8/12/2010
By David Urani, Research Analyst

The housing market has been through a lot lately, from the homebuyers' tax credit, to the White House's HAMP mortgage modification program, to record low mortgage rates. All of those actions were meant to soothe the housing market, and it's actually been quite encouraging to see that prices have been surprisingly resilient for the past year. Although different sources show varying conclusions, when we compare the main pricing indices (as shown below), including those from Case-Shiller, Zillow, and the FHFA, we see that over the past year, prices have essentially flattened out. It's not all that hard to believe, considering economic activity picked up in the second half of 2009 and the tax credit fueled home sales (while also possibly artificially propping up prices directly as well). However, the environment has changed lately.

Foreclosure filings for July increased from June, reaching a total of 325,229 for the month. That makes 17 consecutive months that foreclosure filings have been above 300,000. Both new delinquencies and foreclosure completions rose during the month, indicating an all-around bad report. New delinquencies had been on a steady decline, indicating stabilization in the health of homeowners. However, the latest uptick in new filings indicates that we are by no means home free yet, and in fact weak pricing continues to put more borrowers underwater. In addition, the rate of foreclosure completions (repossessions) continues to rise and now rests at the second highest level on record, second only to May.  Essentially, that means that the rate of vacant homes hitting the market is at an all-time high pace, threatening to add to the excess supply in the market. In fact, existing home supply has already risen for four of the last five months and is up 22% year to date.

Having seen the massive downturn in home sales after the expiration of the homebuyers' tax credit and the still alarmingly high rate of foreclosures, one can say that the housing market is truly in the gutter, from both a supply and demand standpoint. Applying some Econ 101, we can deduce that falling demand + rising supply = lower prices. As of yet, we do not have conclusive data for pricing since the tax credit ended.  The Case Shiller index for May showed a slight increase month to month, but Mr. Shiller himself noted that there seemed to be a residual effect from tax credit sales that had not been processed yet.

Extremely low mortgage rates (now 4.4%), mortgage modifications, tax credits and more have hardly put a dent in the problem. Sure, some of the mortgage relief programs have slowed the process down, but with roughly seven million borrowers in delinquency, slowing the process down can only do so much. In truth there is no silver bullet; if the Obama administration really wanted to do something extreme, they could reduce principals on droves of troubled homeowners but that would come at an exorbitant cost and would obviously be re-fueling the housing bubble. As liberal as he is, I think even he knows that's a bad idea. When it comes down to it, it's simply going to take a true rebound in employment to turn the housing market in the right direction.

David Urani
Wall Street Strategies