Data Suggests Housing Recovery Has Stalled, Temporarily

Written by: David Lereah   Thu, November 19, 2009 Commentary, Market Activity

Today’s housing recovery is having a difficult time settling into a steady trajectory. Since the housing sector hit a cyclical bottom in January of this year, as measured by cyclical lows in existing and new home sales and housing starts, housing activity has been nothing short of wobbly. This week’s data suggests that the recovery might be worse than unsteady-it may have stalled.

The U.S. Census Bureau reported that new residential construction (housing starts) fell by 10.6 percent in October to 529,000 annualized units compared to 592,000 annualized units a month earlier. Single-family and multi-family starts fell by 7 percent and 35 percent, respectively. Housing starts are down 31 percent compared to a year ago. Housing permits fell 4 percent to 552,000 in October from September.

The housing starts report was disappointing news for the nation’s housing sector. October’s 529,000 annualized pace is a far cry from the 590,000 annualized units pace established during the previous four months. It is likely that some of the decline was due to the fear that the first-time homebuyer tax credit would expire at the end of November. However, the tax credit was extended by another seven months and expanded by including move up buyers and raising income eligibility requirements. This development is expected to create an additional 450,000 to 550,000 home sales over the next seven months, prompting homebuilders to dig holes in the ground again.

In other housing news, the Mortgage Bankers Association released its weekly mortgage application survey. Mortgage applications to purchase homes were down 4.7 percent in the week of November 13 compared to a week earlier. Purchase application activity is down a whopping 31.2 percent since the week of October 2. Applications to refinance an existing mortgage loan were down 1.4 percent for the current week.

Applications to purchase homes comprised only 27.1 percent of total application volume, while refinancing applications accounted for the remaining 72.9 percent. The steady decline in purchase applications over the past month is a cause for concern. Again, some of the weakness in mortgage application activity can be attributed to fear of an expiring tax credit. With an extended and expanded tax credit, more households are expected to apply for mortgage loans over the next two quarters.

The Mortgage Bankers Association also released its quarterly mortgage delinquency survey this week. More bad news: mortgage delinquency rates set a new all-time record of 9.64 percent in the third quarter. There was a substantial rise in homeowners who were 90 days or more delinquent on their monthly mortgage payments. The percentage of homeowners who were 60 days and 30 days late on their monthly mortgage payments held steady in the third quarter compared to the second quarter, suggesting that the worst may be over in the current foreclosure crisis. The pipeline of delinquent loans (comprised of 30 and 60 day delinquent loans) entering the 90 day delinquent category is shrinking. A lower number of 90 day delinquent loans translate into an eventual drop in foreclosure filings. Foreclosures started in the third quarter remained at a high level at 1.42 percent, but hopefully that percentage will fall over the next several quarters.

Although the housing markets received disappointing news this week-housing starts and purchase mortgage applications were down and mortgage delinquency rates were up-the retreat might be temporary. The reversal of fortune is attributed to the fear of an expiring tax credit. Since the tax credit was extended and expanded, the housing recovery is expected to get back onto its wobbly feet and move forward.

Of course, one may conclude from this week’s data that the housing recovery is supported by a weak and uncertain foundation. It is unsettling to think that when the homebuyer tax credit finally expires in seven months, the housing recovery is likely to retreat once again.

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