improved data will continue to feed into market optimism on green shoots.”

The recovery will be slow

Despite all the optimism from real estate agents, the US housing market recovery is expected to be slow, many economists say.

“While many indicators are showing signs of life in the US housing market, we should remember that, on a year-over-year basis, home prices are still down about 17 percent on average across all metro areas, so we likely have a way to go before we see sustained home price appreciation,” said David M. Blitzer of Standard and Poor’s, a leading credit-rating and financial research agency.

Straws in the wind:

  • In May 2009, the ten major cities composite index (SPCS-10) fell 16.9% (-15.8% in real terms) from a year earlier, a significant drop but the smallest in nine months. The broader 20-city home price index (SPCS-20) dropped 17% (-16% in real terms) over the same period.
  • Foreclosures are still very high, making up about one-third of total home sales in June 2009. Housing construction is expected to increase only after the inventory of unsold houses is brought back to normal levels.
  • Banks are still very hesitant to lend to potential homebuyers.

“If you’re looking for a real recovery, it’s going to take some time,” says Karl Case, co-creator of the S&P/Case-Shiller index and an economics professor at Wellesley College.

Some cities really struggling

Although national house price declines are slowing, in some US cities house price falls have actually picked up speed over the year.

Prices in Phoenix, Arizona, fell 34.2% in the year to May 2009, as compared to a 26.5% decline over the same period the previous year, according to the S&P/Case-Shiller® HPI.

In Las Vegas, house prices plunged 32% during the year to May. San Francisco and Miami saw house prices dropping 26.1% and 25.1% during the year, respectively.

Other cities with very high house price falls in the year to May 2009 were Detroit (-24.5%), Minneapolis (-21.7%), Tampa (-20.8%), Los Angeles (-19.8%), San Diego (-18.5%) and Chicago (-17.5%).

In the year to end-May 2009, Dallas (-4.2% y-o-y) and Denver (-4.6%) registered the lowest house price falls, according to the S&P/Case-Shiller® HPI.  Cleveland, Boston and Charlotte followed with 6.2%, 7.2% and 10.1% price declines over the same period.

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Home sales are rising!

Home sales are picking up.  The increase is small, amounting to an increase of only 3.6% in June 2009 (on a seasonally-adjusted annualized basis).  New home sales also rose by 11% (annualized) in June 2009, still 21% below the level a year earlier.

Yet this is a lot better than in previous years:

  • In 2008, the number of existing homes sold plunged 13.1% to just 4,913,000 units, following a 12.8% drop in 2007, and a 8.2% decline in 2006.
  •  Sales of new one-family houses dropped 37.5% to 485,000 units in 2008, following a 26.2% drop in 2007 and 18.1% decline in 2006, according to the US Census Bureau and the Department of Housing and Urban Development.
  • Permits to build new homes (one-unit) fell by 41.3% in 2008, following a 29% drop in 2007 and 18% decline in 2006.

Foreclosures are falling!

Housing units foreclosed in the U.S. were down 11% from the previous quarter in Q2, according to the US Foreclosure Index from The unsold houses inventory fell to 9.4-months in June 2009, down from an 11-month supply in June 2008 – better, though still far above normal levels.

First-time homebuyers are getting credit!

Much of the demand for new homes in recent months was fueled by the first-time homebuyer credit, introduced by the government.

The Housing and Economic Recovery Act of 2008:

  • Applies to houses purchased after April 8, 2008, and before December 1, 2008.
  • Applies only to properties used as the taxpayer’s principal residence.
  • The credit amount (up to US$7,500) is an interest-free loan, repayable over 15 years.

Yet the American Recovery and Reinvestment Act of 2009 extended the first-time homebuyer credit until December 1, 2009 and increased the amount to US$8,000.The total amount under the new scheme need not be repaid, unless the home ceases to be the principal residence of the owner within a three-year period following the purchase – i.e., it becomes a gift, though the term “credit” is still used.

Yet mortgage rates remain stubbornly high

Yet it is not all roses.  Though the Fed slashed interest rates to just 0.13% in December 2008, after a dramatic series of cuts starting in August 2007 (when rates had stood at 5.25%), market mortgage rates have barely changed, due to financial institutions’ concerns about market risks.

Interest rates for 30-year FRMs even rose to 5.42% in June 2009 from 5.05% at the start of the year. One year ARMs barely changed, and stood at 4.93% in June 2009.

Lenders continue to be reluctant to lend: Even qualified homebuyers are struggling to get mortgages for owner-occupied dwellings.

  • Lenders fear that house price will decline further, leading to more mortgage defaults.
  • The unemployment rate is expected to rise to 10% by the end of 2009. As unemployment rises, the default rate rises too.

