Home prices are the main subject in this week’s coverage of the housing market. Also I provide some commentary from Maria Bartiromo’s keynote at the Standard & Poor’s event here in New York.
Housing near Official Double-Dip
Standard and Poor’s reported its January Case-Shiller Home Price Index this week. The beginning of the year has started on a sour note for home prices, continuing the end of 2010 trend. San Diego and Washington D.C. were the only cities showing year-over-year gains while month-over-month D.C. was the only market to show a gain (up just 0.1%). The index revealed annual prices down 2.0% in the 10-city composite and the 20-city down 3.1% year-over-year. The 10-city composite is just 2.8% above its April 2009 low and the 20-city is just 1.1% over the same low. If prices cross over this threshold, we’ll officially be in a double-dip housing market.
As we get closer to an official double-dip in housing, the declines don’t seem to be slowing. Of the 20-city composite, 13 cities showed deceleration in annual growth rates. What’s worse is continued low prices could mean more people ending up in negative equity positions. This can procure a vicious cycle of more delinquency and foreclosure. The dip seems to have no end in sight, but I believe we will see the stabilization this year in home prices. There is improvement in the size of the shadow inventory which will ultimately lead to on-market inventory declines. Lower inventory will stabilize prices as demand increases.
Home Prices Could be Artificially Stabilized in 4 States
According to a release from the Appraisal Institute new legislation is being introduced in 4 states to change appraisal rules, artificially stabilizing home prices. Illinois, Missouri, Nevada, and Maryland each introduced legislation which would alter appraisal methods excluding certain types of distressed sales from appraisals. This would ensure appraisals to come in higher, leading to ‘stabilized’ prices. While the legislation is slightly different in each state here’s a quick summary;
Illinois – No foreclosures as comps for 5 years
Missouri – No foreclosures as comps
Nevada – No foreclosures or short sales as comps
Maryland – No properties “sold under duress or unusual circumstances, such as a foreclosure or short sale”
This is one way to stabilize homes though the true picture of market conditions could be lost should legislation like this pass. The existing rules allow for distressed sales as comps. This reduces the displacement in the market. I’m seeing less and less wholesale flipping for zero down payments to investors who are looking to refinance and avoid large down payment because of lower appraisals. I think a free market fix to housing is the best solution. The run up in prices occurred over several years so it’s only natural that the unwinding takes quality time as well.
Interest Rates Inch Up
Freddie Mac reported that mortgage interest rates rose for the week ending March 31st. The 30-year fixed rate increased from 4.81% to 4.86%, while the 15-year fixed rose from 4.04% to 4.09%. Last year the 30-year fixed was at 5.08% and the 15-year stood at 4.39%.
With geo-political issues in the Middle East, Japan, and the return of the European debt crisis interest rates have been favorable since mid-February. Upon stabilization of these issues we’re likely to see higher rates. The Fed recently said we can expect rate increases this year as well. Bottom line; look for higher rates.
Shadow Inventory Declines
CoreLogic reported that the shadow inventory declined from 2 million units to 1.8 million units for the month ending January 2011. CoreLogic has determined that this represents a 9-month supply of shadow inventory. Of the 1.8 million units in the shadow, 870,000 are in serious delinquent status (3 months past due), 445,000 are in early stage delinquency, and another 470,000 are in foreclosure. Also CoreLogic reported that another 2 million loans are in a 50% or greater negative equity position and will likely become shadow inventory sometime in the future.
The shadow inventory decline is a direct result of declining early stage delinquency. Lower home prices could re-grow the shadow inventory. It does appear that the absorption in the market is causing the shadow to decline combined with declines in early stage delinquency.
CNBC’s Mario Bartiromo on Housing
On Wednesday I attended Standard & Poor’s annual Summit on Risk. This year’s theme was “Emerging Prosperity and Continuing Risks in 2011”. CNBC’s Maria Bartiromo was the keynote. I asked Bartiromo about the housing market’s recovery;
“Maria, with the echo-boom population now exceeding that of their parents, the baby boomers, what impact will this generation have on housing? Is it feasible to envision a housing boom again in the future?
“52% of the world’s population is under the age of 30. These people will be the consumers of the future. They are and will be consuming electronics such as mobile devices, cars, and homes. Look at companies like Home Depot that are exceeding expectations. This is directly related to consumption of foreclosed homes. There is no doubt the youth will be a driving force of housing in the future.”
I’ve written on the Generation Y and the emerging echo boom’s potential impact on housing and the probability of a housing shortage in the next 4-5 years. Even if opinion changes on home ownership as an investment, the growing echo-boom will still have a profound impact on housing. Housing is still the largest consumption good aside from any investibility. The change in ownership vs. renting represents an incredible opportunity for people on the landlord side of the equation. The negativity in the housing market is the precise reason to be evaluating it as an investment.
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