As Editor Todd Schoenberger reported earlier, a slew of housing numbers are coming out this week and next – but they don’t necessarily tell the whole picture.
“The sudden rise in home prices suggests that the psychology of the market has shifted substantially,” Yale professor Robert Shiller, of the Case-Shiller Index, recently wrote in The New York Times.
“But what should we expect in the months ahead? Not necessarily that we’re entering a new housing boom.”
Shiller – who correctly called the housing bust back in 2006 – points to natural fluctuation in the housing market to explain much of the recent uptick. He also points out that the government stimulus plan – which provides an $8,000 tax credit for first-time homebuyers – helped juice recent housing numbers.
That government stimulus is scheduled to end Dec. 1 of this year – and, with closing taking 60 days, September should be the last month in which we’ll see effects from the government stimulus plan.
Further hurting the housing market, foreclosures are hitting a new, more devastating phase.
No longer are sub-prime and marginal homebuyers leading the charge. In fact, real estate research service Zillow.com reports that the top-third of homebuyers now make up 30% of foreclosures, up from 16% in 2006.
The bottom third, by contrast, now makes up only 35%, down from 55% in ’06.
And as adjustable- rate mortgages continue to reset – with 2010, 2011 and 2012 still seeing many ARMs ballooning to larger payments – the trend of more expensive homes being foreclosed looks set to continue.
In fact, only 12% of ARM mortgages have already reset to higher rates, according to Fitch Ratings. Despite that low figure, 46% of ARM mortgage holders are already 30 days delinquent or more, while 94% are making the minimum monthly payment – and thus are negatively amortizing their debt.
“The problem is well beyond subprime and is now deep into prime,” says Mark Zandi, the chief economist for Moody’s e conomy.com.
ARM mortgages – and their ugly siblings, interest-only mortgages – aren’t quite as large a group as subprime, with an estimated $311 billion defaults on the horizon, compared to the $400 billion subprimes that have thus far gone belly-up.
However, subprime mortgages continue to default, and more job losses could easily increase the defaults of mortgages across the board.
Indeed, the unemployment rate is perhaps the greatest stumbling block for any true housing recovery.
Foreclosures alone only increase supply – but, with cheap prices, demand in a healthy economy would pick up.
In today’s economy, demand is actually slackening. As bank analyst Meredith Whitney succinctly told CNBC, “No bank underwrote a loan with 10% unemployment on the horizon.”
Jobs have become a leading indicator. Until they return, credit will remain tight, and sectors like the housing market will likely continue to suffer.
Whitney, who also correctly called the housing bust in 2006, is now calling for a further 25% leg down.
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