In the first quarter of 2009, total mortgages dropped 0.5% from the same period last year.

The story of an amazing bubble

The housing bubble has a colorful history, with two main villains – low interest rates, and weak regulation.

The US mortgage market expanded rapidly in the early 2000s, growing from 65% of GDP in 1998, to 106% of GDP in 2007.  The Fed funds rate, the key rate used as basis for most mortgages, were at historic lows from 2002 to 2004 – notably, the Fed funds rate was at 1% from June 2003 to May 2004.

From a high of 16% in the early 1980s, mortgage interest rates have been below 10% for the entire 1990s.The average interest rate for 30-year fixed rate mortgages (FRM) was 5.8% while the average rate for 1-year adjustable rate mortgages (ARM) was 4.05% from 2003 to 2005.

At the same time, mortgages were made available to individuals with low credit ratings, which referred to as sub-prime mortgages.

Some were offered with little or no collateral. Ninja loans (housing loans to people with ‘No Income, No Job, (and) No Asset’) became common during the peak of the housing boom.  Poor lending practices allowed these loans to be approved without proper verification that the applicant was reasonably likely to adhere to the loan payment terms.

House prices skyrocketed. From 1996 to 2006, they rose more than 200% in major cities like Los Angeles, San Diego, Miami and San Francisco, using the SPCS-20 Index.

The Fed, headed by newly-appointed Chairman Ben Bernarke, raised interest rates in early 2006 to contain the inflationary pressures caused by higher energy and commodity prices.

  • The 30-year FRM rate rose to 6.8% in July 2006 (from 5.7% in July 2005)
  • The 1 year ARMs rate rose to 5.8% (from 4.4% in July 2005).

Households with ARMs were immediately affected. More than 30% of loans were ARMs in 2004-2005. Many households, especially subprime borrowers, defaulted on their amortization, and foreclosures rose sharply.

Two US government-sponsored enterprises (GSEs) – Freddie Mac and Fannie Mae — had guaranteed about half of the total outstanding mortgages in the US before the crisis. In September 2008, these two GSEs were placed under conservatorship, as they were unable to handle soaring delinquency rates.

During the last two years, there was an unprecedented rise in foreclosure activities in the US. In 2007, foreclosure filings, which include notices of default, auction sales or bank repossessions, soared 225% to 2.2 million from the previous year, according to Realty Trac’s report.

In 2008, there were nearly 3.2 million foreclosure filings, up 81% from a year earlier. Nevada, Florida, Arizona and California registered the highest foreclosure rates in 2007-2008.

In the first half of 2009, the total number of foreclosure filings rose by 15% y-o-y to 1.9 million, as an increasing number of Americans lost their jobs and were unable to pay their monthly mortgage bills.

Recession easing?

In the second half of 2009, the US economy is expected to see a moderate growth. A modest recovery in housing activity and car sales, the impact of fiscal stimulus and a sharp swing in the pace of inventory investment should give the economy a boost, said William Dudley, President of the Federal Reserve Bank of New York.

However, many economists caution that the economic recovery is likely to be sluggish.

Unemployment is projected to remain high. In June 2009, unemployment rate soared to 9.5%, from 5.6% in June 2008 and 4.6% in June 2007, based on figures from the US Bureau of Labor Statistics (BLS). Fed policymakers expect the unemployment rate to rise further to 10% by the end of 2009.

In 2008, the inflation rate was 3.8%, from 2.8% in 2007. In the face of collapsing demand, the US economy was experiencing a drop in the overall prices, with the consumer price index falling by 1.4% in June 2009 from the previous year. In 2009, inflation rate is expected at 1.6%.

The warning light ignored – a sluggish rental market

The warning light that was ignored in the crisis was the sluggish growth of the US rental market over the past decade.

If demand for housing had really soared, rents would have soared too. Yet median asking rents rose by only 48% from 1997 to 2007, based on the figures from the US Census Bureau – and rose much less, in reality, after inflation.

Vacancy rates were high, too.  Nationwide rental vacancy rates rose to 10.6% in the second quarter of 2009, from an average rate of 9.7% from 2005 to 2007. South Carolina had the highest rental vacancy rate at 19.2%. Arizona and Florida followed with vacancy rates of 18.9% and 18.8%, respectively.

These warning signs were totally ignored.  Readers of the Global Property Guide will know the importance we give to rental returns as an indicator of market health.

As is usual after a bust, rents are now rising while prices fall or are stagnant.  In the first quarter of 2009, median asking rents rose by 6.5% from a year earlier.

This article was republished from Global Property Guide. You can also view this article at
Global Property Guide, an international real estate analysis site.


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