The only good news from the housing market in the last month was a jump in home affordability, a small tick up in home sales and a small drop in the inventory of homes for sale. None of these changes will prompt homebuilders to increase housing starts soon.

The affordability improvement is meaningless. Usually a 10 point jump in affordability to the 135-140 range would mean a strong and improving housing market. But not now. The financially marginal buyers that would typically enter the housing market in this situation are locked out by their credit scores, their lack of enough downpayment or caution from the 25% drop in the value of their securities investments.

The rise in home sales and the accompanying drop in for sale inventory is largely due to bargain hunters buying homes at distressed prices. This is reported to be nearly half of home sales in California and nearly as much in Florida. While necessary for recovery, sales of this type are not sufficient to start recovery until the surplus inventory drops from the current five months of sales to 1-2 months. It is likely that a large share of recent bargain sales were made to speculators who will quickly put them back on the market.

Most of the data in the accompanying table does not yet reflect the negative impact of the August-October credit freeze. That will hit in the next two months. Expect very ugly reports on housing for the rest of this year.

However, there is some good news that is not possible to quantify and add to the table. The peak level of foreclosures — and home thrown onto the resale market — is occurring about now. Foreclosures will remain well above normal levels for several more years and will keep the expected housing recovery beginning next year very slow. The foreclosure peak means that the surplus of homes for sale will now decline more quickly permitting a rise in single family housing starts as early as next spring.

The ebbing of foreclosures will be helped considerable by the large amounts of public cash now committed to mortgage principal or interest rate writedowns to avoid foreclosures. The HUD and private bank programs to do this are now rapidly expanding. And President elect Obama has made it very clear that he will raise the federal deficit to prevent mortgage foreclosures. This comes from his belief that most households facing foreclosure are innocent victims.

How many foreclosures will be avoided with taxpayer subsidies is still uncertain. Speculators who walked away from deals gone sour can expect no help from Washington. Only a small share of homeowners who never had any or very little equity and were financially overextended at the time of their first payment will get relief. The help in the works is both too little and too late and will automatically exclude many people in this group.

Mortgage relief will come mostly to homeowners who once had substantial equity and have a long record of making monthly payments. Some of these are in the former booming housing markets where prices have now plunged as much as 50%. These households paid too much for their home but now have been caught up in the earlier financial misbehavior of their neighbors. However, most of the households in this situation will be elsewhere in the country where the housing problem has only recently become serious. These are people beset with lost jobs or income, unexpected expenses or household breakups — the reasons that cause some foreclosures even in the best of times.

Expect the main impact of the various foreclosure prevention efforts not to jump starts the hardest hit housing markets but to slow the spread of foreclosures from California, Nevada, Arizona and Florida to the rest of the country.

Housing Market Monitor — September 2008

Abbreviations: NAR = National Association of Realtors; NAHB = National Association of Home Builders;
OFHEO = Office of Federal Housing Enterprise Oversight.
Table: Reed Construction Data and Reed Construction Data – CanaData.