Slowdown in U.S. Housing May Bottom Out This Year

by: David Hunkar

The collapse in the US housing sector may stabilize and bottom out this year based on some of the data presented below. Sub-prime and Alt-A mortgages have been some of the worst loans that have hit lenders in recent months. However there have been reports of even prime mortgages including jumbo mortgages going bad due to rising unemployment, fall in income and other factors.

Sub-prime and Alt-A mortgages issuance grew rapidly from 2003 through June 2007. The peak year was in 2005 when nearly two million such loans were originated as the data shows below. The sub-prime mortgages nearly doubled from nearly 1.1 million in 2003 to 1.9 million in 2005. Alt-A mortgages grew even at a higher rate from 304,000 in 2003 to 1.1 million in 2005.

Number of Sub-Prime and Alt-A Mortgage Originations by Year:

Chart-Total-Subprime-Loans-By-year

Source: Federal Reserve Board Calculations based on data from First American Loan Performance
Note: Data used is for 30-year,first-lien mortgages only

The fall in the number of subprime mortgages from 2005 is due to the rise in mortgage rates and the slowing down of house price appreciation. In total about 9.6 subprime and Alt-A mortgages were originated in under 5 years. In 2007, lenders abruptly stopped heavily approving such loans after June and in 2008 they stopped completely.

The majority of the subprime loans were in a few states that included OH,MI and IN in the midwest and CA,AZ,FL and NV as the chart shows below:

Click to enlargeSubprime-loan-by-states

One reason that the housing crash may bottom out this year is because by mid-2009, rate resets for these loans will decline substantially. Many of the sub-prime loans have already had their rates reset in 2008. This is identified by the shaded region in the chart below.

Subprime-rate-resets-by-year

According to a simulation run by Shane M. Sherlund in the paper titled The Past, Present, and Future of Subprime Mortgages,Federal Reserve Board, Washington, D.C., in the worst-case scenario sub-prime mortgage defaults would peak in mid to late 2008 and 2009 for sub-prime fixed rate mortgages.

Worst-Case-Subprime-Loan-Defaults

I shall post more updates on the housing sector and its impact on the economy as I do more research into this complex issue.