Round Two For US Housing
By ALEN MATTICH
A DOW JONES NEWSWIRES COLUMN
U.S. real estate looks like it'll double dip.
Just as it seems that the economy is finally pulling itself out of recession, some rather bad smells are again starting to waft from America's property markets. That commercial real estate is sick is pretty well known. But because there has been relatively little over-building in the sector during recent years, this should remain a much more limited issue for the wider economy than residential real estate has been.
And despite recent hopes that the patient has been stabilized, there are again whiffs of gangrene coming from the housing sector.
That shouldn't be altogether surprising. Despite the hefty losses suffered since the market's peak in early 2006, valuations are still high relative to historic trend. Both price to median household income and price-to-rent ratios are from 10% to 20% above long-run trend. What's more, rental vacancy rates are high and rental rates are falling, which will tend to push the price-to-rent ratio higher still. Valuations may no longer be in bubble territory, but they're not cheap either.
At the same time, fiscal and legal supports are coming to an end. Although U.S. foreclosure filings in the fourth quarter dropped 7% from the previous quarter, this is likely to have been held back by measures instituted to delay the process. Calculated Risk, a blog that specializes in the U.S. housing market, figures foreclosure activity will pick up sharply again in February when trial mortgage modifications come to an end.
Although the tax credit for first-time home buyers has been extended and broadened, the spike in November home sales, triggered by a rush ahead of its original expiry date, is unlikely to be repeated. Inventory levels will be further pushed up by an increase in repossession sales, which will put yet more downward pressure on prices.
Indeed, timely, albeit not seasonally-adjusted, measures of house prices show them to have dropped back for the second month running in December. The widely cited Case-Shiller measure of U.S. house prices, which tends to lag by a couple of months, will be watched closely for evidence of this dip this month and next. But it has shown a deceleration in the rate at which prices were rebounding.
And, finally, there's the small matter of option ARM resets. These adjustable rate mortgages were a popular instrument during the height of the housing bubble because they allowed people initially to pay only part of their mortgage interest, allowing the remainder to accumulate as part of their principal repayments (also pushed into the future). Well, there's a big spike through this year and next in the number of these mortgages that adjust from these favorable terms onto their ultimate pay schedule. It'll be like another wave of subprime defaults. Indeed, research shows the default rate on these option ARMs is second only to those of subprime loans.
Factoring in the millions of households underwater on their mortgages, the fact that mortgage rates have started to creep higher, the gloomy outlook for real estate and a thorough disenchantment with the financial services industry which reduces people's sense of moral obligation to keep to the spirit rather than just the letter of their mortgage contracts, it's little wonder many people are voluntarily walking away from their houses. Why pay a mortgage when you can rent the same sort of house for half as much?
And, unfortunately, where residential real estate goes, so follows the rest of the economy. |
