FT.com on house prices.
FT: Is America’s house price crash at last bottoming out ?
(Link: http://www.ft.com/cms/s/0/91dd4430-7ea0-11dd-b1af-000077b07658.html)For Leon Belenky, the low came at the beginning of summer. "Everybody was sitting on the sidelines," says the Florida real estate broker. "They were waiting to see what was going to happen and no one was buying."
But Mr Belenky, a former software consultant who moved from New York in the mid-1990s to deal in beachfront condominiums and other high-end homes, says he recently detected an improvement. That came even before the cautious optimism generated by the government takeover at the weekend of Fannie Mae and Freddie Mac, the two mortgage giants.
He says American buyers seem ready to move back into the market, whereas previously interest was confined to foreigners trying to take advantage of the weak dollar. At Jade Beach, a luxury high-rise development just north of Miami, clients are following through on commitments to buy several units. Mr Belenky had been nervous they might back out. "Although we are still seeing some turbulence on Wall Street, I think the worst is already behind us," he says.
Property professionals are famously optimistic. But there are very tentative signs that the US housing slump could be in the first stages of moderating, after battering the global banking industry and dragging the US economy to its knees. The pace of decline is no longer growing worse and may indeed be decelerating.
Across the global financial system, the search for a floor in US housing is being followed closely. Even if prices continued to decline for a while at a declining pace, reduced uncertainty as to where they would end up stabilising would allow banks to put a firmer price tag on their losses and start generating credit again. In turn, that could help bolster other troubled housing markets, notably in the UK.
Across metropolitan America, the drop in house prices has eased from a monthly rate of 2.2 per cent six months ago to 0.5 per cent in June, according to the latest Standard & Poor’s Case-Shiller index. Over the same period in Miami, Mr Belenky’s market, the pace of house price declines slowed from 4.5 per cent to 1.7 per cent.
Meanwhile, the volume of new and existing home sales has stabilised – at a low level – across the US, after dropping considerably in the first half-year or so of the credit crisis. According to the most optimistic predictions, these trends could be mutually reinforcing this autumn, paving the way for a recovery early next year. But there are a lot of time- lags in the housebuying process. Some analysts fear that the problems at Fannie and Freddie between June and August – which pushed up mortgage rates over that period – will soon show up in weaker home sales.
That is not the only problem, as Gerard Cassidy, analyst at RBC Capital Markets, points out. "The expected stabilisation in the mortgage markets resulting from the US government’s action will help bring down mortgage rates," he says. "But they do not solve the problem of rising foreclosures and falling house prices."
Still, the government rescue of the twin mortgage funders should guarantee the supply of affordable home loans in the coming months. That could ensure that any weak patch in sales is relatively short-lived, locking in one necessary condition for any recovery: stable turnover.
If sales remain at present levels – a big "if" – inventories of unsold new homes could decline rapidly in the final months of this year and early next year, as the effect of past drops in home starts finally feeds through to home completions. That would still leave a large inventory of existing homes available for sale.
Frank Blake, chief executive of Home Depot, the second largest US retailer, was nonetheless seeing light at the end of the tunnel even before the Fannie-Freddie move. "We don’t think we’re at the bottom yet – but we think you can see it from here," he says. Investors also seem keener than before to wager on a recovery. Shares in Regions Financial, Alabama’s biggest bank, rose more than 15 per cent last week after it took over the branches of Georgia-based Integrity, which collapsed at the end of August because of the mortgage crisis and was seized by regulators.
But for all the glimmers of hope, a rapid turnround in America’s housing market looks unlikely. For many economists, its return to vigour will be long and agonising – and they warn that any progress could quickly unravel. It is hard to believe we are at the bottom. Several indicators of the health of the housing market are still troubling. According to RealtyTrac, a property website, one out of every 464 households received a foreclosure filing in July, compared with one in 557 in February. Foreclosures are not likely to peak until the first quarter of 2009, according to analysts at Lehman Brothers.
Last week, Fitch Ratings sounded another alarm bell, saying as much as $96bn (£54bn, €68bn) in home loans sold with initial flexible payments will switch to more stringent terms, probably forcing even more borrowers into foreclosures. Delinquency rates on prime loans, as well as subprime and other exotic mortgages, are climbing.
Rising foreclosures prevent a reduction in the inventories of unsold homes and raise the danger of local foreclosure "spirals" as fire sales depress prices of other homes in the neighbourhood. As of July, the National Association of Realtors says, it would take a record 11.2 months to work through the supply of previously owned homes.
The mortgage crisis has repeatedly disappointed policymakers since it began 18 months ago. House prices remain elevated on some measures, such as price-to-rent ratios. Moreover, efforts to arrange economically efficient restructurings of mortgage debts – and thereby minimise unnecessary foreclosures – remain an uphill struggle. That is due in large part to the fragmented investor base, with numerous institutions owning a slice of a securitised mortgage.
Looking ahead, one main concern is the interplay between housing and the wider US economy, in particular the jobs market. Unemployment has jumped from 4.9 per cent of the workforce in January to 6.1 per cent, amid eight consecutive months of job losses. As more Americans struggle to keep their jobs, it will be harder for them to buy property, no matter how cheap it looks.
This year’s jump in the price of petrol could also damp the potential for a housing recovery. Many of the neighbourhoods with the biggest oversupply of homes are on the distant fringes of US cities. These areas have been made less attractive by the much higher costs of commuting by car. Furthermore, with the mortgage markets under strain, lenders have raised the bar for prospective buyers, which is making sales harder to clinch and putting further downward pressure on prices.
"Risk-averse lenders are requiring buyers to bring more equity and higher [credit] scores. Even those who qualify are finding it tough to get properties to appraise" – in other words, to have the proposed purchase price endorsed by the lender’s valuer – "or to obtain mortgage insurance, as the entire industry has become more cautious", says Paul Miller, analyst at Friedman Billings Ramsey, a property investment group.
With the subprime sector all but evaporated and the jumbo market (for loans into the millions of dollars) barely alive, about three-quarters of mortgage loans are now guaranteed by Fannie Mae and Freddie Mac. Prior to their takeover, risk spreads on their debt and on their mortgage-backed securities were at near record levels, while the companies were tightening underwriting standards and raising fees to preserve their own capital. That helped keep mortgage rates higher than they were a year ago, in spite of 325 basis points of interest rate cuts by the Federal Reserve.
Now, as risk-spreads on Fannie and Freddie paper narrow again and the fees they charge are under downward pressure, a significant decline in mortgage rates finally comes into prospect. That would improve affordability and should at least result in house prices falling less than they otherwise would have done. Over time, the move could also entice buyers away from the sidelines, because the guarantee of an ongoing supply of affordable home loans reduces the risk of a truly catastrophic decline in house prices.
The problem is that employment and incomes could push the other way – resulting in a more traditional housing downturn driven by recessionary conditions in the broad economy rather than overvaluation and a credit shock.
"We are keeping a watchful eye on residential real estate, to be sure – especially the inventory-to-sales ratio and home prices and the impact of this latest policy intervention," says David Rosenberg, chief US economist at Merrill Lynch, referring to the federal rescue of Fannie and Freddie. But even if the market begins to bottom soon, "the lead time to the end of the consumer recession is likely a year away at a minimum".
That in itself would limit the number of Florida home hunters arriving at Mr Belenky’s door.
