Record Home Price Declines Portend Extended Downturn

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Includes: ICF, IYR
by: Broderick Perkins

History-making home price declines announced this week by two national sources, along with home price implosions in California, Florida, New England and other states, are growing indicators that the housing market malaise is reaching epidemic levels.

Denial will not prevent it.

The national median price for all housing types fell 5.1 percent in October compared to a year ago, the greatest national home price decline since the National Association of Realtors [NAR] began record keeping in 1968 -- 39 years ago, according to NAR.

A lagging indicator of perhaps what's to come, the Office of Federal Housing Enterprise Oversight [OFHEO] Home Price Index came in down 0.4 percent in the third quarter, compared to the second quarter this year -- the first quarter-to-quarter decline in the index since 1994, 13 years ago. The index revealed prices were still rising from the third quarter 2006 to the third quarter 2007, but not by much -- 1.8 percent. The fourth quarter numbers will likely bear out what NAR data has already revealed.

"While select markets still maintain robust rates of appreciation, our newest data show price weakening in a very significant portion of the country," said OFHEO Director James B. Lockhart.

He added, "Indeed, in the third quarter, more than 20 states experienced price declines and, in some cases, those declines are substantial."

State of the States

Ten states saw price declines over the latest four quarters -- the greatest number of declines since the 1996-97 period a decade ago, according to OFHEO. Twenty-one states saw price declines in the latest quarter, OFHEO reported.

Of course that means flat or rising appreciation continues in the vast majority of states, but not the kind of appreciation experienced during the boom.

The states with the greatest rates of home price depreciation for the four-quarter period were: Michigan ( down 3.7 percent), California (down 3.6 percent), Nevada (down 2.4 percent), Massachusetts (down 2.3 percent), and Rhode Island (down 2.2 percent).

For the fifth consecutive quarter, Utah remained the home price growth leader with a 12.9 percent rate of appreciation. That was more than a percentage point higher than the four-quarter appreciation in Wyoming, the state with the second highest rate.

On the city level, 287 cities on OFHEO's list of "ranked" MSAs, 204 had positive four-quarter appreciation and 83 had price declines. Seventeen of the 20 cities having the most depreciation were in hard-hit Florida and California. The other three were in Michigan.

Twenty-four of the 26 California cities on the ranked list experienced price declines between the third quarter of 2006 and the third quarter of 2007. Thirteen of the 24 had price declines of 5 percent or more.

California Screamin'

California is ground zero.

The Golden State making it's own history in the annals of home price depreciation.

The California Association of Realtors reported the median price of an existing, single-family, detached home in California dropped 9.9 percent in October, compared to the same month a year ago. The decline was the largest year-to-year decline in CAR's history books. Condo prices slipped 2.1 percent during the same period.

Of the 20 major markets covered in the CAR report, only 4 revealed year-to-year increases in the median price of existing single-family homes.

However, a look at the county level and all types of housing reveals home price turmoil even within appreciating major markets.

In Silicon Valley (Santa Clara County), for instance, when all types of homes (new, existing, condos and single-family) were included, DataQuick data reveals an 2 percent increase in the median home price county-wide in October, but only three of the nine cities enjoyed any home price appreciation. In San Jose, for example, the county seat and largest city, the median price for all homes was down 3.8 percent.

The growing levels of depreciation nationwide has the experts divided on when it will end, but there's greater consensus that it will be later, rather than sooner. The devil is in the details.

The housing market's bad is the result of unsustainable appreciation fueled by easy mortgage money which became hard money after investors fled, homeowners bled and lenders shed risky loans.

California, like other hard hit states, is a victim of mounting foreclosures with few bail out options from the mortgage makers.

The California Reinvestment Coalition [CRC], surveyed 33 of the state’s more than 80 mortgage counseling agencies that offer assistance to financially strained borrowers, and found that most lenders send defaulting homeowners packing.

Fifty-seven percent of counselors surveyed said foreclosure was the end game and 33 percent said short sales is what brought homeownership to a screeching halt when California homeowners couldn't afford to pay the mortgage.

