Housing and Debt

A Harvard study released yesterday, The States of the Nation's Housing 2006, paints a fairly rosy picture of the nation's housing market - it seems the only real problem that exists in real estate today is one of affordability.

Apparently, it's not a matter of prices having risen too high, the problem is that wages are not rising fast enough - some way must be found to make these expensive houses less of a burden on monthly budgets. The economy is strong, jobs are plentiful, demographics are favorable - there's just this affordability problem. And price declines are virtually ruled out.

With building levels still in check and the economy expanding, large house price declines appear unlikely for now. But if the economy falters, both job growth and housing prices will come under renewed pressure. This would spark higher default rates, especially among subprime borrowers, and turn housing from an engine of economic growth to a drag.

In this report from the Financial Times on the study, the head of the housing department at Harvard comments on the real estate outlook.

"Although housing prices are stretched, it is hard to see the catalyst for a crisis in the market," says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. "The overvaluation looks pretty well balanced by longer term supports for house prices, so we may just see a few years with little action. Houses will revert to being something to live in rather than money makers."

Well, how about lost jobs related to real estate as a catalyst for a crisis. Construction and mortgage lending jobs aren't being created at near the rate as in previous years now that home prices and interest rates have risen so much. The nearly one million construction jobs created in the last few years are not likely to stick around much longer if recent trends continue - the leveling off in recent months is plain to see.
It used to be the case that "as goes the local economy, so goes the housing market", but in much of the country today, the local housing market is the economy.

San Diego, not yet a loser ... barely

In San Diego, many people are becoming a bit concerned now that the single most widely accepted gauge of real estate prices, the year-over-year median price change, has come within a whisker of going negative. This story from Signs on San Diego provides the details.

San Diego County's home prices took their biggest tumble for any spring on record last month, DataQuick Information Systems reported Tuesday.

The median price of all homes sold in May was $490,000, down $15,000 from April, although it was still slightly higher than a year ago.
...
Leslie Appleton-Young, chief economist for the California Association of Realtors, said she no longer uses the term “soft landing” to describe the state of the housing market, but has yet to find a way to characterize current conditions.

“I'm searching for a new moniker,” she said.

She and other industry leaders have rejected analogies like a “housing bubble” prone to popping.

The chart that goes along with the story paints a stark picture of the condo resale market. While new home sales prices are said to be unduly influenced by low-priced condo conversions, the median is the median, and the median price change for all homes sold now rounds to a goose egg.

The number of sales versus the same month last year are way down (despite the increase in condo conversion sales), and inventory is way up. Interest rates will be moving up a bit more in a few weeks and the peak summer selling months have yet to begin.

It appears that the buyer-seller standoff on prices is about to resolve itself in San Diego.

All that debt

Interest rates may have been rising in the last year or two, but that hasn't stopped people from borrowing money. The chart below is from the just-released Federal Reserve Z1 report where it is found that Americans continue to pile on the mortgage debt in spite of increased interest costs.
Note that the totals for 2006 are annualized based on the Q1 data.

Though the rate at which mortgage debt is being piled on has declined a bit in the most recent quarter it is still rising briskly - a rate of about a trillion dollars a year. A trillion here, a trillion there - pretty soon you're talking about real money.

A local lender writes

So what kind of new mortgage debt has been added in recent years? With interest rates higher, how can people continue to afford these high real estate prices? Local lender Mike explains:

A friend of mine works in the County Assessors office and he is in charge of filing all the PCORs (Public Change of Records, required for all property sales). I asked him of all the filings he did last year how many or what percentage of homes were bought in Ventura County with 100% financing.

He told me a pretty accurate figure was close to 80-85%. I could not believe it! Even as a lender I could not believe it! I then asked him what percentage of those homes were bought with adjustable rate mortgages or interest only loans. He immediately said "All of 'em."

The Harvard study, and many others like it, tend to place these non-traditional mortgage products in the context of the total mortgage market. They calm fears by stating things like, "While these types of mortgages accounted for forty percent of all new loans last year, they make up only ten percent of total outstanding mortgage debt."

That's all well and good, except that prices are set by recent sales, not from someone about to make their last mortgage payment, and according to local lender Mike, nearly every recent sale made in these parts has been of the "make my monthly payment as small as possible" variety.

For the thousands of home sales being made every month in at least one county in California, where the median price is over $600,000, prices are wholly dependent upon non-traditional mortgage products, which have yet to see any regulatory control from any federal agency (proposed guidance was circulated last fall, but lenders didn't like what they saw, though Ben Bernanke did recently promise to do something about this some day).

Don't count on prices remaining aloft if interest rates continue to rise and non-traditional mortgage products finally see some regulation. They may not even stay aloft if interest rates are lowered and the loan products get more even non-traditional.

UPDATE (June 14, 8:15 PST):

Here's a link to Keith's post at HousingPanic about the policy advisory board for the Harvard housing study, and here's a link to the Harvard website with the same info.