We’re sceptical of the “second-half recovery” theory–in part because we lived through the same hallucination in 2001 and in part because the housing market is still getting worse. In a piece arguing that this recession will be far longer than most people think, the Economist provides a snapshot of where housing stands.
Short answer? Not pretty:
By many measures the news from housing is still getting grimmer. Housing starts are at less than half their peak, and builders are continuing to cut back. Although this has begun to reduce the stock of unsold new homes, the frailty of demand means that supply still vastly outweighs sales. At 9.8 months’ worth of sales, the stock is at a 26-year high. The official overhang of existing homes (which excludes those repossessed) is not much lower. The excess of supply over demand means that the fall in house prices is accelerating. According to the S&P/Case-Shiller index, house prices are 13% off their peak. They fell at an annual rate of 25% in the three months to January.
The drop in house prices so far has left some 9m people, or 10% of all those with mortgages, owing more than their houses are worth. Among all mortgage borrowers, 6% are behind on their payments; among subprime borrowers, 17% are in arrears. Lenders are already foreclosing on more than 1m homes. The pessimists expect these figures to climb much higher, adding to supply and further depressing prices.
The good news, to the extent there is any, is that even the Economist see signs of hope. We think it will take a while for the market to turn–in part because prices are still high relative to rents and incomes–but at some point the rate at which it is getting worse should slow.
Demand seems to have stabilised: since November total home sales have been running at an annualised rate of 5m or so. Lower prices have made houses a bit more affordable. And government action may help to ease the drought of mortgage finance stemming from the collapse of the subprime market and the contraction of the market for large (“jumbo”) mortgages, and to limit foreclosures.
At the height of the housing boom in 2006, non-traditional loans, such as subprime and jumbo mortgages, backed nearly 40% of home sales. Some $750 billion of financing disappeared as they shrank. Fannie Mae and Freddie Mac, America’s government-backed mortgage behemoths, will fill part of that hole. The Bush administration recently announced changes to these institutions’ capital rules, to let them buy up to an extra $200 billion of mortgages. Political momentum is also building to prevent a surge of foreclosures. For now Congress is debating some modest tax incentives. But a more ambitious idea is gaining support: to allow the Federal Housing Administration to refinance troubled mortgages at a discount.
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