Home Price Plunge to Continue
Posted by Michael A. Kamperman on November 24, 2009
I wish I could say we reached the bottom of the decline in home prices. But wishful thinking is no substitute for a hard look at the latest data. In the third quarter 14.4% of all mortgages are somewhere between 30 days past due to being already in the foreclosure process. The WSJ just reported that 23% of all homeowners with mortgages were underwater. Almost 12% of homeowners have mortgages that are more than 20% higher than the value of their home. In October new home starts dropped almost 10% while existing home sales rose almost 10%. That discrepancy is due entirely to the November 30 expiration of the first time homebuyers’ tax credit, which has now been extended. Purchase mortgage applications for homes plunged in November without the aid of the tax credit mirroring the October new home starts. Despite the report from Case/Shiller that home prices rose in the second and third quarter of 2009, a stunning 11% of 2009 home buyers are already underwater on their mortgages. So we enter the fourth quarter of 2009 with one in four mortgages underwater, one in seven mortgages 30 days or more delinquent, and one in ten mortgages to purchase a home in 2009 already underwater. Meanwhile, GDP for the third quarter has been revised down to an annualized growth rate of 2.8%. More significantly the inflation component of GDP was revised down to .5% from .8%. And one in six Americans are unemployed or underemployed and that number continues to rise. Additionally, tightening credit standards by FHA and other key mortgage lenders are further decreasing the pool of potential buyers. Against this backdrop home prices will continue to fall as desperate sellers continue to out number potential buyers. Home prices will not stabilize until supply and demand is balanced.
Most of us interpret stories easier than we interpret statistics. My wife told me a PHD student has moved back to Waco from Seattle to finish her dissertation. She said the job market was so bad in Seattle that a waitress position she applied for had one hundred applicants, mostly from people with Masters Degrees, and only one person received an interview. The 99 people who did not find a job will not be buying a home and some will default on the mortgage they already hold. And really, just what type of home can a waitress buy in Seattle anyway?
Washington will need to provide much more help to the housing market than it has so far. The early rumor is the Federal Reserve is considering extending its quantitative easing program by continuing to purchase agency mortgages in order to keep interest rates low. This would be a positive for housing as will be the recently extended first time homebuyers’ tax credit, which now includes a $6,500 tax credit for those that just sold a home. But low interest rates don’t help those with mortgages underwater refinance and tax credits don’t help unemployed or part-time workers buy a home. A simple solution would be for the federal government to allow everyone who is current on their mortgage to refinance at 4% without a credit report, appraisal, or new title policy. Since the federal government already is on the hook for over 80% of all mortgages this would not significantly increase potential losses to taxpayers. Additionally, lowering payments will lower the number of defaults and the enhanced cash flow in consumers pockets will increase consumer spending. Fewer foreclosures and more jobs will lower the burden on taxpayers, not increase it.
