Tuesday, February 24, 2009

Case-Shiller Index Signals Continued Declines in Housing Prices

Home prices in 20 US cities declined 18.5% year over year, according to the S&P/Case Shiller index.  The reading was worse than anticipated by economists, although probably not terribly surprising to anyone that reads the news.  Surging foreclosures, rising inventories, and an extremely tight market for financing only puts more pressure on home prices.  Calculated Risk has its usual array of nifty graphs if you like your bleak economic data served up in pictures.

The Wall Street Journal has an interesting article today about the difficulty that many potential homebuyers face in parts of the country where home prices are still above the conforming loan limit.  Many jumbo lenders have fled the business as there is no longer any secondary market for jumbo loans.  Basically, if you originate it, you're wearing it.  The article, although filled with mostly anecdotal stories about high income earners who are being forced to put in excess of 25% down to qualify for mortgage rates that are significantly higher than conforming loan rates, points to the inevitability of further home price declines in high priced areas.  The few remaining jumbo lenders are squeezing all sorts of fees out of potential borrowers.  The article gave ING as an example of one of the few lenders that is increasing its jumbo mortgage foot print.  ING is offering only 7 year jumbo arms at 5.5% (no 30-year fixed), with minimum 30% down for houses and 45% for condos.  Another lender is offering a 7% rate for a 30-year fixed jumbo mortgage with a 5% upfront fee.  Sounds sort of like predatory lending for rich people.  But that's what happens when you're the only guy in town offering financing.  It's called a monopoly.  The potential pool of buyers in high priced areas has shriveled from those who could put 5% down and qualify for a interest only or option arm to those who need 25% down and qualify for a fully amortizing mortgage.  This is a very significant adjustment in the demand side of the housing equation and explains why home sales in places like New York City and San Francisco have fallen off a cliff since Lehman's bankruptcy.  It does not point to a very pretty picture for home prices in those areas.       

When will housing bottom?  The answer is fairly simple.  I firmly believe that in some parts of the country prices have reached a bottomed.  There are several locations in Southern California and Northern California where prices have plummeted and foreclosure sales are brisk.  If investors can buy a property, rent it out, and receive a reasonable return, then prices have bottomed.  As for the rest of the country, until prices reach levels where homes are affordable for the median family income in that region, we're likely to see more declines.  No amount of meddling by the government is going to stop that.   

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