Economic Optimism Aside, Housing Market Still Shows Weakness
Last update: 4/9/2010 7:37:00 AM
(This article was originally published Thursday.)
By Prabha Natarajan
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Pundits and policy makers may be heralding signs of economic recovery, but a key piece of data continues to deliver disturbing news.
One in 10 prime-mortgage holders are behind in their payments, according to the latest home delinquency report from Fitch Ratings, a rate that is about two-and-half times the traditional average.
What matters most with mortgages is jobs, and the rise in unemployment claims Thursday suggests mortgage defaults may not improve soon. Also, in a vicious loop, the surge in foreclosed homes also announced Thursday is likely to lower home prices. This pushes more mortgages underwater, that is, makes the homes worth less than the loans used to buy them. It also sets the stage for another wave of delinquency as homeowners walk away from their obligations.
Making matters worse, the average rate on 30-year fixed-rate mortgages climbed 0.13 percentage point to 5.21%, the highest level since August 2009, Freddie Mac said Thursday in its weekly mortgage market survey.
The primary driver of delinquencies across all types of mortgages continues to remain the ability of the homeowner to earn enough to pay down their loans. Labor Department data released Thursday showed that the number of initial unemployment claims rose 18,000 during the week ended April 3. The four-week average, which smoothes out weekly spikes and gives a better sense of the trend, also rose.
In a way, this data knocked out some of the positive sentiment from last Friday, when the jobs report showed the unemployment rate held steady at 9.7% and the economy added 162,000 jobs in March.
Another disquieting bit of news was that 44% of unemployed in February had been without jobs for six months or more. This is up from 24.6% a year ago.
"Housing recovery is tied to job creation," said Andy Harding, chief investment officer of fixed income at PNC Capital Advisors, adding that until the unemployment rate falls it would be difficult to predict that the housing market will rise.
While unemployment continues to be a key factor in delinquencies, Vincent Barberio, a Fitch managing director who looks at these numbers on a monthly basis, said that underwater loans also have become important in recent months.
"It's hard to quantify what percentage of borrowers is walking away and what portion are not paying due to job loss," he said. "Unfortunately, the net effect is driving the delinquency rate up."
This is one reason the delinquency rate among prime jumbo borrowers, those who bought a home that cost more than the conforming loan limit, also soared above 10% this year from 4.8% a year ago.
"People are turning in the keys and just walking away," Barberio said.
The states with the highest level of jumbo-loan delinquencies are California, New York, Florida, Virginia and New Jersey.
"It concerns me when I read about people doing strategic defaults," said Didi Weinblatt, vice president of USAA's mutual funds portfolio. "People who have never thought of it a year ago are now doing it."
Weinblatt added that she started buying only mortgage bonds guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae, because she was worried about the decline in underwriting standards of other private-label loans.
In March, loans made to subprime borrowers, the least creditworthy borrowers, actually bucked the trend to show a slight drop in delinquency to 46.3%, from 46.9%, for the first time in 44 months.
Barberio said he didn't want to read too much into those numbers. "One month's change doesn't generate a trend," he said, adding that people often use tax refunds to pay down some of their debt at this time of year.
"We expect delinquencies to increase at least over the next four to six months," he said.
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; prabha.natarajan@dowjones.com
(END) Dow Jones Newswires
April 09, 2010 07:37 ET (11:37 GMT)
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