The loan modification programs were certainly successful in delaying the inevitable — foreclosure. As shown in the chart below, there are now approximately 2.5 million foreclosures in process, and another 2.5 million mortgages that are 90+ days delinquent. These numbers will trend down, while REO (currently 562,000 bank-owned homes) and short sales will trend up.
The loan modification programs were certainly successful in delaying the inevitable: foreclosure. As shown in the chart below, there are now approximately 2.5 million foreclosures in process, and another 2.5 million mortgages that are 90-plus days delinquent. These numbers will trend down, while bank-owned properties (REOs) — currently there are 562,000 REOs — and short sales will trend up.
The greatest levels of distress will be in the markets already hit hard, such as Stockton, Calif., and Orlando, Fla. Here are the top five shadow inventory markets in terms of months of supply (from our February report titled "Only the shadow knows"):
No more free lunch
To colorfully illustrate what is occurring; we asked our staff to share stories from their own neighborhoods in markets across the country. Here are a few:
Spend, spend and spend — A neighbor, who had a notice of default filed last September, continued to dress the place up with elaborate decorations on all holidays. Occasionally, the "owners" moved the BMW and SUV out of the driveway to pull their two jet skis out of the garage. Last month, they moved all the vehicles to clear a path for the new furniture being delivered. The notice of trustee sale recently appeared.
Paying the lawyers instead of the bank — A neighbor mired in divorce and job loss lived free in their house for almost a year while having birthday parties with petting zoos, paying lawyers, and buying new flat-screen TVs. The home recently turned over as REO and promptly sold for about $100,000 less than it should be worth, which proved to be a painful comp when our staffer was re-appraised for a refinance on her own home.
Eyesore — A bank sat on a home that has been vacant for months before a notice of default (NOD) finally arrived. The home went to auction late last month. Tall weeds still serve as "natural" landscaping here, with no friendly neighbor or county official wielding a mower in sight!
Homeowners associations take title — To bring home the delay by the banking system even further, we know of several homeowners associations who have completed the foreclosure process and now own homes of delinquent homeowners. They are still waiting for the bank to call them back to deal with the property sale.
What about home prices?
The question on everyone’s mind is: What will happen to prices? The answer: Prices will decline, potentially significantly. Prices will decline because there is more than a one-year supply of homes on the market, and several bank servicing arms and REO managers have told us that they will drop prices to get the loans and homes off their books. Only a quick economic recovery, or a government mandate to rent the homes out, can prevent further price declines.
Hopefully, tremendous affordability and investor appetite for REOs will create a pricing floor that isn’t too far below today’s prices. Price declines are already showing up in the new-home market. In the three months following the April 30 tax credit deadline, homebuilders dropped prices an average of 3 percent.
How much further will prices fall? That varies by market and price point. We recently sent our best estimates by metropolitan statistical area to our clients, and we are updating our Land Acquisition and New Home Sales Forecast reports, which pinpoint where the distress is located in a specific market. Keep in mind that Case-Shiller and median prices have overstated the correction on most homes, so the declines reported in the newspapers will be far less than what is really occurring in the market.
- We collect a complete history on 70-plus variables and forecast the important ones by forecasting each metropolitan statistical area (MSA) and rolling it up.
- In this monthly report, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
- Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and an "F" is its historical worst. The grades are designed to provide a simple tool for decision-makers to scan the data.
- Each of the eight categories has a grade that is nothing more than the average of the grades under it.
Economic growth: D+
Economic trends were mixed this month, as Real GDP (gross domestic product) declined but is still positive, while the employment market gradually improved once again. However, most believe the economy is slowing, and we agree.
Lower GDP growth, driven by slower consumer spending, is a clear sign that the pace of the recovery is slackening. Though job growth, unemployment and jobless claims have improved, job growth will have to come faster to maintain any kind of momentum. There is even early talk of some form of new stimulus, but chances of this are dicey given the enormity of the federal deficit and the upcoming election.
Leading indicators: C-
The leading indicators for the economy were mixed compared to last month. Although some metrics such as corporate bond spread and temporary workers improved, the Leading Economic Index and the stock market were both down. The Leading Economic Index decreased to 4.1 percent from 5.1 percent, and the ECRI Leading Index — also an indicator of future U.S. growth — fell to the lowest level since July 2009.
The year-over-year change in the LEI, however, has been positive for 15 months and the ECRI is still far above the trough. The money supply is up and bond spreads are down. The former could lead to increased spending while the latter is an indication that lenders, at least, are less worried about defaults.
The attitudes of those who would make hiring decisions (captured in the Vistage CEO Confidence Index and the CEO Economic Outlook Survey) reflect general confidence in continued economic growth, although these surveys were taken a few months ago.
Corporate profits and cash positions are strong. Temporary employment has increased by 22 percent year-over-year, which is compared to a drop of 25 percent this time last year, and companies are slowly adding temporary staff to the payrolls.
Stocks worsened this month. All four major indices we track — the Dow, S&P 500, NASDAQ, and Wilshire 5000 — are down 4-6 percent this month and 3-5 percent year-over-year.
