As 2009 approaches the halfway hurdle, the consumer confidence outlook looks a bit more optimistic, home sales have picked up and rates remain low, fueling refinancing opportunities. This has raised speculation across the U.S. over whether a housing market recovery is in sight.
But industry participants caution that the glut of supply continues to put downward pressure on home prices, especially in the areas hit hardest by the housing bubble, like California and the Southeast. This could delay recovery well into next year.
After the Memorial Day holiday, market participants headed back to work with news that home prices had fallen by 19.1% in 1Q09 to a 21-year low, according to the Standard & Poor's/Case-Shiller National Home Price Index. Home prices have now fallen 32.2% since peaking in the 2Q06.
Foreclosure filings, which include default notices, auction sale notices and bank repossessions, totaled 342,038 U.S. properties during the month of April, according to a report last month from RealtyTrac, an online marketplace of foreclosure properties. This is a 32% jump from April 2008. One in every 374 U.S. housing units received a foreclosure filing in April, the highest monthly foreclosure rate posted since RealtyTrac began issuing its report in January 2005, the company said.
California had the highest total filings with 96,560, with Florida, Nevada and Arizona following at 64,588, 16,266, and 16,245, respectively.
Stimulus Grows Confidence
But despite the increase in filings, consumer confidence continues to rise.
According to The Conference Board Consumer Confidence Index, the short-term consumer outlook improved significantly in May. Those expecting business conditions to improve over the next six months increased to 23.1% from 15.7%, and those anticipating conditions will worsen declined to 17.8% from 24.4% in April.
The employment outlook was also less pessimistic, according to The Conference Board, which uses a sample of 5,000 U.S. households in its monthly index. The percentage of consumers expecting more jobs in the months ahead increased to 20% from 14.2%, while those anticipating fewer jobs decreased to 25.2% from 32.5%. Consumers anticipating an increase in their incomes rose to 10.2% from 8.3%.
Indeed, with the economic stimulus plan taking effect, the stabilization of jobless claims, expectations of GDP growth this summer and continued low interest rates, there are a lot of positive influences on the housing market, said Mark Fleming, chief economist at First American CoreLogic. "The water is starting to find its level in many of these places, and we are beginning to see some second order effects," he said, noting that while delinquencies and unemployment continue to rise, the pace is starting to slow.
Furthermore, continued low interest rates and falling home prices are creating great levels of affordability, Fleming said, presenting good buying opportunities. "The more prices continue to fall and the longer that we sustain low rates, eventually, if it hasn't already, it will spur the demand," he said.
But rates must remain low, said one mortgage banker, citing the recent fluctuation in Treasurys and mortgage rates. "The government needs to continue to buy mortgage-backed securities and Treasurys to keep rates down and prices up," the mortgage banker said. "If not, individuals won't be able to afford to refinance or purchase new homes, and investors will be reluctant to bid on them at attractive levels out of fear that they will go down in value."
Delinquency Drives Sales
Despite increased home sales in certain areas, in particular the bubble regions, the majority of the activity stems from distressed transactions with buyers acquiring foreclosed properties or lender-owned real estate, said Jack MacDowell, a portfolio manager at Old Hill Partners.
"Distressed transactions typically stop at the initial transaction, whereas traditional housing turnover results in a domino effect of buyers buying from sellers, and the sellers becoming buyers in subsequent transactions," MacDowell said.
The significant number of distressed sales has market participants cautious about forecasting a recovery.
"I don't think we are out of the woods yet," said Kevin Cavin, a mortgage strategist with FTN Financial Capital Markets. "The delinquency pipelines are very full right now. The rate of serious delinquency - 60+ day delinquencies - is at an all-time high. A lot of these properties will have to be liquidated before the housing market will truly recover."
Indeed, in April delinquency pipelines grew in all seven major non-Agency product types, which include jumbo fixed, Alt-A fixed, subprime fixed, jumbo ARM, Alt-A ARM, subprime ARM and option ARM, according to a report by FTN Financial. Among these products, Jumbo fixed and Jumbo ARM mortgages experienced the largest increase in 60+ day delinquencies on a percent basis.
