MBA Finds Home Sales Show Signs of Stabilization
|June 12, 2008|
Current Housing and Mortgage Market Activities:
Mortgage Spreads Have Narrowed:
Mortgage rates have trended up in recent weeks, as inflation expectations have risen and the Federal Reserve signaled that it will likely hold the federal funds rate steady for an extended period. However, mortgage yields have also narrowed in relation to default-free Treasury yields. The spread between the yields on 10-year Treasury notes and conforming fixed-rate mortgages, which had widened mid-March to about 260 basis points, narrowed to about 210 basis points in early June. In addition, some lenders have reported a narrowing spread between the rates of jumbo conforming mortgages and conforming mortgages, as a result of changes in pricing policy by government sponsored enterprises (GSEs). The Mortgage Bankers Association weekly survey of mortgage applications showed that the jumbo share of mortgage applications has risen since April.
Mixed Home Sales Performance in April:
Both single-family existing home sales and condo sales dropped modestly in April. Sales of single-family homes during the first four months of this year were down 19.0 percent from those during the same period last year. The drop in condo sales has been more pronounced, with year-to-date condo sales 27.6 percent lower than last year.
April new homes sales saw the first increase since October 2007. However, the increase followed the downward revision of the previous months’ figures. April’s sales pace was the same as the sales pace initially reported for March. Sales of new homes during the first four months of this year were down 36.7 percent from the same period last year.
Overall, April home sales performance suggested that the housing market may be close to stabilizing. While further declines are expected in the coming months, they should be modest.
Single-family starts dropped modestly in April—the 13th consecutive decline—while multifamily starts surged. Through the first four months of this year, single-family starts were 39.4 percent lower than those in the first four months of 2007. By contrast, year-to-date multifamily starts were 11.3 percent higher than last year.
Inventory-Sale Ratios Remain Historically High:
Inventory overhang continued to be a huge problem. The number of total existing homes available for sale jumped in April. (The data are not seasonally-adjusted so the large increase partly reflected normal increases in the Spring season.) A decline in the sales pace and an increase in inventory pushed up the months’ supply for single-family homes to 10.7 months in April from 8.3 months a year ago. The months’ supply for condos rose to 14.2 months from 9.0 months last April.
For new homes, the number of homes available for sale saw the 12th consecutive monthly decline. The steady decline in inventory reflected considerable cutbacks in single-family homebuilding. A drop in inventory and an increase in sales pace pushed the months’ supply down to 10.6 months in April from 11.1 in March. Despite the decline, the months’ supply stood at the fourth highest reading since the inception of the series in 1963.
Home Prices Declines Deepen:
The median price for single-family existing homes fell 8.5 percent in April from a year ago, the third consecutive year-over-year drop of at least 8.0 percent. This is the 21st consecutive month of year-over-year decline in prices. From the peak in June 2007, the median price for single-family homes has declined 12.1 percent. The median price for condos fell 3.7 percent from last April—the sixth consecutive monthly drop.
The median price for new homes rose 1.5 percent in April from a year ago—the first year-over-year increase in the past five months. The increase followed a sharp drop of 14.1 percent in the previous month. The reason for the increase in home prices may be due to a change in the mix of sales: the only region where sales declined last month was in the South, where a typical home costs much less than in the Northeast and the West, both of which saw big increases in sales in April.
Home price measures that track repeat sales of the same house over time are a better indicator of home price trend than average or median home prices because they are not distorted by the mix of sales of low- and high-priced homes. The Office of Federal Housing Enterprise Oversight (OFHEO) purchase-only index, which excludes refi transactions, declined 3.1 in the first quarter from a year ago after a year-over-year drop of 0.5 percent in the fourth quarter of 2007.
The Standard and Poor’s S&P/Case-Shiller national composite index, which uses the same methodology as the OFHEO purchase-only index, was down 14.1 percent in the first quarter from a year ago, following an 8.9 percent year-over-year decline in the fourth quarter of 2007. The drop was the biggest since the series began in 1987. It has now fallen about 16 percent from its peak in the second quarter of 2006.