"The survey findings are distressing," says CRC Associate Director Kevin Stein.

He added, "Until lenders begin to deal honestly with this crisis and act in earnest, thousands upon thousands of Californians will suffer from foreclosure and the forced sale of their homes. The consequences will be devastating for homeowners, their neighborhoods, local governments and the state's economy."

That's true in other once hot markets that, unfortunately, have become victims of their own "success."

Goldman Sachs' recent "Americas: Specialty Finance: Mortgage Finance" says California home prices have a ways to fall because they are overpriced by 35-40 percent compared to 13 to 14 percent nationwide.

In California, the median home price was $589,000 at the end of August, but real-world economic conditions support prices at or below $380,000, Goldman reported.

That's because, until 2004, Californian home prices were boosted by high levels of disposable income and low interest rates. That changed in 2004 with a spike in "affordability products" including subprime loans and non-traditional mortgages.

The loans helped qualify those who otherwise couldn't, but later proved to risky to hold.

"They spiked in 2004 and drove California home prices above levels supported by economic conditions, now that the secondary market for these products has evaporated, we expect home prices to return to normalized levels (as prices fall and disposable incomes grow)," the report says.

The report concedes California's home prices had been resilient during the first signs of the downturn, but the state's housing future is now a candidate for a reversal of fortunes.

"We believe that a downturn is imminent, with sales volumes down 52 percent from the peak (in January 2005) and inventory (11.8 months) up 100 percent since last year. House price depreciation and credit deterioration go hand-in-hand. We anticipate residential mortgage credit deterioration to follow house price declines in California. Presently, credit quality (in absolute terms) is better in California versus the national average, but the rate of deterioration is much worse. For instance, in the second quarter of 2007 delinquency rates for prime ARMs and subprime ARMs rose 92 percent and 73 percent year-on-year respectively in California, versus 53 percent and 38 percent nationally," Goldman Sachs reported.

Rome [NY] Isn't Burning

The picture is darkening over a growing number of markets.

RealtyTrac's latest litany of lost homes reveals foreclosures were up 94 percent in October this year compared to last October -- nationwide.

With each passing month and at the end of every quarter, new rounds of numbers make the housing bust look more and more like the dot com bomb -- with a nauseating spin. Dot commers found some respite in real estate and even helped give birth to the boom. Foreclosed homeowners, left twisting in the winds of a bubble gone bust, get no quarter.

And, while the housing market is beginning to burn like an uncontained California brush fire, realty leaders fiddle with media rights, futilely hoping to censor the press or force it to mantra chant the dogma of local conditions and long-term investments when what consumers really need is a clue about how to make the next mortgage payment.

The denial is blinding.

Even local markets that have managed to escape depressed prices are unable to over come the scourge of the mortgage money changers who show little mercy in any market, local, regional or national.

Then there's that anecdotal evidence, local commentary, the word on the street

It's what really brings the story home.

The November 28, Federal Reserve "Beige Book", is a collection of just such anecdotal evidence about market conditions. It was gathered from economic and business contacts with boots on the ground in the reserve's 12 districts.

Here's what they are saying:

  • "Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown."
  • "Most Districts pointed to further increases in the inventory of available homes, with the earlier tightening of credit conditions for mortgage lending continuing to create barriers for some buyers."
  • "Consequently, prices on new and existing homes sold were reported to be down on a short-term or year-earlier basis in most Districts."
  • "Contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest."

As is often the case, as goes California, so goes the rest of the nation and perhaps the economy as well.

Said Bill Higgins, chief lending officer at online banker Ing Direct, "The bizarre thing is as we are looking at more foreclosures and real estate values, what's probably going to happen next year is the whole housing inventory market will change and you'll have almost as many foreclosures on the market as non foreclosures and that will make it hard to sell. It will hurt prices."

If it walks like a duck, quacks like a duck and has a market tension headache as throbbing as Chicken Little's…yeah, it's going to hurt.