Is today’s good news on home prices only a false dawn?
So how stable is this stability in home prices?
That’s the question raised by the good news on home prices from today’s (February 23) release of the most recent S&P/Case-Shiller index of home prices. On a seasonally adjusted basis the index climbed 0.3% in December from November. For the fourth quarter the index climbed a seasonally adjusted 0.3% from the third quarter.
On a year to year basis the index was down 3.1% from December 2008. But that’s still good news: It’s the smallest year to year drop since May 2007.
Enjoy the good news while it lasts because most housing experts expect to see home prices fall again in 2010. And home builders, which have recently shown signs of recovery, are warning of tougher times ahead. D.R.Horton (DHI), which reported its first quarterly profit since 2007 in the fourth quarter of 2009, told investors in a February 2 conference call that it sees the September quarter ahead as its most challenging because the government tax credit for buying new homes that juiced sales in 2009 is now set to expire in April.
An even bigger problem than the expiration of tax credits is a wave of foreclosures expected in 2010.
The mortgage crisis shifts to the FHA and Congress wants to make the problem permanent
Another of the “emergency” measures enacted to stop of the financial crisis from plunging the economy into a depression looks like it’s on the road to becoming “permanent.”
And this one could really blow up on us taxpayers—again—not so far down the road.
I’m talking about the “emergency” change in the rules for Federal Housing Administration (FHA) qualified loans that let the agency insure housing loans for as much as $729,000. The temporary change went into effect in two stages in March 2008 and in February 2009. Up until then, the FHA could not insure loans of more than $362,790. That lower limit was in line with the agency’s original mission of helping low-income families who couldn’t make the traditional 20% down payment required by private lenders get a mortgage.
The logic of the higher “temporary” limit was that the FHA would now be able to insure loans in the hard-hit, high-priced housing markets of states like California. The higher limits would enable buyers in these markets to get loans to buy houses that would otherwise sit unsold. The loans would thus support housing prices and the home building industry in high-priced real estate markets.
The FHA has certainly insured lots of loans in these markets. So far in 2009, the agency has insured 107,000 loans in California alone.
How much is that house? At least 10% below the asking price
When sales of existing homes fell in August–for the first time since March–home sellers jumped into action, slashing the asking price on their properties.
The average discount from asking price to sale price was 10% as of October 1, according to Trulia, a provider of real estate pricing date. The total hit? A $28.4 billion price cut in an effort to attract buyers.
So where was the worst damage? And what does this discounting mean for future home prices?
Home prices could fall by another 25%, says Meredith Whitney, but stock market shrugs
The stock market doesn’t hear what it doesn’t want to hear.
On September 10, influential financial sector analyst Meredith Whitney of Meredith Whitney Advisory Group told CNBC that U.S. home prices could fall by yet another 25%.
The stock market barely blinked before continuing its rally. The Standard Poor’s 500 stock index finished the day up almost 11 points to 1044. The index hasn’t closed at that level since October 2008.
There’s nothing flakey about Whitney’s logic. “No bank underwrote a loan with 10% unemployment on the horizon,” she told CNBC.
Default isn’t just for subprime mortgages anymore
The rate of default among home owners with prime mortgages is soaring. These are supposed to be the safest mortgages, the ones that went only to borrowers with the best credit scores, remember.
And that’s a huge problem for a banking system that was almost brought to its knees when subprime mortgages, those that went to borrowers with the worst credit, defaulted by the truck load.
The dollar volume of prime mortgages in delinquency or default rose 13.8% from March to June, according to a new study by Standard & Poor’s. The study only covered mortgages originated by banks, bundled into securities, and then sold to investors. It omitted what are called “conforming” mortgages, backed by federal-government-backed Fannie Mae (FNM) or Freddie Mac (FRE).
The study comes as some Wall Street analysts have started to question recent numbers suggesting that the housing market has either bottomed or moved into recovery. The widely followed S&P/Case-Shiller index of housing prices showed a gain in prices in May from April. That was the first month-to-month increase since 2006. On an annual basis prices declined a seasonally adjusted 2%, leading investors to argue that the housing market was near a bottom.
The problem, though, is that pesky phrase “seasonally adjusted.” Efforts to revise the raw data to reflect normal seasonal swings in home buying activity–most home buying takes place in the spring and summer–led to over-stating the price recovery, analysts at Barclays Capital and Bank of America have argued. A more accurate estimate, Barclays calculated, would be that housing prices declined at an annual 10% to 15% rate.