The S&P Homebuilding Index also declined this month, falling 6 percent from last month. This index has been hammered recently and has declined 30 percent from the most recent peak in April as weaker-than-expected homebuilder orders and CEO commentary worried investors.
Affordability continues to be excellent with low mortgage rates and tamed home pricing nationwide. Our housing-cost-to-income ratio ticked down slightly to 26.7 percent, and housing affordability remains excellent compared to history. Though home prices eased downward a bit and incomes were only very slightly higher, the key income-to-price ratio is still at 3.4, almost equal to the long-term historical norm and a level conducive to market health.
Affordability continues to be bolstered by historically low mortgage rates. The 30-year fixed mortgage rate decreased to 4.36 percent this month, while adjustable mortgage fell to 3.52 percent. The Fed’s overnight lending target rate remained at a range of 0.00 percent to 0.25 percent, which is the lowest level on record. The share of adjustable-rate mortgage applications increased to 5.8 percent this month, but is still far below the peak level of 35 percent of total applications in early 2005.
Consumer behavior: D+
Consumer behavior improved modestly this month as most of our metrics remain on trends indicating gradual improvement. Consumer sentiment increased slightly to 68.9 but remains well below the historical average. The Consumer Confidence Index, which had declined over the past two months, improved this month to 53.5, but is also well below the historical average.
The credit outstanding per household has fallen 10.8 percent over the last year to $7,367 per household. The personal savings rate increased to 6.4 percent, and is only slightly lower than the recent peak of 6.9 percent in May 2009. The Misery Index did increase this month, rising to 10.7 from 10.6 the previous month. This was the result of a slight increase in the inflation rate.
Existing-home market: D
The existing-home market again worsened this month, due to a continuing "hangover" of the demand pulled forward by the expired federal tax credit. Seasonally adjusted annual resale activity dropped to 3.83 million homes this month, according to the National Association of Realtors, and has decreased 25 percent year-over-year. On a rolling 12-month basis, sales have decreased 2.6 percent compared to the previous month, but have increased 10.7 percent year-over-year.
The national median price of an existing, single-family home ticked down to $183,400 currently from $183,500 the previous month, after improving for the past two months. This increase is, however, partly due to a change in the mix of homes as more upscale distressed properties come onto the market. The median existing-home price has decreased 4.6 percent year-over-year.
The S&P/Case-Shiller U.S. National Home Price Index improved once again, and has returned to positive territory this quarter for just the second time since late 2006, increasing 3.6 percent year-over-year. The number of unsold homes increased to 12.5 months of supply, which is above the historical average of 7.3 months.
Longer-term, 23 percent of homeowners have mortgages higher than their home values, with the worst concentrations in the same states hit hardest by the boom and bust: California, Nevada, Arizona and Florida.
New-home market: C-
The new-home market generally worsened this month, as both new-home sales and builder confidence worsened. After increasing the prior month, new-home sales dropped 12 percent to 276,000 transactions on an annualized basis. This is down 32 percent year-over-year and is the lowest level on record going back to 1963.
Like existing-home sales, the poor showings for May and June are undoubtedly skewed by the April 30 end to the federal tax credit. It should be noted, however, that the sample size used by the Census Bureau to calculate new-home sales is extremely small and the confidence interval consequently large. The rolling 12-month total decreased slightly this month to 357,000 transactions, and remains near historically low levels.
The median single-family new home price decreased to $204,000, and is down 5 percent year-over-year. Supply is a concern, as the months of unsold homes metric increased to 9.1 and is still above the historical average of 6.2 months. The volume of new homes for sale, however, dropped very slightly to 209,000 homes, a level well below the historical norm. Builder confidence was down again, reflecting the post-tax credit downturn.
Repairs and remodeling: D+
Conditions for residential repairs and remodeling are worse this month, with multiple metrics declining. Homeowner improvement activity declined 3 percent year-over-year, but these year-over-year declines have steadily eased. The Remodeling Market Index fell this quarter to 42.6 from 44.5 the previous quarter.
Private residential construction has increased year-over-year for the fifth time since June 2006 this month, increasing 5.5 percent. Residential investment as a percent of GDP inched up to 2.5 percent this quarter.
Housing supply: F
Housing supply indicators were mixed this month, but generally worsened. All of these metrics, moreover, remain at very poor levels from a historical perspective. Single-family starts were down, as were single-family and multifamily permits. Total completions decreased markedly, in fact, to 587,000 units, a 33 percent drop from last month. This is a historically low figure and is partly due to builders reducing construction activity with the passing of the federal tax credit.
Seasonally adjusted new-home starts increased this month due to a larger gain in the more volatile multifamily sector. Total permits decreased to 565,000, due to declines in both single-family and multifamily permits. Permits are now down 4 percent year-over-year, an indication that supply has stabilized.
Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history, with only six states undersupplied, all with small populations except Texas. The homeowner vacancy rate decreased this quarter to 2.5 percent, which is down from 2.6 percent last quarter.
Copyright 2010 John Burns