Housing Faces the Fall

As recently as two weeks ago, the standard sources of price data, Case-Shiller, NAR, FHFA, were making headlines with the news that housing prices were up over the first half of the year.  But as the summer ends and the home buying season winds down, a cloak of gloom is settling over the industry and Washington policy-makers, whose efforts to reverse the decline of national wealth in home equity have largely failed.

Experts believe the indices that prompted optimism in the first half are about to reverse themselves as government props to stabilize prices either, like the $30 billion homebuyer tax credit, faded away, or bombed altogether.

After 18 months of tax credits, July housing sales sank 26 percent from July 2009 and inventories soared to their highest level in recorded history.  Now that the average American home takes more than a year to sell, sellers are cutting prices in despair.

ZipRealty reported Friday that the number of price-reduced homes on the market increased 3.26 percent in August compared to July, ZipRealty’s monthly review of MLS-listed properties in 26 major markets found that 47 percent of “for sale” homes had at least one price reduction and the average seller actually slashed their list price twice to attract buyers.

The growing number of price-reduced homes outpaced newly listed homes in August, which increased less than one percent, with sellers nationally reducing their asking price by an average of $19,092.


“It appears that homebuyers are taking their time as they don’t feel a sense of urgency to make an offer, unless the price is right, and sellers are having to aggressively cut their prices to stay competitive in this market,” said Leslie Tyler, vice president of marketing for ZipRealty. “We typically find if a buyer hasn’t walked through the door in 30 to 45 days, a seller needs to lower their asking price. If a home hasn’t had an offer in six months, it’s time to rethink the sale.”

The number of canceled modifications in the Home Affordable Modification Program (HAMP) has jumped significantly, while the rate of new modifications has declined to a fraction of the previous pace. Most of these loans have not yet entered foreclosure, and it appears that many will enter non-federal modifications. That said, the effect of this program is nevertheless starting to reverse, from one that absorbed would-be distressed supply from the market, to one that will at some point add it back.

There are still over 11 million homeowners literally underwater on their mortgages. A subset of these, some 4.8 million, are over 60 days past due in their monthly payment obligations. This figure is up over 30 percent from where it was a year ago.

Massive purchases of mortgage-backed securities by Fannie, Freddie and the Federal Reserve have kept mortgage rates low, but record low rates alone don’t seem to be enough to encourage demand.  While the conforming spread has risen by roughly 30 basis points from its low point at the end of the Fed’s MBS purchases in March, it is still significantly below normal levels. GSE reform discussions that get underway later this year could present a new risk to this last source of temporary policy support.

Even a new Federal Housing Administration  refinancing initiative designed to help three to four million homeowners get out from under their underwater mortgages that kicks off tomorrow faces two major problems.  First, lenders must agree to eat 10 percent or more of the principal and the program won’t help borrowers who are deeply underwater.

While an Administration facing a tough off-year election struggles to find answers, economists and experts are now speaking of a price free fall that may take two years to complete.

“We probably, almost assuredly, will experience more house price declines. By those two criteria, I think that would qualify as a double dip.,” said Moody’s economist Mark Zandi in July

“Housing needs to go back to reasonable levels,” said Anthony B. Sanders, a professor of real estate finance at George Mason University told the Washington Post. “If we keep trying to stimulate the market, that’s the definition of insanity.”

In July, Scott Sambucci, vice president of data analytics for Altos Research, said house prices will continue to drop through the rest of the year and will begin 2011 lower than they were in 2009.

 ”The recovery period is dependent on inventory,” Sambucci said. “But different markets move differently. It’s important to get local.”

Goldman Sachs is just one of many investment houses that have lowered their outlook for home prices.   Last year, it estimated that federal housing policies-the homebuyer tax credit, mortgage modification programs, and the Fed’s MBS purchases-boosted house prices by about 5 percent, with the implication that the fading of these policies would lead to renewed price declines in 2010. In August Goldman updated its house price forecast; expecting a 3 percent decline in the Case-Shiller 20-city index this year and another 1 percent in 2011.

The consensus among the experts that home prices will fall farther before they hit bottom may become a self-fulfilling prophecy as the very buyers so desperately needed to buy up the excess inventory and stop the price slide will wait until they are absolutely sure that prices have reached their lowest point.

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