National Housing Market Outlook

Shadow Inventory Stepping into the Light

John Burns photo

John Burns

September 17, 2010
The Loan Modification programs were certainly successful in delaying the inevitable – foreclosure. As shown in the chart below, there are now approximately 2.5 million foreclosures in process, and another 2.5 million mortgages that are 90+ days delinquent. These numbers will trend down, while REO (currently 562,000 bank-owned homes) and short sales will trend up.
The greatest levels of distress will be in the markets already hit hard, such as Stockton and Orlando. Here are the top 5 Shadow Inventory markets in terms of months of supply (from our February report titled “Only the Shadow Knows”):
No More Free Lunch
To colorfully illustrate what is occurring; we asked our staff to share stories from their own neighborhoods in markets across the country. Here are a few:
  • Spend, Spend, And Spend – A neighbor, who had a Notice of Default filed last September, continued to dress the place up with elaborate decorations on all holidays. Occasionally, the “owners” moved the BMW and SUV out of the driveway to pull their two jet skis out of the garage. Last month, they moved all the vehicles to clear a path for the new furniture being delivered. The Notice of Trustee Sale recently appeared.

  • Paying the Lawyers instead of the Bank – A neighbor mired in divorce and job loss lived free in their house for almost a year while having birthday parties with petting zoos, paying lawyers and buying new flat screen TVs. The home recently turned over as REO and promptly sold for about 100k less than it should be worth, which proved to be a painful comp when our staffer was re-appraised for a refinance on her own home.

  • Eyesore – A bank sat on a home that has been vacant for months before an NOD finally arrived. The home went to auction late last month. Tall weeds still serve as “natural” landscaping here, with no friendly neighbor or county official wielding a mower in sight!

