The US sub-prime home mortgages sector is being blamed for the world’s economic ills. Experts agree that unless a line is drawn under the precipitous house price collapse, the US economy cannot recover and banks will remain unwilling to lend.
The government is pulling out a lot of stops to combat the downturn. Last week new President Obama signed the American Recovery and Reinvestment Act, which includes initiatives to help families recover and maintain their mortgage payments.
The National Association of Realtors wants the Act to be implemented swiftly.
It estimates that the home buyer tax provisions could stimulate up to 300,000 additional home sales, helping to stabilise values and protect some homeowners from bank foreclosure.
The housing market is bleak and, for the moment, foreclosures continue to increase. Steve Friedman, national director of homebuilding services at Ernst & Young in New York, says: “The residential for-sale market is not going to get healthy for the rest of the year. There is too much supply and not enough demand, even though the number of homes delivered to the market has fallen.”
Friedman says that at the peak, US homebuilders built 2.1m homes a year, but in 2008 they built fewer than 500,000 this year the number could be less than 300,000. “From peak to trough, that’s an 80% decline in new homes,” he says. “Historically, consumer confidence levels are low and consumers will not make big decisions such as buying a new home.”
Meanwhile, data up to November 2008 published by Standard & Poor’s for its S&P/Case-Shiller1 Home Price Indices, reflects continued big drops in the value of family homes across the country. Eleven of the 20 metropolitan areas covered showed record rates of annual decline. Friedman says: “The poster children for housing distress are South Florida, Arizona, Nevada and parts of California. Peak to current value declines are 30%, and almost 50% in some cases.”
Other S&P/Case Shiller indices illustrate the magnitude of the home price decline in the past two years. In November 2008, average home prices were at similar levels to those of the first quarter of 2004. From their peaks in mid-2006, the 10-City Composite and 20-City Composite are down 26.6% and 25.1% respectively.
S&P/CS monthly data also continues to show declines. All 20 metropolitan areas, and the two composites, have recorded three consecutive monthly falls. In addition, eight of the areas – Atlanta, Boston, Charlotte, Chicago, Dallas, New York, Portland and Seattle – have posted their largest monthly decline on record.Owners of multi-family portfolios are also suffering from downward pressure on rents due to lower demand, as tenants opt to lodge with their own family and immigration rates decline. Friedman predicts a double hit for institutional investors beginning in the second or third quarter of this year when this declining rental income is coupled with lack of debt available from lenders to the corporate sector.
There will be some good prospects for equity buyers though. “It’s a good opportunity for those with access to capital,” says Friedman. “Life insurance companies continue to generate substantial cash flow through premiums, as do the pension funds through premiums, which need to be invested. Historically they are present in the market, but they will put more in, although it’s hard to quantify how much.”
But Rick Sharga, senior vice president of US researcher RealtyTrac, says: “There is a stand-off. The banks and lenders are unwilling to discount properties, or the securitised notes behind them, to a level that would entice institutional investors in large numbers to buy.”
This, Sharga explains, is because there is speculation that the government will buy up distressed assets and notes at a reduced discount. “So the prospect of government housing relief is stalling normal discounting, and also purchasing by vulture funds. That’s why banks, if they can get a better deal from the government, are unwilling to drop prices for buyers as steeply as they need to.”
So far, America’s lending industry has been incapable of stemming the tide of mortgage foreclosures and Sharga predicts “pretty significant government intervention in terms of regulatory procedures and legislation” if no solution is found to the problem of exposure to distressed assets.
