How is the US housing market tracking?
With the recent US debt debacle and subsequent downgrading of the US economy from AAA status to AA+ it's timely to re-visit the housing market fundamentals in the USA. As a brief and simplistic retrospective, US home values started sliding in May 2006 after more than 9 years of virtually uninterrupted capital gains. Since the market peaked back in 2006 US home prices have fallen by -32%. Falling home values acted as a catalyst, causing mortgage defaults to rise which in turn caused severe distress across the finance sector not just in the US, but globally due to the prevalence of securitised US mortgages held by banks and institutions around the world.
While the magnitude of home price declines has moderated since early 2009 when prices fell by -8.5% over the three months to February, the US housing market is far from out of the woods.
- Transaction volumes are running -33% below the five year average and are yet to show any consistent improvement. Australian transaction volumes are tracking about -16% below the five year average.
- CoreLogic estimates that about 22.7% of all homes with a mortgage were in negative equity at the end of the first quarter 2011. When you add in those homes with "near negative equity" (ie. 5% or less) the total rises to 27.7% of all loans. While a similar figure isn't yet available for Australia, RP Data will be releasing our own Australian Equity Report over the coming month that is likely to show an extremely low number of homes are showing negative equity.
- Distressed sales (ie homes that are being sold by the lender or sold at a price lower than the amount owed on the property) comprise 30% of all sales in the USA. The number of "short sales" (those home being sold for less than what is owned on them) has tripled over the last two years and CoreLogic estimates the number of short sales is expected to increase by another 25% during 2011.
- The percentage of homes that are at least 90 days in arrears is slightly higher than 8% in the US. Comparable data for Australia shows delinquent housing loans remain well below 1%.
The recent announcement by the US Federal Reserve that official interest rates will not move until at least mid 2013 may provide a boost to prospective US home buyers. The vast majority of US home loans are on a 30 year fixed terms which means most mortgage holders can't immediately take advantage of the very low interest rate environment until they are able to re-finance. Current 30 year fixed term mortgage rates are sitting at about 4.6% and will likely fall to 4.5% in August. The certainty around interest rates is in direct contrast to the Australian mortgage market where the direction of interest rates over the short to medium term still seems to be up in the air. It is also important to note that the vast majority of Australian mortgages are on a variable rate. This means any change in the interest rate environment has an immediate impact on most mortgage holders and consumer behaviour.
With the US housing market remaining weak, both the Government and banking sector are looking for increasingly creative ways to combat the high rate of default and rising number of bank and Government owned properties. Banks are offering principal reductions on mortgages and increasingly flexible re-payment options rather than facing the likely losses that would be incurred if the property is taken to market or the mortgage holders simply chose to walk away from the debt (remember most mortgages in the US are non-recourse, so if the collateral (ie home) is worth less than the loan it is very difficult for the bank to recoup its loss from the borrower). A principal reduction is simply reducing the amount of out- standing debt payable by the mortgagee in order to ensure that they don't walk away from their debt responsibility.
From a mortgagee's perspective walking away from the mortgage typically results in a seven year black mark against your name in the form of a poor credit rating. However, in some instances those people that have defaulted are still living in the same property as the eviction process in the US is very drawn out compared with Australia.
Additionally, Government owned institutions such as Freddie Mac and Fannie May are considering renting out the large number of homes they own rather than adding to the pool of distressed assets in the market.
Obviously the US housing market is vastly different to Australia's however, this does not mean that we should become complacent. The mortgage market meltdown in the US has resulted in a greater level of data transparency which is a good thing and potentially one way in which the Australian economy can learn from the changes now being made in the US.
Tim Lawless is research director at RP Data.