If you haven’t yet heard the comparison of today’s housing market to depression era housing, the latest Zillow Home Value Index (ZHVI) has fallen 26% since its June 2006 peak. The June 10th ZHVI Report indicated an additional decline of national home values to an average of $177,412. Stan Humphries, Zillow Chief Economist, was keen to point out that the 53 month housing value decline of 26% has officially exceeded the housing value decline of the Great Depression (which is reported to be 25.9% from end-of-year 1928 to end-of-year 1933).
Although the ZHVI indicated that the Washington, DC regional data fared slightly better than the national data, foreclosures may not be a factor. The Zillow Home Value Index indicates that the national home value index declined 5.1% from the previous year, whereas the ZHVI for the Washington DC region declined 4.7%; while the national foreclosure rate for the same time was 0.094% compared to the Washington region’s foreclosure rate of 0.067%.
Zillow’s dramatic news was reported 11 days after the National Association of Realtors® release of the latest Pending Home Sale Index (PHSI) data (Realtor.org). Although the latest PHSI data indicated a 3.5% increase in pending home sales in November 2010 compared to October 2010, the data revealed a decrease in pending home sales compared to November 2009. Because the PHSI is a precursor measure of home sales, it is reasonable to conclude that the number of home sales also decreased from the same time last year.
Although past home value and home sale declines have been attributed to foreclosure and distressed property activity, the recent (albeit brief) decline in foreclosure activity may indicate that other factors are affecting the housing market. Foreclosure activity has recently decreased to resolve issues that arose from legal challenges to alleged lender procedural irregularities.
However, a recent article by Quinn Eddins entitled, “The Problem with Housing” (Mortgage Banking; Dec 2010; 71, 3) alleges that continued sale and value declines are due to excess foreclosure inventory and shadow inventory (homes in foreclosure but not yet foreclosed upon or released for sale). Eddins points out that slight increases in home buyer activity and slight home price increases in early 2010 were mostly due to short term interventions; he states “…The fundamental problem facing housing markets is one of supply. Even if the demand for homes… were to return to peak levels it would take years to absorb the current supply of homes for sale, in foreclosure and in the inventories of financial institutions. The longer it takes to reduce this supply, the longer home prices will languish.”
Eddins solution to the problem is to decrease the number of distressed home owners through equity sharing, which allows a lender to significantly reduce a home owner’s monthly mortgage payment by allowing a third party to invest in the loan in return for sharing in the home’s equity. The idea of equity sharing is not new; it has been incorporated in various home ownership programs and has even been introduced in the last two Congresses as a means to sustain FHA and support home ownership (most recently as H.R.6256: Strengthening FHA Through Shared Equity Homeownership Act of 2010 by Rep. Gary Mill [R-CA]).
Unfortunately, the reality is that regardless of interventions to sustain the housing market, stagnation will continue until there is sustained significant economic growth.
By Dan Krell
Copyright© 2011
This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.
And when will it bottom out? That is the question we all would like to know. There is, IMHO, another large round of foreclosures coming once all the lawyers get their ducks in a row. I believe that 2011 will be a record setter for foreclosures and, unless the government intercedes to extent the misery, the market will hit rock bottom this year.
I don't have a crystal ball and can't tell the future. However, I speculate that the market will turn around when there is sustained significant economic growth.