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Slow Housing Sales Is Still the Greatest Weakness of the Expansion

By the Mortgage Guy /

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Typically the spring season in America is open house season and homebuyers and the residential property market is abuzz. But ever since the housing bubble burst a few years ago the spring house buying season has become less and less active, and sales have plummeted. Fitch Ratings, Wells Fargo, Fannie Mae and Freddie Mac are all projecting this trend to continue through the spring of 2011 and the most recent Case-Shiller Home Price Indices indicate a drop from the 2010 spring buying season, in spite of a slight increase in 2009 figures.

From Standard & Poors:

"There is very little, if any, good news about housing. Prices continue to weaken, while trends in sales and construction are disappointing," said David M. Blitzer, chairman of the Index Committee at S&P Indices. "Ten of the 11 MSAs that recorded index lows in January fell further in February. The one exception, Detroit, is 30% below its 2000 price level. The 20-City Composite is within a hair's breadth of a double dip. Fourteen MSAs and both Composites have continued to decline month-over-month for more than six consecutive months as of February."

"Recent data on existing-home sales, housing starts, foreclosure activity and employment confirm that we are still in a slow recovery," Blitzer added. "Existing home sales and housing starts rose in March, but remain close to recent lows. Foreclosure activity showed decreases in mortgage delinquencies in the fourth quarter of 2010, but are still close to historic highs."

Where We Go from Here

During the first two years the housing recovery appears to be yo-yoing up and down as the current inventory of extensive foreclosures present as distressed sales, loan modifications fall short, and as significant new foreclosures take place as a result of Alt-A and option ARM resets, Fitch Ratings is forecasting.

Fitch also believes that two of the more significant hindrances to a stable recovery will continue to be high unemployment and the resulting inability for so many Americans to be approved for mortgages because of stricter loan approval criteria.

A third obstacle that the recovery will have to overcome, according to the National Association of Realtors (NAR), is the vast and growing inventory of homes in most regions of the country. In the first quarter of 2011 the available inventory of homes nationwide stood at 8.6 months. On top of that CoreLogic believes that there are 1.8 million additional distressed properties. These are properties that are over 90 days delinquent, relative to foreclosure, and many are already owned by the banks but simply not yet listed for sale which will inevitably be foreclosed upon. This is what has become known as the shadow inventory, something that was never considered during the boom years of the 1990’s and 2000’s.

Fannie Mae's Economics & Mortgage Market Analysis Group’s April 2011 Economic Outlook assessment states that the large inventory of foreclosed distressed homes have accounted for over 30% of all home sales in the first quarter. This ever climbing share of the market, in conjunction with the winding down of a variety of programs meant to bolster the property market, has caused home price measures to drop.

Doug Duncan, Fannie Mae chief economist recently said, “Home price expectations have deteriorated during the past several months, which could cause some potential homebuyers to remain on the sidelines -- and further sharp cutbacks in housing demand would pose a risk to the fragile housing recovery." Duncan continued, "We expect a little more decline in house prices at the national level than we had thought previously, but expect prices to begin stabilizing later this year."

One positive gauge of things starting to slowly improve is the reported upward movement in new jobs nationwide. Although Americans are hoping to see more people getting back on the payrolls, 230,000 private-sector jobs over the last two months have been a welcome relief for many.

Duncan further stated, "We anticipate there will be continued reasonably good news in employment through the rest of the year, if that continues, we expect housing to move in a similar positive direction -- hopefully by the second half of 2011."

Freddie Mac Shows Signs of Some Earlier Upward Movement

Frank Nothaft, vice president and chief economist of Freddie Mac had this to say. "Expect to see a bit of spring in homes sales activity during the second quarter. Sales contract signings for existing homes were up in February, positioning the market for a bounce up going into the traditional home-buying season." Again, this is another positive sign that the property market is starting to show some signs of improvement.

Home Builders Could be the Last to Find Relief from the Current Crisis

An important segment of the housing market is new home sales, and they were hit the hardest of late. The Fitch Ratings forecast in its spring 2011 Chalk Line reports that with so many properties going for pennies on the dollar in short-sales, plus the large inventory of distressed homes, new homes took a back seat to them all. This trend continues in 2011 with most public builders not showing a profit within the first quarter and with revenues falling even further behind last years. The second quarter of 2011 is showing signs of being better and there has been an increase in new home orders which is probably attributed to the seasonal benefits of the annual spring market.

Wells Fargo Economics Group recently reported this assessment:

"The steady decline in existing home prices due to foreclosures and short sales has significantly widened the gap between the median prices of a new home versus existing. The large price gap will continue to make it difficult for builders to compete. The median price of a new home is now $213,800 while the median price of an existing home is $159,600. Unfortunately, the gap will likely remain until the pace of foreclosures moderates."

"New home sales rose 11.1% in March, but remain at an extremely depressed level. Much of the increase reflects payback from the pullback in February due to unusually harsh weather conditions in the first half of the month. With builders still reluctant to increase inventories, the overall inventory of new homes fell to 183,000 units, the lowest level since 1967. The pipeline of new housing also remains depressed."

Bob Curran, Fitch’s managing director and lead homebuilding analyst, offered his opinion as well. "If the economy continues its advance and a moderate number of jobs are added, housing metrics should, for the most part, rise at a single-digit pace this year." But Curran also warned us that, "if the broader economy begins to retreat from what gains it has made thus far, U.S. housing is in essence right back where it started about a year ago."

The general state of the US economy and the housing market have always been inextricably connected, and will continue to be so. In order for the slight increases to continue to build and slowly increase over the next year the economy cannot do a double dip and slide back to the levels of the last few years. As long as the current administration can continue to add more jobs each month so that more Americans can contribute to the health of the economy, keep the homes they now have or buy new ones, the property markets will slowly return to the levels that everyone is comfortable with.

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