decreased 15 percent from April 2008, while the number of homes on the market fell to the lowest level in almost eight years.
Near record-low mortgage rates, bargain pricing and tax credits for first-time buyers are helping to put a floor under purchases after almost four years of declines. Still, rising unemployment and tight credit indicate sales will not rebound much in coming months, even as the worst recession in half a century begins to ease.
“The good news is probably the continued improvement in inventory levels,” said Adam York, an economist at Wachovia Corp. in Charlotte, North Carolina. “We’ll take the improvement in the new-home market as a sign we’re getting closer to the bottom and we might see some stability in the housing market by the summer.”"
I see stories like this printed constantly in the financial media, constantly touting improved inventory levels marking the bottom and the worst being behind us in terms of the housing market. Sorry, that is absolutely the wrong conclusion. What is happening is that subprime mortgage resets have worked their way through the system and the subprime mortgage borrowers have long-since defaulted, with the houses at the low end of the market having worked their way through the system. What will happen now, and what we are starting to see is a huge uptick in Alt-A and Prime mortgage defaults.
Now, while the default rate is lower % wise for these two segments, the total size of these types of mortgage outstanding is much much greater than subprime, and hence the wave of defaults, in dollar amount, will be as large if not larger than the subprime wave we just endured. Since these buyers tend to buy higher priced homes, the median sale price will undoubtedly increase as the distressed sale cancer moves upmarket, however the price Y-o-Y on the properties for sale will tank. It will take 2-3 years for this wave to work through the system.
NY Times has the data which is depicting this: http://www.nytimes.com/imagepages/2009/05/25/business/economy/25foreclose.grfx.ready.htm
Subprime defaults rose rapidly in 2006-2007, plateauing in 2008 while ALT-A defaults began to rise rapidly in 2007 continuing through today, and prime mortgages defaults began rising in earnest in 2008. Already the total dollar amount of ALT-A and Prime mortgages defaults individually exceed the total amount of defaulted subprime mortgages ($250B), and we are only partially through the ALT-A default wave and just beginning the prime default wave. This default wave is being caused less by fraud (though still a significant part of the ALT-A default wave) and more by macroeconomic factors (job losses mostly).
Mortgage issuance:
2003:
$2,445B in Conforming (62% of 2003 issuance)
$ 631B in Jumbo's (16% of 2003 issuance)
$ 315B in HEL's ( 8% of 2003 issuance)
$ 79B in Alt-A ( 2% of 2003 issuance)
$ 237B in Subprime ( 6% of 2003 issuance)
$ 237 B in FHA/VA ( 6% of 2003 issuance)
2004:
$1,198B in Conforming (41% of 2004 issuance)
$ 526B in Jumbo's (18% of 2004 issuance)
$ 526B in HEL's (18% of 2004 issuance)
$ 204B in Alt-A ( 7% of 2004 issuance)
$ 321B in Subprime (11% of 2004 issuance)
$ 146B in FHA/VA ( 5% of 2004 issuance)
2005:
$1,092B in Conforming (35% of 2005 issuance)
$ 560B in Jumbo's (18% of 2005 issuance)
$ 374B in HEL's (12% of 2005 issuance)
$ 374B in Alt-A (12 of 2005 issuance)
$ 624B in Subprime (20% of 2005 issuance)
$ 94B in FHA/VA ( 3% of 2005 issuance)
2006 (Start of subprime default wave):
$983B in Conforming (33% of 2006 issuance)
$477B in Jumbo's (16% of 2006 issuance)
$417B in HEL's (14% of 2006 issuance)
$387B in Alt-A (13% of 2006 issuance)
$596B in Subprime (20% of 2006 issuance)
$ 90B in FHA/VA ( 3% of 2006 issuance)
2007 (Start of Alt-A default wave):
$1166B in Conforming (48% of 2007 issuance)
$340B in Jumbo's (14% of 2007 issuance)
$364B in HEL's (15% of 2007 issuance)
$267B in Alt-A (11% of 2007 issuance)
$194B in Subprime ( 8% of 2007 issuance)
$ 98B in FHA/VA ( 4% of 2007 issuance)
5 year totals:
$ 6,884B in Conforming (45% of 2003-2007 issuance)
$ 2,534B in Jumbo's (16% of 2003-2007 issuance)
$ 1,996B in HEL's (13% of 2003-2007 issuance)
$ 1,311B in Alt-A ( 9% of 2003-2007 issuance)
$ 1,972B in Subprime (13% of 2003-2007 issuance)
$ 665B in FHA/VA ( 4% of 2003-2007 issuance)
-------------------------------------------------------------
$15,362B total, $7T in Conforming, $3T in Jumbo's, $2T HEL, $1T Alt-A, $2T in Subprime
See http://www.growthology.org/photos/uncategorized/2008/07/11/litanhousing1.gif
There is a lot more pain to come in the housing market, except now it will be the better off and those with jumbo mortgages who are in trouble. Take an optimistic simple hypothetical.
What's just starting to hit the system:
Prime default rate (for ALL loans in this category):
(1.11% Q1 2008, 2.4% Q4 2008, 5% peak) vs. 2003-2007 issuance: $9,400B
What's just starting to hit the system:
HEL default rate (for ALL loans in this category):
(2.9% Q1 2008, 4.4% Q4 2008, 6% peak) vs. 2003-2007 issuance: $2,000B
What's partially worked through the system:
Alt-A default rate (for ALL loans in this category):
(5.2% Q1 2008, 9.1% Q4 2008, 12% peak) vs. 2003-2007 issuance: $1,300B
What's been worked through the system:
Subprime default rate (for ALL loans in this category):
(11% Q1 2008, 17% Q4 2008, 20% peak) vs. 2003-2007 issuance: $2,600B
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