By David A. Lereah (ReeconAdvisoryReport.com)
RISMEDIA, February 12, 2009-Nearly three years into a spiraling downturn, our nation’s housing sector looks like a mere shadow of itself. Some of what remains today is good; and some of what remains today is not so good.
Gone are the wanton days of subprime and Alt A lending. Once 40 percent of total originations at the height of the real estate boom, the nontraditional lending business has closed its doors. Also gone are overly accommodative underwriting practices that flooded the marketplace with low down payment loans and no documentation loans. Left in its wake are a mounting number of foreclosures and an increasing number of households unable to meet their mortgage obligations.
Today, lenders are pursuing responsible lending almost to a fault. Mortgage credit is tight; there are few mortgage products and down payment requirements begin at 20 percent. Adjustable-rate mortgage products are scarce and the jumbo market has shrunk to irrelevance.
Gone are two of the most powerful corporations in the world-Fannie Mae and Freddie Mac, who once wielded enormous political and business influence over the housing sector. Today, the two nationalized mortgage giants behave more like wounded soldiers in a war not yet over.
Gone is an irrelevant and weak FHA boasting little market share. Today, FHA has become a major player with a 20 to 40 percent market share, depending on the region of the country.
Gone is the high level of second home buying for resort and investment purposes. During the height of the real estate boom, second home purchases accounted for almost 40 percent of total home sales. Today, second home purchases account for less than 20 percent of total home sales; while foreclosure properties account for almost 40 percent of total home sales.
Gone are the days of 7 million existing home sales, over 1.3 million new home sales, and 1.7 million housing starts in a single year (2005). Similarly, gone are the days of steady and sometimes surging home price appreciation.
Today’s housing landscape is so much different; our nation’s housing sector has literally shrunk in size. Existing home sales were an annualized 4.74 million in December, while new home sales and housing starts were a mere 330,000 and 550,000, respectively. Home values have plummeted over the past several years. According to the Case-Shiller home price index for twenty cities, home values were down 18 percent in 2008 compared to 2007.
It is not an overstatement to say that our nation’s housing sector has experienced dramatic changes during these past several years. The housing pie has gotten smaller and the composition of the pie has also changed. All of the major housing players will have to adjust to this new reality.
The nation’s battered labor market took another hit this past week with the news that employers cut 598,000 jobs off of U.S. payrolls in January. The unemployment rate rose to 7.6 percent, the highest level since September 1992. The job loss is the worst since December 1974 and takes job losses to 1.8 million in the last three months. Businesses are laying off workers at a pace not seen since World War II. It has never been more apparent that bold fiscal action is needed to restore our nation’s labor markets and jump-start the economy.
Other economic indictors echoed the dismal labor report. Auto sales fell to an annualized pace of 9.5 million units in January, the lowest pace since 1982. This report was troubling and reflects very weak consumer demand for big ticket items such as autos and homes. Factory orders fell 3.9 percent in December for the fifth consecutive monthly decline. The manufacturing sector is contracting at a rate not seen since World War II. And weekly jobless claims increased by 35,000 to 626,000 for the week ending January 31. It is clear that business confidence is weakening as companies continue to lay off workers at an alarming pace.
On the housing side, the pending home sales index rose 6.3 percent in December, exceeding expectations. The rise in this index probably reflects households responding to lower mortgage rates in December. The index suggests a mild rise in future existing home sales in the coming months but we are mindful that there could be some fallout from a home contract to a home closing. Finally, the purchase application index for the week ending January 30 fell 11.2 percent to 261.4, while the refi index rose 15.8 percent to 3,906.3. The rise in the purchase index was disappointing news and likely reflects a modest rise in mortgage rates during the week.
David A. Lereah, president of Reecon Advisors, is a recognized expert in real estate economics and financial services. Dr. Lereah was Senior Vice President and Chief Economist of the National Association of Realtors and Chief Economist for the Mortgage Bankers Association of America. This commentary first appeared in the Reecon Advisory Report, an independent source of news, insight and intelligence on the real estate economics that are shaping real estate markets. For more information, go to ReeconAdvisoryReport.com.
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