Housing What’s Hot, What’s Not?

May 31, 2007  by in UnCategorized   

By Home Furnishings Business in on June 2007 Six months ago the talk was all about the “housing bubble.” Now economists and other commentators are moving on to foreclosures and rising mortgage rates.

Fact or fiction?

It’s probably a mix of both. First of all, housing statistics were less than stellar in February, compared with year-earlier results. Residential construction starts stood at

1.5 million, off 28.5 percent from a year ago, sales of existing homes fell to 6.7 million from 6.9 million, a 3.6 percent decline, and new home sales fell from 1 million 12 months ago to 848,000, a drop of 18.3 percent.

Compared with January, though, the overall housing market looks much better. Starts increased 9 percent, resales were up 3.9 percent and new home sales slipped 3.9 percent.

Pending home sales, which measure the number of homes under contract, but not closed, declined 8.5 percent, year-over-year, in February, but were up 0.7 percent compared with January results.

Perhaps the best methodology is to compare housing today versus housing in 2004. For residential construction starts, the year-to-date (two months) average in the Northeast slipped 6.2 percent from 2004 results, fell 15.7 percent in the South, dropped 29.8 percent in the West and plummeted 50.9 percent in the Midwest.

The decline in sales of new homes was nearly as depressing: the Northeast, Midwest, South and West saw drops of 41.6 percent, 33.6 percent, 16.9 percent and 39.7 percent, respectively.

The pending home sales index, 2007 YTD average versus 2004, was somewhat less alarming: down 9.1 percent, 14.4 percent, 6.0 percent and 12.6 percent, respectively, for the Northeast, Midwest, South and West.

The lone bright spot was in sales of existing homes, where only the West region reported a decline—16.2 percent. The Midwest was flat at 5.6 million homes; the South was up 0.8 percent and the Northeast increased 2 percent, 2007 over 2004.

Unfortunately, comparisons of the year-to-date averages skew the results, since the first two months of the calendar are traditionally the lowest-performing of the year. Based on just these two months compared with the same months three years earlier, the housing market appears to slipping, but is certainly not in a free-fall.

Despite low sales and starts, average housing prices for the first two months of 2007 were up substantially over 2004 prices, with the highest increase—15 percent—recorded in the West, where the median sale price of existing homes was $329,400, up from $286,400 in 2004. Median prices in the Northeast, Midwest and South also increased, to $243,800, $154,600 and $170,400 respectively, resulting in gains of 8.3 percent, 2.9 percent and 3 percent.

So, bubble or no bubble? In 2006 and so far in 2007, housing statistics are remaining relatively steady, despite the annual first-quarter slowdown.

The End of the Easy Mortgage?

There may be a slowing in the overall housing market and rising home prices, but mortgage rates continue to be among the lowest in the last 35 years. According to the 2005 American Housing Survey (AHS), compiled by the U.S. Department of Commerce, one-third of owner-occupied housing is owned free and clear, with the balance carrying mortgage or home-equity loans.

Data compiled by Freddie Mac, the federal government-chartered corporation that buys mortgages, repackages them and then sells them to investors, shows 30-year fixed-rate mortgages are hovering in the low- to mid-6 percent mark. The all-time low point for these mortgages was reached in June of 2003, when rates sank to 5.23 percent. The high water mark—18.45 percent—was reached in October of 1981.

Analysts are not worried about the 30-year fixed-rate mortgage (FRM), but with the popularity in recent years of Adjustable Rate Mortgages (ARM). The 30-year FRM has long been considered the mainstay of the mortgage rate business.

ARMs don’t get quite the same respect. But in recent years they’ve received a lot more attention, as borrowers and lenders became more creative in tailoring loans to specific customer needs and qualifications.

ARMs usually begin the loan repayment schedule with low “teaser” rates that are several percentage points below the 30-year rate. As the loan matures, sometimes in as little as a year or two, that initial rate blossoms into a monthly mortgage payment that borrowers may find difficult to manage.

Other ARMs are known as “option” loans, since the borrower can choose from a variety of repayment plans, such as interest-only or principal-only monthly payments, allowing the amount borrowed to grow steadily larger, potentially saddling the homeowner with crushing debt down the road.

Of those 67 percent of properties that have either mortgage or home equity loans, the 2005 American Housing Survey indicates 10 percent are ARM loans, subject to ARM problems. One major difficulty in refinancing these loans is hefty prepayment penalties that are frequently part of the loan agreement.

According to the Mortgage Bankers Association (MBA), about $1.1 trillion to $1.5 trillion in ARMs will face rate increases this year, and the association expects borrowers to refinance more than half of those mortgages. The tricky part for homeowners with a steadily rising ARM is to find and qualify for a loan that they can afford.

The problem in refinancing is a general tightening of credit due to increasing defaults and foreclosures. Financial institutions that once were more than willing to write generous loans to almost anyone have shut off the spigot.

Subprime mortgages, those written for homeowners with credit problems, are the most worrisome. The mortgage rate for subprime loans is usually about three percentage points higher than the going market rate. Current estimates are that 10.5 percent of subprime loans will fall delinquent, a rate much higher than the rest of the mortgage market.

When the Bow Breaks, the Furniture Baby May Fall

Perhaps the greatest single incentive for Americans to buy furniture is the purchase of a new home. A new home gives the owner the urge to decorate and make that new house into a stylish home. Anything that gets in the way of that poses a problem for furniture retailers.

Analysts at NAR say tighter lending criteria and fallout from subprime loan failures will lead, eventually, to a healthier housing market with greater assurance that owners can handle mortgage adjustments, but more stringent loan standards will slow the housing recovery. David Lereah, the association’s senior vice president and chief economist, predicts that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than 3 percent a year over the next two years.

NAR has also created the “Housing Affordability Index.” The index shows that, over the past year, home ownership is still within the reach of most borrowers. Combining mortgage rates with home prices, family income and a 20 percent down payment, the index indicates that home affordability slipped below the 100 percent mark just once in the past 13 months, based on a monthly principal and interest payment of no more than 25 percent of income.

Trouble may loom ahead for potential home buyers in the West, though. Based on February statistics, the affordability index fell to 74.5 percent when the required monthly payment soared to 33.6 percent of income.