The OFHEO purchase-only index showed a much more modest decline in home prices than the Case-Shiller national index because it excludes jumbo loans and under-represents subprime, Alt A and adjustable rate mortgage loans. The Case-Shiller index may have captured more of the impact of foreclosed homes, which are sold at a deep discount. Both subprime and adjustable rate mortgage loans have seen sharper increases in their foreclosure rates than prime and fixed-rate loans (see below). One drawback of the Case-Shiller national index is that it does not cover the wide geographic areas that the OFHEO index does.
A report from real estate analytics firm Radar Logic Inc. found that home prices from motivated sales—defined as liquidity-driven sales of real-estate owned and similar transactions—declined much more sharply than non-distressed sales. For example, in Los Angeles, price-per-square-foot for distressed sales have fallen 9.1 percent through March of this year, while non-distressed sales have seen prices fall a much more modest 3.3 percent.
Data from DataQuick Information Systems showed that foreclosures drew buyers in Southern California. Home sales in the area surged 22 percent in April from March, with homes under $500,000 accounting for two-thirds of the monthly gain. Nearly 38 percent of homes sold in April were in foreclosure at some point during the previous 12 months, compared with only 5 percent in April 2007. The area’s median home price was $385,000, down 24 percent from $505,000 in April 2007
Loan Quality Deteriorates Further:
The Mortgage Bankers Association National Delinquency Survey showed that credit quality deteriorated in the first quarter of this year. The seasonally-adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties stood at 6.35 percent of all loans outstanding, up 53 basis points from the fourth quarter of 2007, and up 151 basis points from one year ago. The seasonally-adjusted total delinquency rate is the highest since the inception of the series in 1972; however, the non-seasonally adjusted delinquency rate is not a record.
The percentage of loans in the foreclosure process was 2.47 percent at the end of the first quarter, which was a record high. It increased 43 basis points from the fourth quarter of 2007 and 119 basis points from one year ago.
The percentage of loans on which foreclosure actions began during the quarter was 0.99 percent on a seasonally adjusted basis—also a record high. It was 16 basis points higher than the previous quarter and up 41 basis points from one year ago.
Delinquency rates normally peak at the end of the year and drop to their lowest point for the year at the end of the first quarter. The non-seasonally adjusted rate is down 67 basis points from the fourth quarter but up 131 basis points from the first quarter of last year.
While the foreclosure start rates were up for all types of mortgages, a reflection of the decline in home prices, the magnitude of the national increases is clearly driven by certain loan types and certain states, mainly California and Florida. For example, while subprime ARMs represented about six percent of the loans outstanding, they represented about 39 percent of the foreclosures started during the first quarter. Prime ARMs represented about 15 percent of the loans outstanding, but about 23 percent of the foreclosures started.
Housing and Mortgage Market Projections:
Leading indicators of home building activity were mixed. Permits, a leading indicator of starts, increased 4.9 percent in April. Single-family permits rose 4.0 percent, the first monthly increase in 13 months. However, home builders’ confidence remained at a depressed level. The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index declined to 19 in May from 20 in April after holding steady for the previous three months. (Readings below 50 indicate that more respondents view conditions as poor.) The index was one point above the record low of 18, reached in December 2007, and has hovered within two points of the historical low over the past nine months.
Leading indicators of home sales were also mixed. The Mortgage Bankers Association weekly survey of mortgage applications declined in April and May, suggesting continued modest declines in home sales in the coming months. By contrast, the National Association of Realtors’ (NAR) Pending Home Sales Index jumped 6.3 percent to 88.2 in April. The index is based on signed contracts for existing single-family homes, condos and co-ops. It is a leading indicator of NAR’s existing home sales, which are based on closing, as the signed contract for the purchase of a home generally precedes its closing by one to two months. The increase in pending home sales suggested that existing home sales should increase in the near term. According to NAR, pending sales contracts have increased significantly in areas with large price declines.
Given the significant excess supply in the housing market, we expect continued modest declines in housing starts to bring about a more balanced market. Housing starts should hit bottom in the fourth quarter of this year at 875,000 units (slightly higher than our projection in the May forecast.) Existing home sales should stabilize in the third quarter and increase modestly in the fourth quarter. New home sales should bottom in the fourth quarter. Given the elevated month’s supply, home prices should decline further through next year.
Below are our projections for the rest of this year and next year: