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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

U.S. Housing Sector Needs a Supportive Nudge

Housing-Market / US Housing Oct 21, 2011 - 04:15 AM GMT

By: Asha_Bangalore


Best Financial Markets Analysis ArticleSales of existing homes, inclusive of condos, fell 3.0% in September to an annual rate of 5.03 million units after an 8.4% increase in August. Sales of existing single-family homes dropped 3.6% to an annual rate of 4.47 million units in September vs. a 9.0% jump in August. As Chart 1 indicates, sales of existing homes are far from the peak registered in 2005 and are very close to cycle lows seen in 2008 (The wide swings in home sales in 2009-10 are related to the temporary first-time home buyer credit program).

Distressed properties (foreclosures and short sales) and negative equity position of homes (mortgages exceeding the current market value of homes) are the two major problems haunting the housing sector. The National Association of Realtors (NAR) pointed out in today’s report that 30% of existing home sales during September were that of distressed properties (see Chart 2). The other major challenge in the housing market is that 22.6% of outstanding home mortgages (10.8 million mortgages in August 2011) exceed the current market value of the home (negative equity position). Reportedly, discussions are underway to bring about reductions of the principal and prevent foreclosures of homes.

A string of programs have been put in place to since the crisis unfolded to address the home mortgage crisis but each has resulted in only a small change, with foreclosures and negative equity remaining persistent. A multi-pronged program including principal reduction, expedited home mortgage refinancing, and foreclosure procedures simplified is necessary immediately. Also, loan underwriting standards have to be addressed because the NAR has indicated today that 18% of its members reported contract failures in September, up from 9.0% a year ago. Contract failures, as defined by the NAR, “are cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses.”

As a result of a large pool of distressed properties, a declining trend of home prices is inevitable. The median price of an existing single-family home fell to 5.5% from a year ago to $168,400 in September (see Chart 3). CoreLogic data show that the pricing situation of non-distressed homes has improved in recent months (see Chart 3). Seasonally unadjusted inventory of unsold single-family homes rose one notch to 8.5-month supply in September. The elevated inventory situation of existing homes is another reason home price gains have not been recorded as yet.

Asha Bangalore — Senior Vice President and Economist

Asha Bangalore is Vice President and Economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was Consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Copyright © 2011 Asha Bangalore

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.

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