  • Homeowners Associations Take Title – To bring home the delay by the banking system even further, we know of several homeowners’ associations who have completed the foreclosure process and now own homes of delinquent homeowners. They are still waiting for the bank to call them back to deal with the property sale.
What About Home Prices?
The question on everyone’s mind is: what will happen to prices? The answer: prices will decline, potentially significantly. Prices will decline because there is more than a one year supply of homes on the market, and several bank servicing arms and REO managers have told us that they will drop price to get the loans and homes off their books. Only a quick economic recovery, or a government mandate to rent the homes out, can prevent further price declines. Hopefully, tremendous affordability and investor appetite for REO will create a pricing floor that isn’t too far below today’s prices. Price declines are already showing up in the new home market. In the 3 months following the April 30 tax credit deadline, home builders dropped price an average of 3%.
How much further will prices fall? That varies by market and price point. We recently sent our best estimates by MSA to our clients, and we are updating our Land Acquisition and New Home Sales Forecast reports, which pinpoint where the distress is located in a specific market. Keep in mind that Case-Shiller and median prices have overstated the correction on most homes, so the declines reported in the newspapers will be far less than what is really occurring in the market.
Our free macro data on all of the markets is as follows:
Economic Growth………………………………………………………………….D+
Economic trends were mixed this month, as Real GDP declined but is still positive, while the employment market gradually improved once again. However, most believe the economy is slowing and we agree. Lower GDP growth, driven by slower consumer spending, is a clear sign that the pace of the recovery is slackening. Though job growth, unemployment, and jobless claims have improved, job growth will have to come faster to maintain any kind of momentum. There is even early talk of some form of new stimulus, but chances of this are dicey given the enormity of the federal deficit and the upcoming election.
Leading Indicators…………………………………………………………………C-
The leading indicators for the economy were mixed compared to last month. Although some metrics such as corporate bond spread and temporary workers improved, the Leading Economic Index and the stock market were both down. The Leading Economic Index decreased to 4.1% from 5.1%, and the ECRI Leading Index – also an indicator of future U.S. growth – fell to the lowest level since July 2009. The year-over-year change in the LEI, however, has been positive for 15 months and the ECRI is still far above the trough. The money supply is up and bond spreads are down. The former could lead to increased spending while the latter is an indication that lenders, at least, are less worried about defaults. The attitudes of those who would make hiring decisions (captured in the Vistage CEO Confidence Index and the CEO Economic Outlook Survey) reflect general confidence in continued economic growth, although these surveys were taken a few months ago. Corporate profits and cash positions are strong. Temporary employment has increased by 22% year-over-year, which is compared to a drop of 25% this time last year, and companies are slowly adding temporary staff to the payrolls. Stocks worsened this month. All four major indices we track – the Dow, S&P 500, NASDAQ, and Wilshire 5000 – are down 4-6% this month and 3-5% year-over-year. The S&P Homebuilding Index also declined this month, falling 6% from last month. This index has been hammered recently and has declined 30% from the most recent peak in April as weaker than expected home builder orders and CEO commentary worried investors.
Affordability continues to be excellent with low mortgage rates and tamed home pricing nationwide. Our housing-cost-to-income ratio ticked down slightly to 26.7%, and housing affordability remains excellent compared to history. Though home prices eased downward a bit and incomes were only very slightly higher, the key income to price ratio is still at 3.4, almost equal to the long-term historical norm and a level conducive to market health. Affordability continues to be bolstered by historically low mortgage rates. The 30-year fixed mortgage rate decreased to 4.36% this month, while adjustable mortgage fell to 3.52%. The Fed’s overnight lending target rate remained at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 5.8% this month, but is still far below the peak level of 35% of total applications in early 2005.
Consumer Behavior………………………………………………………………..D+
Consumer behavior improved modestly this month as most of our metrics remain on trends indicating gradual improvement. Consumer sentiment increased slightly to 68.9 but remains well below the historical average. The Consumer Confidence Index, which had declined over the past two months, improved this month to 53.5, but is also well below the historical average. The credit outstanding per household has fallen 10.8% over the last year to $7,367 per household. The personal savings rate increased to 6.4%, and is only slightly lower than the recent peak of 6.9% in May 2009. The Misery Index did increase this month, rising to 10.7 from 10.6 the previous month. This was the result of a slight increase in the inflation rate.
Existing Home Market……………………………………………………………..D
The existing home market again worsened this month, due to a continuing “hangover” of the demand pulled forward by the expired federal tax credit. Seasonally adjusted annual resale activity dropped to 3.83 million homes this month, according to the National Association of Realtors (NAR), and has decreased 25% year-over-year. On a rolling 12-month basis sales have decreased 2.6% compared to the previous month, but has increased 10.7% year-over-year.. The national median price of an existing single-family home ticked down to $183,400 currently from $183,500 the previous month, after improving for the past two months. This increase is, however, partly due to a change in the mix of homes as more upscale distressed properties come onto the market. The median existing home price has decreased 4.6% year-over-year. The S&P/Case-Shiller U.S. National Home Price Index improved once again, and has returned to positive territory this quarter for just the second time since late 2006, increasing 3.6% year-over-year. The number of unsold homes increased to 12.5 months of supply, which is above the historical average of 7.3 months. Perhaps most worrisome, pending home sales decreased sharply again this month to the lowest level on record as the post-tax credit environment remains harsh. Longer-term, 23% of homeowners have mortgages higher than their home values, with the worst concentrations in the same states hit hardest by the boom and bust – California, Nevada, Arizona, Florida.
New Home Market……………………………………………………………………C-
