The Mortgage Corner

We are finally seeing some turnaround in housing—in those markets and regions that haven’t suffered as much from the housing bubble. That means of course where housing wasn’t overbuilt and unemployment not so severe. The boom and bust cycle occurred mostly in Florida, Nevada, California, and Arizona, where unemployment is highest. Michigan has the biggest drop in joblessness—from 14 percent to 11 percent, thanks to a recovering auto industry.


The latest S&P Case-Shiller Home Price survey tells us where are the winners and losers. Gambling capital Las Vegas still leads the losers, with Phoenix, Arizona, Miami and Tampa, Florida close behind. Dallas, Denver, and Boston suffered the least.


Graphs: Calculated Risk Blog

On a Not Seasonally Adjusted (NSA) basis, as of July, the Case-Shiller composite 10 index was 3.8 percent above the post-bubble low. The Composite 20 index was 3.7 percent above the post-bubble low (NSA). But the prices rises may be temporary due to a not very strong selling season and might fall to new lows (NSA) later this year or early in 2012, says Econoday.

Total existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, tell us the overall state of housing. They declined 3.0 percent to a seasonally adjusted annual rate of 4.91 million in September from an upwardly revised 5.06 million in August, but are 11.3 percent above the 4.41 million unit pace in September 2010.


And we can see that sales have been hovering around 5 million after the huge volatility in 2009-10, with the end of the housing tax credit and fears of a double-dip recession. Housing sales seem to have stabilized, in other words, and probably won’t show much upside until the huge backlog of foreclosures is worked through. But very strict credit conditions are also dampening sales, according to the National Association of Realtors.

NAR chief economist Lawrence Yun also said the market has been stable although at low levels, and there is plenty of room for improvement. “Existing-home sales have bounced around this year, staying relatively close to the current level in most months,” he said. “The irony is affordability conditions have improved to historic highs and more creditworthy borrowers are trying to purchase homes, but the share of contract failures is double the level of September 2010. Even so, the volume of successful buyers is higher than a year ago and is remaining fairly stable – this speaks to an unfulfilled demand.”

One key to future sales will be the for-sale inventory, which is also impacted by the large number of foreclosures coming on the market. Sales are still hovering around an 8 months’ supply, whereas 4 to 5 months is the historical norm, according to Calculated Risk.


Another plus was that builder confidence in the market for newly built, single-family homes rose four points to 18 on the just released National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for October. This is the largest one-month gain the index has seen since the home buyer tax credit program helped spur the market in April of 2010, and is in line with the rise in housing construction.

"Builder confidence regained some ground in October due to modest improvements in buyer interest in select markets where economic recovery is starting to take hold and where foreclosure activity has remained comparatively subdued," said NAHB Chairman Bob Nielsen.


One reason for the increased builder optimism was that construction spending actually increased for the first time year-over-over year since the beginning of the recession. This was largely from the public sector although major private components also gained. August construction spending rebounded 1.4 percent, following a 1.4 percent drop in July. The rise in August came in much higher than the consensus forecast for a 0.2 percent decrease, again according to Econoday.

What about the future? Housing demand has historically depended mostly on household formation, largely a function of twenty-somethings leaving home to strike out with their own household. It has historically hovered around 1 million per year, but sunk to a 500,000 annual average during the recession. We will see a sharp increase in housing construction and sales when this generation feels confident about jobs and the economy to begin to buy again.


“Living in tight spaces is not sustainable”, says the NAR’s Lawrence Yun. “More people cannot be comfortably shoved into existing households.  Aside from the desire to be independent and to move away from temporary living situations, there is the issue of “familiarity breeding contempt,” as the saying goes.  It is just a matter of time before household formation returns to its historic normal growth of 1 to 1.2 million each year.  There could even be more-than-normal household formation for a few years from both normal population growth and from people leaving temporary arrangements.  A stronger economy and job prospects will help in restoring normal household formation.”

Home builders are expected to add only 770,000 new units this year, which is well below the one million new demand from household formation, but still up from the 500,000 range of the past three years. One optimist on household formation is Warren Buffet, who believes it will take new household formation to bring back the housing market and economic growth in general.

We are already seeing that happen with the latest construction spending numbers, which showed a big jump in apartment construction, rising rents and a drop in vacancy rates. Predictions are that household formation could again reach the 1 million mark as early as next year, if jobs creation continues to improve.

Harlan Green © 2011