By Nick TimiraosHave government policies staved off a future home price decline, or have they simply kicked a future price decline further down the road?
It’s a timely question with Tuesday’s report on January home prices from the Case-Shiller home price index, which showed slightly better than expected home price appreciation. After adjusting for seasonal factors, home prices gained by 0.3% in the three month period ending in January 2010 versus the three month period ending in December 2009. Price gains were led by Western markets such as Los Angeles and San Diego that have seen lots of activity at the low-end as first-time buyers compete with investors for deals on distressed sales.
To recap, the government took a series of aggressive steps to help prop up the housing market last year:
- Congress extended and expanded the home buyer tax for contracts signed by April 30 and closed by June 30.
- The Federal Reserve extended its purchases of mortgage-backed securities to help keep mortgage rates low. Those purchases are set to end on Wednesday.
- The Federal Housing Administration has helped provide a steady source of mortgages with minimum down payments of 3.5%. Insurance premiums will rise on FHA-backed loans beginning next week.
- The government has pushed banks to do more to modify loans, which has held back the number of new foreclosures hitting the market. Foreclosure activity should pick up as more borrowers fail to qualify for modifications and as new programs go into place next week to accelerate short sales, where homes sell for less than the amount owed.
Standard & Poor’s, which publishes the Case-Shiller index, warns that the rebound in home prices from last fall is “fading.” There was always a big concern that home prices would slide after the tax credit expired, and while it was extended, the threat of expiration produced a big flurry in buying activity last fall.
While home price indexes that include distressed sales, such as the Case-Shiller index, hit their bottom last year, says Thomas Lawler, an independent housing economist based in Leesburg, Va. But he says there’s still reason to worry about a “risk of renewed downturn” after the home buyer tax credit expires and if the economy doesn’t improve. “The bottom’s been reached but for many people it won’t feel like a bottom,” he says.
The stream of buyers generated by the extension of the tax credit “has been less robust than expected,” says a monthly report from John Burns Real Estate Consulting. While analysts are “cautiously optimistic” forecasts for housing starts may have to be revised down in the coming weeks if sales don’t pick up.
The high-end of the housing market is still weak with more signs of distress, as sellers wake up to the fact that the luxury market won’t be able to dodge 30% price declines from the peak. And though the low end of the market has stabilized, “it isn’t picking up as quickly as we thought,” say the analysts.
Readers, do you think we’ve reached the bottom, or have we simply postponed it?
This is your new blog post. Click here and start typing, or drag in elements from the top bar.  This story in the WSJ on Monday’s looks at how the problems that many housing analysts have long feared about the potential shocks from option adjustable-rate mortgages may not come to pass—in no small part because many of these loans have already defaulted.
Option ARMs allowed borrowers to make minimal payments initially that led loan balances to grow. Loans “recast” and begin requiring full payments on the larger balances, usually five years after origination or when the balance hits a pre-set ceiling. For years, analysts have worried about housing aftershocks from a wave of loans, originated from 2005-07, that would being jumping to sharply higher payments this year.
But “recasts are now a non-issue,” says Ramsey Su, a San Diego investor and former real-estate broker specializing in foreclosed properties. “What people said was going to happen this April, it already happened over the last six months,” says Mr. Su.
In other words, option ARMs have performed so badly (their delinquency numbers rival those of subprime loans) that many expected recasts won’t matter. Banks have also tried to aggressively modify some borrowers out of option ARMs with big payment shocks.
There’s almost half as many active option ARMs today as there were in March 2006, when originations peaked at 1.05 million. Meanwhile, almost one-third of the active loans are already delinquent, according to First American CoreLogic.
Mr. Su says that there may be some borrowers who “procrastinated” and will be forced to default when their payments adjust higher, but that the housing market’s woes have been overwhelmed by much bigger problems, such as the 11 million Americans who owe more than their homes are worth.
Because they required little money down and minimal monthly payments, option ARMs appealed to investors and other low cash-flow borrowers who essentially made a “put” on home prices. They stood to reap profits as prices rose, but had no incentive to keep paying once prices fell.
