Housing Outlook: A Mixed Bag

At present, the U.S. economy is providing wobbly support for the housing sector. Monthly job losses continue, but are shrinking. GDP is unable to sustain a growth pace to create new jobs. Business confidence is low; and consumers remain cautious due to lost wealth and job losses.

On the positive side, corporate profits are up strongly, while labor costs are falling. And fiscal and monetary policy continues to be accommodative, ready to support economic activity.

In recent months, housing activity weakened despite the presence of the homebuyer tax credit and historic low mortgage rates. Existing home sales tumbled 22 percent since November of last year. Similarly, new home sales decreased 14 percent since November. Consequently, the months’ supply for both existing and new homes rose to 7.8 months for existing homes and 9.1 months for new homes.

Two major leading indicators of housing activity-pending home sales and mortgage applications to purchase homes tell us that it will get worse before it gets better. The National Association of Realtors’ pending home sales index has fallen 20 percent since October, while the purchase application index has dropped 7 percent over the past month. Both indicators are reliable predictors of home sales, suggesting that March and April home sales reports are likely to post relatively weak numbers.

On the price front, The Case-Shiller 20-city home price index fell by only 0.24 percent in December from a month earlier, but fell 3.1 percent from a year ago. The Case-Shiller 20-city index has now dropped by 28.8 percent since the index peaked in May 2006.

Looking forward, expect downward pressure on home values, as measured by the Case-Shiller index, due to mounting foreclosures, supply imbalances and relatively weak housing demand. The Mortgage Bankers Association’s mortgage delinquency survey revealed that the 90-day past due category rose to a record level in the fourth quarter of last year, while the 30-day past due category fell from a quarter earlier. An unusually high number of delinquent loans in the 90-day past due category is sure to translate into more foreclosure filings this year. In addition, there is widespread speculation that banks are hoarding underwater/delinquent loans that are ripe for a foreclosure filing. This “shadow” inventory is estimated to be well north of 1.5 million properties. In fact, some estimates place the nation’s shadow inventory closer to 7 million homes. The potential for a substantial increase in foreclosure filings due to shadow inventory does not portend favorably for home price stabilization. On a positive note, the drop in the number of mortgage loans in the 30-day past due category suggest a drop-off in foreclosure filings sometime into the not-to-distance future.

The housing outlook is mixed for the remainder of 2010. Mortgage rates are expected to drift slightly upwards due to the winding down of the Federal Reserve’s mortgage security purchase program. Home sales and new residential construction activity are expected to fall in the first half of the year, before rising again, albeit modestly, in the second half. Distressed sales (foreclosures and short sales) are expected to flood the market throughout the year, exerting downward pressure on home values during the first half of the year, while home values are expected to stabilize and maybe rebound in the second half of the year due to a rebounding economy and job creation that will likely occur in the second half of the year.