Home Prices Still Have a Long Way to Fall
Posted by Michael A. Kamperman on October 22, 2009
The foreclosures and short sales are lined up to keep coming and coming and coming. The WSJ publishes a quarterly survey of real estate fundamentals for 28 metropolitan areas across the country. The news going forward is bleak. In Miami, almost 27% of all first lien mortgages are delinquent, which means they are 30 days or more past due. Imagine a situation where one in 4 homes could wind up in foreclosure sometime during the next couple of years. We have become so desensitized to bad news that we have lost our ability to interpret some of the data we are confronted with. This has now happened to the Journal’s reporter James R. Hagerty when he stated “by contrast, metro areas with relatively low foreclosures and mortgage delinquency rates include Boston, Denver, Minneapolis, and Seattle making them less vulnerable.” The delinquency rate in these cities is averaging 8%. This may be low compared to Miami, but historically it is a very high delinquency rate. Foreclosures started rising and home prices started falling at the beginning of 2007. The worst hit city in the survey in the middle of 2007 was again Miami, with a delinquency rate of 5%. The delinquency rate in Seattle was under 2%. Now, our best areas are in much worse shape than Miami was in the summer of 2007. Real estate prices collapsed in Miami from the second half of 2007 until now. There is no reason to think the pressure that distressed sales will place on home prices in our strongest markets will not drag home prices down much further. To translate, if 8% of the mortgages are delinquent then 1 in 12 homeowners risk foreclosure. This is an average of 1 potential foreclosed house per block. The unemployment rates are much higher in our strongest cities today than they were in Miami two years ago. And credit is much tighter.
Of course the reason so many mortgages are delinquent is that so many of them are underwater. When the borrower gets in trouble they are unable to sell the home and pay off the bank. Home sales and home prices were buoyed by the first time home buyers tax credit this year. Since the borrower must close by November 30 there will no longer be any sales tied to the tax credit. It is possible the tax credit simply pulled demand forward in the same way the cash for clunkers program pulled auto demand forward. After the clunker program ended auto sales went kerplunk. Home prices will probably go kerplunk too.
Needless to say the federal government needs to provide a lot more support to the single family housing market if it wants to see prices stabilize. Rather than another tax credit, we should let everyone who is not delinquent refinance with a 30 year mortgage at 4% interest. Importantly, no credit check and no appraisal should be applied to borrowers who are current on their mortgages. The existing title policy and survey should be kept in force. The loans should be made with no closing costs. This will lower mortgage payments for borrowers currently unable to refinance because their homes are underwater, or they have become unemployed, or their credit is now subprime. Lowering mortgage payments will decrease future delinquencies and raise disposable income for millions of Americans putting people back to work. The federal government already is backing over 80% of all mortgages in America. Anything they can do to stabilize home prices will save the taxpayers a lot of money down the line.
