The economic environment for homebuilders continued to worsen in January and in February as well based on preliminary housing market and economic reports. Home affordability increased again in January to a level usually consistent with a much larger and expanding market.

However, the January index could be the peak for some months. Job cuts began in February and are likely to continue for at least several more months. Wage growth is now slowing abruptly. Although there is no data yet it is almost certain than the turn to an economic slowdown/recession is cutting bonuses, commissions, self-employed profits, rental income and dividends. Also, the 30-year fixed mortgage rate moved up in February in response to persistently high energy and food inflation and a rise in inflations expectations. Home affordability gains will end and possibly reverse.

Permits and sales dipped in February and now appear likely to decline somewhat more into the spring. The traffic of prospective buyers remains depressed by the prospect of further drops in home prices as earlier defaults move closer to foreclosure dates. The 2.4% drop in prices in the 4th quarter for homes with conforming mortgages suggests that we are now in the period of most rapid home price declines.

The mortgage availability situation is no longer worsening for homebuilders although the fall out from the collapse of the subprime mortgage market is now seriously slowing the rest of the economy. Congress has approved raising the limit for conforming mortgages substantially which will quickly boost the availability and cut the cost of $417,000 to 700,000 mortgages. This is positive but a small part of the needed solution.

Also, lenders are now more willing to make larger concessions to homeowners in default because they fear even larger losses from selling foreclosed homes in a very depressed market. Perhaps a few hundred thousand distressed homeowners with significant home equity and an acceptable credit record until recently can save their homes. But they will have to cut back on other spending which will tend to stretch out the downturn/recession period in the aggregate economy. This is also positive but a small part of the needed solution.

The core of the subprime problem is three other groups of homeowners that lenders are not capable of rescuing. These people first appeared in the housing market in significant numbers in late 2004. One group is those who got fraudulent mortgages and do not want to talk to anyone about mortgage help for fear of acknowledging their fraud. A second group is speculators who got in or stayed in the market too long. Hundreds of thousands in this group have already decided to abandon their downpayment, if there was one. They also do not want to talk to credit counselors.

The third group is those who overreached, took a mortgage that they should have known they could not repay. Many in this group were simply “pretending” to buy a house because it was cheaper than rent, knowing that foreclosure generally takes longer than eviction. They may talk to credit counselors but there is no solution to their mortgage payment problem short of a 50% or more concession by their lenders who often would rather foreclose now than later on demonstrated poor credit risks.

Do not count on credit counseling, foreclosure moratoriums or public funds to buy bad mortgages to stop home prices from falling. They will fall further and the faster this happens the sooner the housing recession will end.

Member Comments