Looking at the national home-price index of Standard & Poor's/Case-Shiller Home Price Indices, it appears that the housing boom is over. Of the 20 major cities in the U.S., the biggest drops are in Detroit and Boston, which are down 5.9% and 5.1%, respectively....and...there is a good chance home prices will be down 10% to 30% over the next five years.
A recent quarterly survey of U.S. housing conditions in 28 major metropolitan areas showed that the inventory of unsold homes at the end of 2006 was up substantially in nearly all of the markets from the already plentiful level of a year earlier.
Home price trends vary greatly from one region of the country to another. Housing demand remains weak here in Metro Detroit, sapped by auto-related job losses, while the chic urban zones of San Francisco and Manhattan generally have stayed firm. Southeastern Michigan housing inventories are up 39% from a year earlier in a very weak employment outlook. Also, the percentage of Metro Detroit mortgage loans that are thirty days or more delinquent in the fourth quarter of 2006 is 3.94 percent, the highest in the country. Both of these factors are pushing single-family home prices down.
Now adjustable-rate mortgages are resetting to higher rates, and homeowners are falling behind on payments. Bad loans, so-called nonperforming loans that include mortgages, rose 11% in December 2006 vs. December 2005 at banks with more than $10 billion in assets, says SNL Financial. Some banks are setting more money aside or buying extra insurance to cover losses. For example, here in Metro Detroit, Comerica Bank with 58 billion in assets saw an increase in bad loans of 55.1% (vs. the average of 11% at 56 banks over 10 billion in assets) while the bank's provision for bad loans decreased 4.5% (vs. an increase of 4.1% on the average for the 56 banks over 10 billion in assets).
Some real estate professionals and bargain-hunting investors are focusing on buying and selling foreclosure properties. “It’s just crazy. We have 100 houses [at auction] each week, when we used to have 10 or so,” says Elaine Began, a deed clerk in Macomb County. The foreclosure process usually begins when mortgagees fall three months behind on payments. The lender sends a default notice to the homeowner and to the county. If the homeowner can’t pay up, a foreclosure date is set. County officials handle the auction and use the proceeds to pay off the mortgage and any other debts secured by the house. Leftover money goes to the foreclosed homeowner and, in some cases, leftover debt is the new owner’s responsibility.
In the third quarter of 2006, there were 5.7 million vacant housing units for sale or rent, accounting for a record 4.6% of all U.S. homes. The average in the 1990s was about 3.5%. To get this ratio back to normal, 1.3 million vacant homes would need to be occupied. High vacancy rates have other effects. When an occupied home gets sold, the seller has to buy or rent another home. That sets off a chain reaction that ripples through the housing market. When a vacant home gets sold, the seller doesn't have to do anything.
Realtors tell us that this a great time to buy or sell a house because interest rates are low and there are many houses to choose from. Fixed-rate 30-year mortgages averaged a modest 6.2% in the last quarter of 2006. That, combined with income growth, means houses remain affordable even though prices have rose more than 50% nationally in the past five years. The affordability index of the National Association of Realtors is still over 100, meaning a family making the median income can afford to buy a median-priced house. Globalization and financial innovation are two key factors in keeping rates low and these low rates promise to keep a floor under housing.
So, has housing hit bottom? Not if history is any guide, says Hugh Moore, a partner at Guerite Advisors, a money manager in Greenville, SC. Using data from the seven previous housing cycles since 1959, Moore concludes that the sector will fall further and land hard.
Take housing starts. In the past, they fell an average 51% from peak to trough. So, the current downturn, with housing starts off about 30% from the January 2006 peak, has further to go. And it may meet recession on the way. That's because in six of the seven cycles, when starts fell more than 25% from their most recent peaks, the economy tanked.
History shows housing corrections take an average 27 months. Thus, the current doldrums may linger a year or more. Perhaps, that is why about 8,000 real estate professions in Michigan let their licenses lapse on the October 31, 2006 renewal date.
The glut in inventories is likely to increase as sellers try to take advantage of what they hope will be a stronger selling season as winter turns to spring. Some sellers pulled their homes off the market late last year, intending to relist them in the spring. Sellers are expecting homebuyers to take their time and be tough negotiators.