Foreclosure and REO Marketplace: An August 2008 Update
Robert L. Labbé - August 5, 2008Foreclosure prevention bill becomes law – some relief for the foreclosure crisis: The passage of the housing bill at the end of July is anticipated to help some 400,000 borrowers avoid foreclosure by permitting them to refinance into 30 year government backed loans. The law allows lenders and investors to refinance borrowers into an FHA insured loan provided they write down the principal amount of their loan to 85% of current value. The housing law, although aiding only a small percentage of defaulting borrowers, will provide some relief to a housing market now in its 3rd year of declining values. Moreover, many states, including California, are enacting foreclosure reform packages aimed at stemming foreclosures. Recent action by Treasury in assuring funding and capital for Fannie Mae and Freddie Mac, government sponsored enterprises which touch over 70% of all US mortgages, should also provide additional stability and the liquidity needed to help the market emerge from this steep housing correction.
US foreclosures and REO – the updated numbers: According to Irvine based RealtyTrac, as of June 30, 2008 almost 740,000 US homes entered some stage of foreclosure, with bank seizures having increased by 154% to 370,179 for the first half of 2008. Industry estimates are of 1.5 million or more foreclosure filings in 2008, with roughly 50% of those filings, or 750,000 resulting in bank repossessions or REO. RealtyTrac placed the national foreclosure rate in the 2nd quarter as one foreclosure filing for every 171 households, although the numbers vary widely by state.
Home price declines – the drop from their historical highs through May 2008: The S&P Case-Shiller 20 city index dropped by 15.8% from May 2007 through May 2008. The numbers for the major metropolitan regions most affected by negative appreciation through the end of May are:
Las Vegas: peaked August 2006 - 31.4%
Miami: peaked December 2006 - 30.9%
San Diego: peaked November 2005 - 28.4%
Los Angeles: peaked September 2006 - 27.4%
San Francisco: peaked May 2006 - 25.4%
Washington: peaked May 2006 - 20.6%
Boston: peaked September 2005 - 11.9%
Chicago: peaked September 2006, - 11%
New York: peaked June 2006 - 9.9%
Denver: peaked August 2006 - 7.1%
Since the beginning of the downturn the US has lost approximately $3 trillion in household wealth. A bright spot however shows smaller year over year declines in markets such as Tampa, Boston, Detroit, Minneapolis, New York, Dallas and Atlanta. Furthermore, The Boston Globe recently reported two (2) consecutive months of housing price increases for Boston, a market that peaked close to one year before most other major metropolitan areas. Some will see this as a leading indicator. Moreover, a July 22, 2008 press release on US monthly housing prices from the Office of Federal Housing Enterprise Oversight (OFHEO), although somewhat limited as the index only tracks Freddie and Fannie purchases, indicates that for the 12 month period ending May 2008 nationwide housing prices fell only 4.8 percent. Furthermore, the OFHEO monthly index showed a slight housing price increase of .3% for the Pacific Census Division (Hawaii, Alaska, Washington, Oregon and California).
Growing US housing demand: Despite the bad news of record foreclosures, high inventories and a current homeowner vacancy rate of about 3 percent (representing close to one million of the roughly 80 million US housing units) demand for housing continues to grow every year through the creation of new households. The current level of 111 million U.S. households is growing by approximately 1 percent a year, and will absorb about 1.1 million housing units a year according to RDQ Economist chief economist John Ryding. James L. Doti of Chapman University estimates demand from new households to be 1.7 million units annually. With new housing starts in June 2008 at a seasonally adjusted rate of just over 1 million, down from approximately 2 million two years ago, Doti argues an annual shortage of 700,000 units will soon develop, setting the stage for a housing price recovery. "This analysis suggests that U.S. housing prices, on average, are nearing a bottom and will soon be poised for a turnaround." Additional optimism comes from Richard Gaylord, president of the National Realtors Association, who cites a recent survey finding that nearly one-quarter of potential home buyers are "waiting on the sidelines."
Calling a bottom for something as large and complex as the $20 trillion US housing market is difficult. Wall Street, still in the midst of a sobering hangover from an overzealous foray into the mortgage market will surely be last in line to do so. But a combination of a variety of federal and state government initiatives, new household formation, pent up "sideline" demand, growing foreign investment, and a severe curtailment of new housing production all constitute significant market forces that will eventually have an impact on beginning an end to this housing correction now in its third year.
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