These loans and other “interest-only” adjustable-rate mortgages, which allowed borrowers to defer principal payments for a few years, helped to fuel the run-up in home prices, particularly in high-cost markets where housing became increasingly unaffordable during the boom. “It allowed people with good incomes to get a mortgage that was ten times their income,” says John Burns, a housing consultant in Irvine, Calif.
A borrower who made $50,000 a year, for example, could obtain a $278,000 30-year fixed rate loan with a 6% interest rate. With an interest-only loan, the borrower could qualify for a $320,000 loan, and with an option ARM, the borrower could obtain a $500,000 loan.
While option ARMs may be waning as a first-order worry for the housing market, interest-only loans are probably more of an immediate concern. Many of those borrowers may be under water and unable to refinance when their loans reset. When those loans reset, they typically begin requiring full principal and interest payments, which will send payments up. But some loans also move to an adjustable rate that is tied to interest rate benchmarks, currently very low. That means that payments could rise very modestly, or even go down, for borrowers who reset this year.
But the worry is that “in a higher rate environment, those borrowers could be exposed to substantially more stress,” says Roelof Slump, a managing director at Fitch Ratings.
Readers, what do you think are the biggest worries for the housing market today?
By Nick TimiraosToday’s look at the high-end housing market reveals how more sellers are beginning to get more realistic about home prices and cut deals on million-dollar homes.
Many housing economists say that for borrowers who can get a mortgage and who have stable incomes, pulling the trigger on a house they like makes a lot of sense right now. (Of course, they also note that the days of buying high-end properties as high-yield investments are history, at least for the time being).
But while there are certainly opportunities at the high end, buyers shouldn’t feel a need to rush because the market is still oversupplied. And those who do make purchases need to be realistic about the potential for some future price declines. “There’s still going to be more pressure on this market for the next couple of years,” says T.J. Culbertson, a real-estate agent in Beverly Hills, Calif.
On the other hand, as mortgage rates are low for those who can get financing. “If you’re waiting because you think the price might get better, well, the mortgage rate could go in the wrong direction,” says John Burns, a real-estate consultant based in Irvine, Calif. He says it could be a good time to buy generally speaking in markets where values have returned to 2003 levels.
While some borrowers are worried that they’ll buy a new house only to see it decline in value, that’s a much bigger concern primarily for first-time buyers. Those who already have homes could also see the price of their current home fall in value.
The high end of the housing market didn’t see nearly the same spectacular appreciation as the bottom of the market, which has dropped much more sharply and is now showing signs of stabilization. In San Francisco, prices on homes for the bottom third of the market (currently homes under $325,000) have fallen 57% from the peak, returning to levels last seen 10 years ago, while for the top third of the market (currently more than $600,000), prices are down 23% to 2004 levels, according to the Standard & Poor’s/Case-Shiller home price indexes. But prices rose by 4% over the last three months of 2009 at the bottom end, compared to just 0.5% at the high end.
One big headwind facing the high end: it’s harder to qualify for a loan than it used to be, which has reduced the pool of potential buyers. The market for million dollar homes was fueled during the height of the housing bubble by exotic mortgage payments that allowed high leverage. Now that those products are gone, banks are back to requiring much bigger incomes.
But the economic downturn has seen a big drop in the number of high-income earners. The number of households with gross taxable income of more than $200,000 fell to 2.8 million last year, according to estimates by Moody’s Economy.com, down from 4.57 million households in 2007.
Another headwind that faces the market: distressed sales. At the high end, more borrowers who took out exotic mortgages that will adjust to higher payments in the coming year or who have been holding out by living off of reserves begin to capitulate.
One problem is that many homeowners at higher price points aren’t realistic about prices and wait too long to pursue a short sale, where a home is sold for less than the amount owed, says Maggie Navarro, a real-estate agent in Pasadena, Calif. “It’s very, very difficult for these people to believe they’ve had such a severe reversal of fortune,” she says. “The higher-end people are so much less realistic than sellers on the more modest end of the scale.”
Some markets have had relatively few sales, leaving borrowers unsure about how much their property has fallen in value. Many homeowners don’t “have a clear opinion of how far their house is underwater,” says Mr. Burns.
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