One-by-one various market players have come forward in recent weeks with predictions of slowing - in some cases negative - home price appreciation (HPA) in coming quarters. While actual HPA information varies depending on the source, and typically lags several months behind, both anecdotal and futures market information back up a prediction of slowing ahead. For example, the one-year futures-implied HPA on the Chicago Mercantile Exchange Composite Index has fallen in recent weeks to -4% HPA from 0%.
And while the degree to which subprime borrowers - who are expected to be hit the hardest from a slowing rate of home price growth - will fall behind on their payments remains a matter of speculation, early indications are showing later vintage deal performance to fall behind the rosy payment histories of loans in recent years.
Subprime lender New Century Financial Corp., among others, are noting an uptick in delinquency speed for those mortgages originated in 2005 and beyond, compared to 2003 and 2004 vintages - meaning some homeowners likely did squeeze into too much house last year, and may not be getting much of a boost from the housing market. New Century executives said during the company's second quarter earnings call last week that 2005 and 2006 vintages are in their early months displaying credit characteristics that are more in line with later vintage deals. "We are seeing isolated markets where home prices are flat or are experiencing slight declines, but at this point, we don't see widespread property declines or think that this scenario is likely to develop," said Brad Morrice, who became chief executive of New Century last month.
Michael Youngblood, head of ABS research at Friedman Billings Ramsey, said last month that U.S. home price growth is poised for a gradual slowdown - to year-over-year gains of 7.1% in the second quarter of this year; 5.7% in the third; 4.4% in the fourth; and 3.5% by the first quarter of next year. And house prices are anticipated to fall in four MSAs in the second quarter of this year, 10 in the third quarter, 28 in the fourth and as many as 24 in the first quarter of next year. House prices have never fallen year-over-year in more than three of the 379 MSAs in any of the past four quarters, he pointed out.
RBS Greenwich Capital economist Omair Shairf said last week that regional sales of new homes have declined at a quicker pace this year than had been expected, and the rate of decline could accelerate in the second half of this year. Average year-to-date sales of new homes in the Northeast have declined by 25.2%; in the Midwest by 12.4%; and in the West by 15.1%. Rising mortgage rates and low affordability are clearly dampening housing demand, and potential homebuyers are turning to the rental market, as evidenced by the sharp fall in rental vacancy rates," Shairf wrote.
A nationwide decline in home prices is generally not expected, and, as many have pointed out, such a situation would not happen without a coinciding wave of job loss.
One real-time indicator, the CME Composite Index, is still new as it was only launched in mid-May. Trading volume has been relatively light, according to JPMorgan Securities. It is still an interesting perspective on market sentiment toward where the housing market it headed. As of July 27, 1,283 contracts had traded. The index, which settles every four months, is based on the S&P/Case-Shiller home price indices. As of last week, futures on the Composite Index implied -3.7% annualized of 11-month appreciation, with quarter-over-quarter price declines of -5.92% in 4Q06 and -7.05% in the first quarter of 2007, JPMorgan said.
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