Monday, January 26, 2009

Are we near the trough?

The housing crisis has been going on for 3 years now. Slowly at first, but this last year things seemed to have picked up steam. Everyone knows there is a housing crisis - and throughout the country everyone is feeling the effects (well most everybody.) But now reports are coming in that some economists see a light at the end of the tunnel. While the optimistic stories always seem to generate a good deal of press - eventually they will be correct. In an article from The Record titled Economist thinks housing will bottom out in 2009 brings us some of that economic optimism. However since it was buried in the Real Estate section and not front page, we think that The Record does not share the same optimism. Well, lets take a look at the article -

"We should come out of 2009 on an upswing. It won't be strong, and we will still have home price declines throughout the year, but it will be an upswing," [David Crowe, chief economist for the National Association of Home Builders] said.

Weighing heavily on housing market forecasts is the continued decline in employment. Frank Nothaft, chief economist for the mortgage agency Freddie Mac, said he expects unemployment will jump to 8.7 percent by the end of 2009, up from 7.2 percent today. And that in turn will push mortgage delinquencies and foreclosures higher, adding to an already bloated supply of homes on the market.

"The single most important trigger event for delinquencies is unemployment," Nothaft said. "Clearly there will be more significant job losses over 2009 and that will contribute to delinquencies on loans of all types." Particularly troubling, he said, is that even prime borrowers with conventional, conforming fixed-rate loans are defaulting in higher numbers.

The job picture also dims consumer confidence, which is at or near historic lows, "making them afraid to go out and buy anything durable, and that certainly includes a home," Crowe said. That is making it difficult to work off the excess inventory of homes for sale.

Home prices will continue their slide in 2009 and may well keep falling into 2010, said David Berson, chief economist for mortgage insurer PMI Corp. The company's winter forecast shows that of the top 50 U.S. metropolitan areas, more than half have a 50 percent or greater risk of seeing lower home prices two years from now as they do today. In some hard-hit markets such as Las Vegas, that risk is about 90 percent, he said.

If there is any good news for housing, it comes from mortgage rates, which are at historic lows and not expected to move up. But mortgage credit is not nearly as available as it was in the housing boom as lenders tightened underwriting standards throughout the last year, Nothaft said.

Notice how the only bright spot is the one that is not really determined by the markets - the mortgage rates. The blemishes on the bright spot are the stricter requirements for mortgages as well as the for every foreclosure there is a potential homebuyer out of the pool for at least seven years. And many who were burned by the bubble. Not everyone put 0% or had a pick-a-payment loan, there was another group that wanted a house and were afraid if they did not buy they would be priced out of the market. Perhaps with more homework, or if they stumbled across the bubble blogs, they would have had more caution and stayed out.

Another part of the bubble burn was that all of the institutional forces (lenders, realtors, the government) were pushing for more homeownership. During the bubble shopping was patriotic, and we had entered the ownership society with the potential of 100% homeowners - perhaps renting was too 20th century.

Now we are paying the price. But are we really near the trough? We think the builder was giving a pep-talk rather than a real economic analysis. This next year will get worse before things get better - remember those option arms...

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