On the heels of last weeks delightfully mixed bag of employment data (job creation looks like it may be out of reverse and into neutral) we get some new housing data. There the signals are more disquieting, if expected (at least by me.) The housing market may now be heading back down.
The interesting aspect of this is that so many people see this as unlikely. So let us list some reasons why this is a real risk, if probably not as rapid a fall as we saw previously.
- Prices are still above a long term stable level. This could be taken care of by stagnating prices and inflation, but there is little inflation right now.
- The price to rent ratio is out of whack, and rents are still falling, in fact, accelerating. Little wonder, since there is an 11% vacancy rate.
- There are 231,000 newly built housing units sitting vacant.
- There are 3.29 million vacant homes for sale.
- Then there is the shadow inventory of homes that are off the market for various reasons (such as foreclosed homes banks are unwilling to sell yet to avoid realizing losses.)
- Defaults are accelerating, with the largest source of pain now prime loans. As I have maintained for a long time this is not, and never has been, a subprime problem. Subprime was just what collapsed first being the weakest link in the housing market.
- That acceleration is unlikely to slow any time soon as not only are workers still losing jobs and few new potential owners getting jobs, but the length of unemployment is unprecedented in the post war era. The longer a worker is unemployed, the more likely they are to default.
- Lending is still tight for many mortgage seekers.
- We are forming households at a reduced rate, thus lessening demand for new homes.
- More than 20% of homeowners are currently underwater. Nothing correlates more closely with default rates than negative equity.
- Worst of all, we need to revisit an old topic of mine that is no longer a longer term risk, but right around the corner. The likely huge wave of defaults represented by Alt-A and Option Arm Loans about to reset. Defaults have followed with a lag each wave of resets, and the largest wave, from the era with the worst underwriting is about to hit. Notice, subprime is receding. With the system as fragile as it is now, what will this wave bring on?
I always am nervous about calling anything a prediction, but further housing deterioration is a very grave possibility.
Needless to say, this has led to further problems at Fannie, Freddie with more to come. Not that you should be concerned about that, the mission has changed. On their way to probably 400 billion in losses (I remember when I was an alarmist claiming that the losses would be far more than the 20-30 million the government was claiming, probably 200 billion. It turns out I was a cockeyed optimist) the government has officially eliminated any limit on their exposure. Why? It seems to be so that they can take losses!
Freddie’s federal overseers nevertheless have instructed Mr. Haldeman to focus on something that isn’t likely to make the bleak balance sheet look any better: carrying out the Obama administration plan to allow defaulted borrowers to hang onto their homes.
On a recent afternoon, employees at Freddie’s headquarters here peppered Mr. Haldeman with concerns about the company’s future. He responded that they were “fortunate” to have such a clear mission—the government’s foreclosure-prevention drive. “We’re doing what’s best for the country,” he told them.
FT Alphaville is certainly in the skeptical camp referred to by Ms Burns, and we were not reassured when the housing agency released its December monthly report on Tuesday.
According to the report, the default rate in the FHA’s single-family portfolio hit 9.12 per cent in the fourth quarter of 2009, compared with 6.82 per cent in the same period a year prior.
In absolute terms, that means the number single-family mortgages insured by the FHA and in default reached 531,671 in the fourth quarter of 2009. That’s a 66 per cent increase versus the same period in 2008.
The agency is being hit hardest by the 2007 and 2008 mortgage vintages; the performance of these loans is so dismal the FHA expects to have to pay claims on at least one out of every four loans made in those years.
Cross Posted at: The View from the Bluff