The new home market generally worsened this month, as both new home sales and builder confidence worsened. After increasing the prior month, new home sales dropped 12% to 276,000 transactions on an annualized basis. This is down 32% year-over-year and is the lowest level on record going back to 1963. Like existing home sales, the poor showings for May and June are undoubtedly skewed by the April 30th end to the federal tax credit. It should be noted, however, that the sample size used by the Census Bureau to calculate new home sales is extremely small and the confidence interval consequently large. The rolling 12-month total decreased slightly this month to 357,000 transactions, and remains near historically low levels. The median single-family new home price decreased to $204,000, and is down 5% year-over-year. Supply is a concern, as the months of unsold homes metric increased to 9.1 and is still above the historical average of 6.2 months. The volume of new homes for sale, however, dropped very slightly to 209,000 homes, a level well below the historical norm. Builder confidence was down again, reflecting the post-tax credit downturn.
Repairs and Remodeling…………………………………………………………..D+
Conditions for residential repairs and remodeling are worse this month, with multiple metrics declining. Homeowner improvement activity declined 3.0% year-over-year, but these year-over-year declines have steadily eased. The Remodeling Market Index fell this quarter to 42.6 from 44.5 the previous quarter. Private residential construction has increased year-over-year for the fifth time since June 2006 this month, increasing 5.5%. Residential investment as a % of GDP inched up to 2.5% this quarter.
Housing Supply………………………………………………………………………..F
Housing supply indicators were mixed this month, but generally worsened. All of these metrics, moreover, remain at very poor levels from a historical perspective. Single-family starts were down, as were single-family and multifamily permits. Total completions decreased markedly, in fact, to 587,000 units, a 33% drop from last month. This is a historically low figure and is partly due to builders reducing construction activity with the passing of the federal tax credit. Seasonally adjusted new home starts increased this month due to a larger gain in the more volatile multifamily sector. Total permits decreased to 565,000, due to declines in both single-family and multifamily permits. Permits are now down 4% year-over-year, an indication that supply has stabilized. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history, with only six states undersupplied, all with small populations except Texas. The homeowner vacancy rate decreased this quarter to 2.5%, which is down from 2.6% last quarter.
Data Current Through September 14, 2010
Overall Grade
Economic Growth
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 1.6% C
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -491,000 C-
Employment Growth Rate
- Non-ag Payroll, NSA 0.2% C-
Unemployment Rate 9.6% F
Average Length of Unemployment (Weeks) 33.6
Median Length of Unemployment (Weeks) 19.9
% of Labor Force Unemployed (27 weeks and over) 4.1%
U.S. Initial Jobless Claims 473,000
Mass Layoff Events, SA (YOY % Change) -38.1% A-
Productivity -1.8% D+
Retail Sales 3.6% C
Capacity Utilization 73.7% D
Core CPI 0.9% A+
Full CPI 1.2% C
Personal Income Growth, nominal 2.6% D
Federal Deficit (last 12 mos., $mil curr.) -$1,324,188 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 112,215,000
- Growth Rate 0.7% D
Owned Households 75,097,000
- Growth Rate -0.1% D
Rented Households 37,118,000
- Growth Rate 2.3% B-
Leading Indicators
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 4.1% C
ECRI Leading Index -10.0% D+
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 94%
CEO Economic Outlook Survey 95%
U.S. Average Hours Worked per Week 33.5
Temporary Employed Workers 22.1% A+
Corporate Profit Growth (pre-tax) 39.2% B+
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 152.0%
Capital Goods New Orders 10.6% B
Money Supply - M2 0.7% C-
Interest Rate Spread
10-year Treasury 2.77%
2-year Treasury 0.50%
Interest Rate Spread 2.27% B
3-month LIBOR 0.31%
3-month Treasury 0.16%
TED Spread 0.15% B
Stock Market (Return over last 12 months)
Dow Jones 5% C
S&P 500 3% C
Wilshire 5000 4% C
S&P Super Homebuilding -8% D+
Tougher Standards on Business Loans - Large Firms -9% B
Tougher Standards on Business Loans - Small Firms -10% B
Crude Oil Price (Current $) $74.70 D+
ISM Manufacturing Index 56.3 C
ISM Non-Manufacturing Business Activity Index 54.4 C
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 - 1.0 points are also paid up front by the borrower)
JBREC Affordability Index 1.4 B+
US Median Home Payment / Income Ratio 26.7%
US Median Home Price / Income Ratio 3.4 C
Mortgage Rates, Fixed 4.36% A+
Mortgage Rates, Adjustable 3.52% A+
Fixed/Adjustable Spread 0.84% D
Fixed/10-year Spread 1.59% C
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 5.8% B+
Equity/Owned Home (Current $) $83,487 D-
Debt % in Home (LTV) - Homes with Mortgages 85.3% F
Median Household Income $53,678
- Growth Rate, nominal -3.6% F
Consumer Behavior
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 53.5 D
Consumer Sentiment Index 68.9 D
Consumer Comfort Index -46.5 F
Revolving Cons. Credit per Household $7,377
- Growth Rate -10.6% A
Personal Savings Rate 6.4% C
U.S. Net Worth Growth Rate 13.0% B
Financial Obligation Ratio 17.4% C
Misery Index (Unemployment + Inflation) 10.74 C
Existing Home Market
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) 3.6% C
NAR Single-Family Median Home Price $183,400
NAR Single-Family Annual Price Appreciation 0.9% C-
Freddie Mac Annual Price Appreciation -4.6% F
Annual Sales Volume, SA 3,830,000 C
Existing Home Inventory for Sale, SA 3,984,000 F
Months Supply of Unsold Homes, SA 12.5 F
Purchase Mort. App. Index, SA 193.1 D+
Pending Home Sales Index, SA 79.4 F
Homeownership Rate 66.9% B
New Home Market
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 13 F
Multifamily Condo Market Index 25 D+
Median Price, NSA $204,000
Annual Appreciation Rate -4.8% D
Constant Quality Price Index (YOY % Change) -2.7% D
Sales Volume, SA 276,000 F
New Home Inventory for Sale, NSA 209,000 A-
Months Supply of Unsold Homes, SA 9.1 B
Months of Homes Completed, SA 3.5 B-
Months of Homes Under Const., SA 4.4 B-
Months of Homes Not Started, SA 1.3 B-
Repairs and Remodeling
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -3.0% D+
Remodeling Market Index - Current 42.6 C-
Remodeling Market Index - Future Expectations 38.9 C-
Private Residential Construction (YOY % Change) 5.5% C
Residential Investment as % of GDP (nominal) 2.5% F
Housing Supply
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 587,000 F
Single-Family Starts, SA 432,000 F
Multifamily Starts, SA 114,000 F
Total Starts, SA 546,000 F
Single-Family Permits, SA 416,000 F
Multifamily Permits, SA 149,000 F
Total Permits, SA 565,000 F
Manuf. Housing Placements, SA 57,000 F
Total Supply, SA 622,000 F
Total Housing Stock 131,158,000
Excess Vacancy 1,721,097 F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are "A" scores, the average is a "C", and the worst 15% ever are "F" scores, with distributions throughout.

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John Burns
Chief Executive Officer
As CEO, John grows, leads, and supports a team of passionate, articulate, likable, and smart experts. Together, we solve today so our clients can navigate to tomorrow.

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