The market is also waiting on a "shadow inventory" of unsold homes from non-distressed sales, or voluntary sellers.
"Homeowners who want to sell may find it difficult to compete with fire-sale home prices stemming from distressed sales, which include pre-foreclosure short sales, foreclosure-driven home liquidations and repossessed-by-the-bank home liquidations. They will likely wait until distressed selling declines, which could take another 12 to 24 months," Cavin said.
Get 'Em While They're Cheap
However, sellers are motivated right now, Fleming said. "Banks, servicers and other lenders want to sell these properties, but at a fair price."
And there are areas where the rate of depreciation has slowed. "This presents favorable asset allocation opportunities for the managers able to identify the pricing inefficiencies," MacDowell said. "The volatility in trading levels among mortgage-backed securities has been largely indiscriminate both as security values decline as well as in the recent rally, which again can prove fruitful for active asset allocation strategies focused on detailed borrower credit and geographic forecasts."
Forecasts for an initial recovery in the housing market remain months if not years away, several industry participants agreed.
Bank of America/Merrill Lynch analysts said in a recent report that they expected that a recovery would not begin until the end of next year. The analysts noted that home prices are expected to decline by another 15% in 2009 and 4% in 2010. This would mean peak-to-trough decline of roughly 40% at the national level (based on the S&P/Case-Shiller Home Price Index).
The next drop in home prices will likely be a result of a continued increase in foreclosure sales, a weakening in the housing market in regions that have survived the downturn thus far and unemployment, the analysts said.
Little Security in Stimulus
A main variable potentially impacting a recovery in the housing market - and borrower performance - is the effect of recent government programs aimed at mitigating the overhang in distressed supply and stabilizing home prices.
But the impact of government intervention programs has been marginal thus far, with a lot of details still up in the air, many market participants agree.
The scope of government intervention and its impact is perhaps the biggest source of uncertainty in our estimates, Bank of America/Merrill Lynch analysts said. "It is not clear at this point whether various government programs will be successful in stabilizing the housing market," they said. "The overall government response, while still evolving, is starting to look fairly comprehensive. However, various parts of the government plan are still in the planning/design stage, and some face opposition from investors."
These programs include the Troubled Asset Relief Program (TARP), HOPE for Homeowners Program (including the Helping Families Save Their Homes Act) and the federal stimulus program, which have all made "headlines but not headway," according to one market participant.
Another federal program, The Homeowner Affordability and Stability Plan, is targeted toward the conforming borrower. But there is not a whole lot out there to save nonconforming borrowers, Cavin pointed out.
However, the real issue on the mortgage front, several market participants agree, is the negative equity that borrowers have, which provides less incentive for them to remain current on their mortgage. This will prevent a meaningful recovery in the housing market in the near-to-medium term, many agreed.
While new administration programs may boost the number of modifications, concern still remains over whether newly modified loans will perform any better over time than loans modified to date, according to a recent report from Fitch Ratings. In recent months, loan modifications have increased 7% in overall RMBS and 18% of subprime loans modified through the end of April, Fitch said. The rating agency projected that a whopping 65% to 75% of mortgage loans that are modified will re-default after 12 months.
However, in the coming months, FTN's Cavin said he did expect to see an increase in refinancing activity if borrowers are able to qualify for recent government programs, which should alleviate some of the pressure on homeowners' monthly payments. It may also help some borrowers on the verge of delinquency or who are "financially distressed" because of resetting mortgage rates or loss of a job, for example, he said.
Indeed, the Federal Housing Finance Agency's (FHFA) all-transactions House Price Index (HPI), which includes both home purchases and refinancing in conforming, conventional mortgages on single-family properties purchased or securitized by Fannie Mae or Freddie Mac, showed more strength over the latest quarter than the purchase-only index. The all-transactions HPI rose 0.4% in the latest quarter and fell only 3.3% over the four-quarter period, according to the FHFA.
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