RISING INTEREST RATES. Many financial and economic pundits expect interest rates to begin rising in the near future. A major problem with an increase in interest rates is that will force down the prices of houses even further and wipe out more equity. The main culprit in the run up in housing prices from 2002 to mid-2007 was low interest rates. Higher interest rates make qualifying for mortgage money more difficult, so something else in the home purchase equation has to give – home prices. This reduces the size of the mortgage needed, hence the size of the monthly payment for which the borrower has to qualify. Conversely, if the cost of money is low and qualification for larger mortgage sums is easier, the money otherwise left on the table is packaged into the cost of the house. See the following article. http://seekingalpha.com/article/227115-correlation-of-mortgage-rates-with-real-housing-price.
THE THREAT OF DEFLATION. A decline in housing prices may presage declines in prices of other goods and materials, which initiates a deflationary spiral. Among economists who responded to a recent WSJ poll, nearly two-thirds said that deflation poses a bigger risk to the economy than inflation over the next three years.
AN INCREASING INVENTORY OF HOUSING UNITS. According to a WSJ blog yesterday, the “shadow inventory” of potential foreclosures and other distressed sales will rise to 4.7 million units this year, or a national average equal to a 10-month supply of homes. The shadow supply is as high as 26 months in some cities such as Miami and Orlando. But those numbers are dependent on how quickly banks move to foreclose on delinquent loans, according to a report released yesterday by John Burns Real Estate Consulting of Irvine, California.
Foreclosures are conducted according to the laws of the state in which the real estate encumbered by the delinquent mortgage is located. Some states, such as Florida, have foreclosure laws that require lengthy court procedures, thus lengthening the clearing process.
In addition, the share of distressed sales will rise to around 40% of all home re-sales through 2012, and the shadow inventory of distressed loans will stay at elevated levels through 2016. This rising share of distressed sales could further escalate the decline in house prices because the owner-banks are motivated to clear the owned real estate off their books. John Burns Real Estate Consulting estimates that prices will fall by another 8% to 11% through 2012.
ZipRealty, a brokerage firm, examined more than 1 million home listings and found that many home sellers are slashing prices by as much as 60%.
THE SHRINKING NUMBER OF LENDERS. The WSJ online reported that 279 banks have collapsed since Sept. 25, 2008, and the Federal Deposit Insurance Corp. increased its number of problem banks by 6% to 829. Because of bank failures and consolidation of banks, the number of U.S. banks could fall to 5,000 over the next decade from the current 7,932. This is in addition to the more than 4,000 banks have gone out of existence in the past 15 years. The banks' disappearance means not only cutbacks in lending but also fewer banking choices, lower interest rates on time deposits, and lost jobs. Consolidation of banks also means the biggest are getting bigger: Bank of America, J.P. Morgan Chase & Co. and Wells Fargo hold 33% of all U.S. deposits, up from 21% in 2006, according to SNL Financial. That gives them more market power to squeeze out smaller competitors.
THE EFFECT ON CREDIT SCORES. Also reported in a WSJ blog is a new report from the Pew Research Center on how Americans have fared during the recession. It that divided respondents into two groups:
· A group that “held its own”, which was 45% of respondents and correlated to myFICO’s estimated 47% of Americans who have the best credit scores (over 720) during the recession, and
· A group that “lost ground”, which represent the remaining 55%.
Demographically, the “held their own” group tended to be older people who already owned homes. According to the Pew report, 69% of people age 18-49 and 60% of those 30-49 “lost ground”.
JOB GROWTH. Few doubt that the expansion of employment opportunities would have a salutary effect on the housing and credit markets. Currently, however, growth in employment hasn’t been strong enough to accommodate the number of jobs that must be created on a monthly basis to deal with the regular flow of new entrants to the labor force, let alone the previously employed.
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©2010 by The Falbey Institute for the Development of Real Estate
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