HOUSING SECTOR EVALUATION; Last post 0f 2009..
Still-rising delinquencies dog housing's recovery
3:46p ET December 29, 2009 (MarketWatch)
BOSTON (MarketWatch) -- Investors appeared to take a report on flat U.S. home prices in stride Tuesday, but still-rising mortgage delinquencies signal more foreclosures, putting a damper on hopes that the housing market is recovering.
"Delinquencies are a precursor to foreclosures," said Cameron Findlay, chief economist at LendingTree.com, in an interview Tuesday. "We're not seeing any decreases in delinquencies, which is very concerning."
More strapped borrowers are falling behind on their monthly payments during the recession as unemployment hovers around 10%.
Late Monday, Fannie Mae said serious delinquency rates in its conventional single-family-home mortgage portfolio rose to 4.98% in October from 4.72% the previous month. A year ago, the rate stood at 1.89%.
A wave of foreclosures would only add to the inventory overhang of unsold homes and delay a lasting recovery in residential real estate. Home prices peaked in the summer of 2006, before the credit crisis popped the bubble.
Values have rebounded somewhat in recent months, with some economists attributing the bounce to the expiration of the $8,000 tax credit for new homebuyers. The credit has been expanded and extended to spring.
The S&P/Case-Shiller home-price index of 20 major U.S. metropolitan areas released Tuesday showed values were flat in October, but still down more than 7% compared with October 2008. Home prices were off 29% from the 2006 peak.
Another potential headwind for home prices is rising mortgage rates, which boost the overall cost of owning a home. The rate on a 30-year fixed-rate mortgage broke above 5% in the latest week, according to a survey from Freddie Mac. Mortgage rates have been at rock-bottom levels, but they are widely expected to rise in 2010.
Analysts are watching the yield on the 10-year Treasury note, which is closely linked to mortgage rates. If demand for U.S. government debt wanes as a result of massive stimulus spending or other fears, it would send mortgage rates higher. And higher mortgage rates could lead to more foreclosures as adjustable-rate mortgages reset higher over the next two years, LendingTree's Findlay said.
The Federal Reserve has kept short-term rates near zero, and plans to keep interest rates low for an extended period. The Fed pumping liquidity into the mortgage market is also helping to keep mortgage rates artificially low. The Fed, however, plans to wind down its $1.25 trillion program to buy mortgage-backed securities by the end of the first quarter of 2010. Meanwhile, more-stringent lending standards mean it's more difficult for many borrowers to qualify for a mortgage.
Although the Fed is committed to keeping rates low and the market has been working off the inventories of houses for sale, "housing starts remain weak, fears that the market will be swamped by a wave of foreclosures are heard and government programs aimed at the housing market will expire in the first half of 2010," said David Blitzer, chairman of the index committee at Standard & Poor's, on Tuesday.
'Diminishing returns'
Home sales tend to drop off significantly during the colder months, so the spring season will be the big test for the recovery.
"From now through late January, we expect very limited activity in the housing market, as this is traditionally one of the slowest times of the year," said Buck Horne, a Raymond James analyst, in a Dec. 16 research note.
"Looking further ahead, though, we believe the extension and expansion of the homebuyer tax credit will provide a healthy tailwind for the industry once the 2010 spring selling season begins," he added. "That said, we also believe these incremental benefits likely have diminishing returns, and the back half of 2010 could be more challenging if meaningful job growth is still absent from the economy."
Earlier this month, Moody's Investors Service upgraded its outlook on the U.S. home-building industry to stable from negative. It cited strengthening indicators such as housing starts, sales, and improving home affordability.
"The industry's recovery remains precarious, however, given the sizable number of potential foreclosed homes that might eventually come to market, as well as the anticipated continued decline in home prices in 2010," Moody's said.
"The U.S. government's support for the sector is a critical source of strength," the ratings agency said. "A premature removal of government backing would put the industry's outlook at considerable risk of returning to negative."
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