Nov 05 2008
Deepening Financial Turmoil Further Delaying Housing Recovery published by Milan Rubenstein of Milan Management LLC
The optimism in the housing markets spurred by the federal government’s action to place Fannie Mae and Freddie Mac into conservatorship this summer has been overtaken by the continued stress and panic in the financial markets, according to the Mortgage Bankers Association of America’s (MBAA) latest outlook.
The outlook preceded by a few days release of the latest housing data that showed slight increases in existing and new home sales, but continued price declines.
The relatively stronger performance of existing home sales over new home sales largely reflects the rising share of foreclosed homes that were sold through the multiple listing services. Many homebuyers have found that foreclosed homes can be substitutes for new homes, especially those that were recently built and are being sold at deep discounts. The National Association of Realtors estimated that foreclosures account for about one-third of the existing home market, indicating that activity would have been much weaker had it not been for distressed sales.
The months’ supply measures for new and existing homes stayed above 10 months, which is worrisome given that it has now been over two years of the housing downturn, the MBAA noted. With tighter lending standards and reduced credit availability, potential buyers are having trouble selling existing homes and securing financing.
All measures of home prices released in the past months show accelerating price declines. The median price for total existing homes posted the largest decline on record at 9.5%, compared with a sizable 6.2% drop for new homes.
Homebuilding activity continued to fall in September as builders try to address the huge overhang of unsold inventory in many parts of the country and soft housing demand.
Leading indicators of home building activity suggested further declines in the near term. Single-family permits-a leading indicator for single-family housing starts-dropped in September for the 17th time in the past 18 months.
Given deteriorating performance of leading indicators of the housing market, the MBAA said it expects continued declines in housing activity. It also expects housing activity to remain sluggish in 2009, as the economic downturn continues through the first half of next year. As economic growth accelerates to trend pace in 2010 and credit conditions return to more normal levels, it expects significant improvement in both housing starts and home sales.
MBAA said it expects total existing home sales for 2008 could decline about 13% from 2007 to 4.94 million units. However, it expects sales to pick up about three% in 2009 and about 6% in 2010.
It expects new sales to decline another 12% in 2009 before rising about 25% in 2010.
Median home prices for new and existing homes are expected to continue their decline this year, falling about 6-7%. Prices should decline more modestly in 2009 before rising slightly in 2010.
With increased uncertainty on financial markets and the economy and with responses from policymakers to tackle the credit crisis, there is little clarity on how effective these measures will be to shore up the capital position of financial institutions and restore liquidity and confidence to the financial system, the MBAA said.
The MBAA noted that massive liquidity injections by central banks around the world over the past several weeks are slowly working to push down the interest rates on interbank lending. The Libor rates have slowly declined, which should help reduce financial stress as these rates are used to calculate interest rates on some mortgages and business loans. Other short-term interest rates such as the rates on commercial papers have declined as well.
Milan Rubenstein Milan Management LLC
