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The US housing market has drifted lower, with house prices falling by 7.22% (seasonally-adjusted) year-on-year to Q3 2011, according to the Federal Housing Finance Agency (FHFA) (figures adjusted for inflation). The seasonally-adjusted Case-Shiller index was more negative, falling by 7.42% from a year earlier, and by 1.61% in the latest quarter.
Yet despite depressed house prices, there are positive indicators:
- Homebuilder confidence was up to an 18 months high in November 2011, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI).
- The number of homeowners who owe more than their homes worth decreased modestly in the third quarter, though levels remained high.
- The mortgage delinquency rate dropped to 10.53% during the year to Q2 2011, down from 11.17% in during the year to Q2 2010, according to the US Federal Reserve Board.
- The rental market is expanding.
Prices are still not bottoming-out
However, house prices still don’t seem to have bottomed out. Freddie Mac expects that the US housing market will decline over the following months, because of the large inventory of homes with delinquent mortgages.
The number of new single family houses sold in September 2011 was 313,000 units, a 0.9% decline from September 2010.
Average prices were 20.02% down in Q3 2011 from the Q1 2007 peak, according to Federal Housing Finance (FHFA). Adjusting for inflation would make that significantly larger.
Some say prices are now so low that US houses are now actually undervalued. In a study by real-estate firm Zillow Inc. reported in August, US home prices are down from their “fair value” in one-third of nearly 130 housing markets. Undervalued markets includes: Detroit (25% undervalued), Modesto, California (18%) and Fort Myers, Florida (13%).
However, the study also shows that a lot of markets still appear to be overvalued. Zillow’s analysis used the price-to-income ratio in determining whether housing is undervalued or overvalued.
Economic reasons for expecting a poor outcome for the housing market include:
- High unemployment.
- High house inventories, combined with foreclosures and unemployment, are pushing down house prices in certain areas.
HOUSE PRICE CHANGES, Q2 2011 |
||||
| US Census Bureau | ||||
| Median asking price – US$138,400 | ||||
| Median sales price – US$228,100 | ||||
| Average sales price – US$267,600 | ||||
| FHFA: All transactions index | ||||
| FHFA: Purchase only index | ||||
| S&P/Case-Shiller®: 10 main cities | ||||
| Source: US Census, NAR, FHFA, S&P See also: measuring US house price changes |
Are homes undervalued?
The house price-to-rent ratio, the measure of house prices fundamentals which the Global Property Guide favours, does not suggest that house prices, in general, are undervalued. In fact house prices are still above their long-term trend, as is clearly visible from the graphs:
Shrinking housing market
To replace the vacuum created by the mortgage crunch, government agencies have been pumping out more housing loans.
A new mortgage relief plan was announced by President Barack Obama in October 2011, attempting to stimulate the economy and to revitalize the housing sector.
The relief plan is actually a revamp of an existing government mortgage-refinance program, namely, the Home Affordable Refinance Program (HARP). Introduced in early 2009, HARP allowed refinancing for “underwater borrowers” (borrowers with low-or no-equity mortgages) under certain conditions and qualifications, if mortgages are backed by Freddie Mac and Fannie Mae.
The program was deemed ineffective since it only refinanced 894,000 mortgages by end-August 2011, way below from the government’s 4 – 5 million target.
This time around, HARP’s previous maximum loan-to-value (LTV) ratio has been scrapped and the 2% fees paid by some high-risk borrowers have either been reduced or abolished. Moreover, the HARP deadline has been extended to December 31, 2012.
Despite this, the new HARP has limits. According to FHFA, to be eligible for HARP:
- The mortgage must be owned or guaranteed by Freddie Mac and Fannie Mae.
- The mortgage must have been sold to Freddie Mac and Fannie Mae on or before May 31, 2009.
- The mortgage cannot have been refinanced under HARP previously, unless it is a Fannie Mae loan that was refinanced under HARP from March-May 2009.
- The current LTV ratio must be higher than 80%.
- The borrower must have no late payment in the past six months and no more than one late payment in the past 12 months.
The US is one of the few countries with a mortgage-to-GDP ratio over 100%. Mortgage debt rose from 61% of GDP in 1994 to 1997, to 103% in 2007, before falling to 95% of GDP in 2010.
Critics say HARP is a costly way to stimulate the economy. Aside from that, the program favours buyers without repayment problems, not delinquent borrowers or those already in a foreclosure process.
New home buyers face higher down payments and mortgage rates, and stricter loan requirements, as home loan limits on FHA, Fannie Mae and Freddie Mac lending have been reduced from $729,750 to $625,500, from October 1, 2011.
Mortgage rates are still high?
The US Fed’s key rate remains unchanged at 0.13%, having been cut in December 2008. The rate can hardly fall further.
Home mortgage rates are of course higher. As of October 2011, the average interest rate for 30-year Fixed Rate Mortgages (FRMs) was 4.07%, while the average rate for 15 year FRMs was 3.35%. One-year adjustable rate mortgages (ARM) have an average lending rate of 2.92%.
In 2010 and 2011, interest margins ranged from 2 to 4 percentage points, up from 0.2 – 1.5 percentage points from June 2006 to August 2007.
So despite the key rate drop from 5.25% in August 2007, actual lending rates have changed much less.