Housing Weak, or not a Bubble?
All the bad news on the housing industry is compiled by Comstock Partners
Ø 32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000
Ø 43% of first-time home buyers in 2005 put no money down.
Ø 15.2% of 2005 home buyers owe at least 10% more than their home is worth.
Ø 10% of all home owners have no equity in their homes
Ø $2.7 trillion in loans will adjust to higher rates in 2006 and 2007.
Ø 70% of borrowers who took out pay-option ARMS in the past year have loan balances larger than their initial loan.
Ø Homeowners face higher payments as mortgages are reset. Generally, monthly payments rise between $200 and $500 depending on the size of the mortgage.
Ø According to Reality Trac, August foreclosures were up 23% over July and 53% over a year ago.
Ø The number of homes for sale is at record highs, and inventories are 59% higher than a year earlier.
Ø New home sales are down 22% and existing home sales down 11%.
Ø The NASB housing market index has recorded an all-time decline.
Ø The housing affordability index is at a 15-year low.
Ø The house price-to-income (rents) ratio is off the charts. According to HSBC, in 18 states accounting for over 40% of national home values, the price-to-income ratio is 3.6 standard deviations above the mean.
Ø The OFHEO index of house prices deflated by the consumption price deflator has soared to a record high of 350 from 250 in 2001. From 1976 to 1996 it never was above 220.
Ø According to the NAR the year-to year prices of existing homes are now flat. A short time ago they were rising at a yearly rate of 16%.
Ø Nationally, home prices have not declined on a year-to-year basis since 1933. Recently, however, prices have been dropping in the North East, West and Mid-West.
Ø Sales incentives are now estimated at 3% to 7% of selling prices.
A hat tip to The Big Picture for the link.
On the other hand, a recent paper from the Chicago Fed argues that the housing boom is/was not a bubble, and not due only to low interest rate, but the result of fundamentals. Some of their conclusions:
Second, the current levels of spending on housing are largely explained by the wealth created by dramatic technological progress over the previous decade. Third, changes in the demographic, income, educational, and regional structure of the population account for only one-half of the increase in homeownership. … The last finding is that substitution away from rental housing made possible by technology-driven developments in the mortgage market, such as subprime lending, could account for a significant fraction of the increase in residential investment and homeownership. The current spending boom thus may be a temporary transition toward an era with higher homeownership rates and a share of spending on housing that is nearer historical norms.
I haven’t read the paper yet, but the conclusions are intriguing. (Just returned from a road trip giving speeches, so give me a break.) A hat tip to Economist’s View for the link.
