The Federal Reserve Bank of St. Louis provides the most comprehensive statistics and analyses of the Federal Reserve System.
The latest report on housing offers little hope.
Higher delinquencies and foreclosures have been a consistent feature of the mortgage market since 2005. Figure 1 shows the increasing foreclosure rates for the past two years. As of October 2010, the foreclosure rate stood at about 3.3 percent. In contrast, the percentage of mortgages in serious delinquency peaked in early 2010 and has been on the decline since, dropping to about 4.1 percent in October. (We define a mortgage as seriously delinquent if payments have been past due for over 90 days but the mortgage has not been foreclosed upon.) A decline in serious delinquencies would imply that foreclosure rates in the near future are likely to fall, absent any surge in new delinquencies. Of course, there is little doubt that these rates are significantly higher than normal and that mortgage markets in the U.S. are still under significant stress. To put things in perspective, seriously delinquent rates and foreclosure rates averaged 0.84 percent and 0.46 percent over the first half of the decade, respectively.
It offers hope regarding inventories, but it fails to mention shadow inventory held by lenders.
At the same time, there has been a sharp decline in the demand for housing. Housing starts have been decreasing slightly over the past few months, although the overall trend has not seen a significant change since starts bottomed out in January 2009 at a bit less than 500,000 on an annualized basis. This October, there were 519,000 housing starts on an annualized basis, about 69,000 fewer than in September.
Then comes a downbeat assessment.
Needless to say, the future path of house prices will depend not only on the trends in housing but also the condition of the overall economy, including the unemployment rate. As of November, the national unemployment rate stood at 9.8 percent with continuing insipid growth in the economy overall. If the unemployment rate continues to increase and the economy suffers further job losses, higher default rates on mortgages could occur, leading to lower prices. A fall in house prices could imply that more mortgages are underwater—that is, the amount homeowners owe on their mortgages exceeds the current market price of their homes. As recent research has shown, this could lead, in turn, to further defaults, exacerbating the stress in mortgage markets.
Expectations of economic conditions and future house prices also play a significant role, as do interest rates. If prospective buyers expect home prices to decline, they are more likely to postpone purchasing a home in favor of renting. Also, if long-term rates rise, the recent slide in mortgage rates could reverse; such a move, in turn, would dampen mortgage demand.
Weaker job growth and higher mortgage rates are unlikely to spur demand for housing. Until people feel the economy’s prospects are definitely getting better, they will remain less likely to buy a home.