Near Record Pace of Foreclosure Suggests Further Price Declines Ahead
By Dean Baker
September 16, 2009
Close to 40 percent of buyers are first-time home buyers.
Realtytrac reported a slight drop in August from the record pace of foreclosure notices reported in July, but the 358,471 foreclosure actions in the month were still the second highest on record. This corresponds to an annual rate of more than 2 million foreclosures, assuming an average of two notices for each foreclosure.
This means both that mortgage modification programs are still having a very limited effect in slowing the pace of foreclosure and that foreclosures will continue to glut the market with houses for sale. With combined new and existing home sales running at close to 5.5 million a year, the resale of foreclosed properties will comprise close to 40 percent of this market.
Interestingly, foreclosures fell sharply in some of the former bubble states, with Nevada, Arizona, and California experiencing declines of 8.4 percent, 9.6 percent, and 14.6, respectively. In California, foreclosures are down by 9.2 percent year over year, although it still has the third highest foreclosure rate in the country. In some of these markets, prices have probably hit bottom. They are unlikely to have any sharp rebound any time soon, but the bubble has deflated and house prices are likely to move upward more or less with inflation in the years ahead.
In contrast to the situation in these former bubble markets, foreclosure rates rose across most of the New England states, although part of the rise is likely due to changes in methodology. With a 15.6 percent rise in foreclosure filings from July, Massachusetts now ranks 16th in the country in foreclosure filings. Massachusetts has yet to see any substantial decline in prices, even though its market had one of the larger bubbles in the country.
At this point, it is still too early to assess the impact of the first-time buyer’s tax credit. The credit does not expire until the end of November, but anyone hoping to complete a closing by this time (a requirement to get the credit), will have to be in the market now. Over the course of October, the impact of the credit on new contracts should dwindle, as people seeking the credit will have already bought their home. If Congress chooses to extend the credit, the extension will almost certainly have much less impact, since most potential first-time buyers will have already purchased their homes.
As noted before, there is a strong likelihood that price declines will resume later this fall. The uptick in sales driven by the credit has led to a substantial increase in the number of homes offered for sale at just the time that the boost from the credit is dwindling. The inventory will also be a much larger drag in the slow-selling winter months than in the spring and summer. This imbalance is also taking place against a backdrop of rising unemployment, falling rents in many areas, and house prices that are still 10-15 percent above their trend level as a nationwide average.
The one big plus for the housing market continues to be extraordinarily low interest rates. The Fed’s actions in buying up mortgage-backed securities have succeeded in keeping rates much lower than they otherwise would be. This is one part of the Fed’s special lending that will be difficult to unwind any time soon.
The Fed’s efforts to maintain low mortgage rates will get considerably more difficult if there is any evidence of rising inflation. In this respect, the August data on producer prices and import and export prices were not good news. The indices showed somewhat higher inflation than most economists had predicted. While current rates of inflation clearly are not a problem, and there is no plausible story of the inflation rate rising to dangerous levels any time soon, these facts will not prevent the markets from becoming concerned.
The Fed may find itself having to confront the fear of inflation rather than actual inflation. This may cause the Fed to backtrack from its commitment to buy mortgage-backed securities, which in turn will lead to higher mortgage interest rates.
Dean Baker is Co-Director of the Center for Economic and Policy Research, in Washington, D.C. CEPR's Housing Market Monitor is published weekly and provides an incisive breakdown of the latest indicators and developments in the housing sector.