Over the weekend some friends asked me whether the subprime mess was getting better or worse. Good question, and I had a strong sense the answer was no.
Today I am trying to offer a more detailed look at where things stand.
The result is my new housing cheat sheet. Use it to impress your friends better than I did. But be careful: if you get known as the housing expert, you will be expected to offer updates at every dinner party you attend.
START WITH INVENTORIES
The most important indicator of the health of the housing market is the inventory of homes for sale. It makes sense. If you have more of anything for sale than there is demand, prices go down, right?
You can find the official indicator in the Census Bureau's New Home Sales report here. Latest read is that there is an 11 month supply of new homes for sale, up from around 8 months last year. Inventories are still rising and that's not a good sign.
Next, let’s look at existing homes for sale. These are old – excuse me, “pre-owned” – homes on the market. The National Association of Realtors tracks this here.
The latest reading is “4.06 million existing homes available for sale, which represents a 9.9-month supply at the current sales pace, up from a 9.6-month supply in February.” For comparison, in 2006 the inventory supply was six and a half months.
HOME PRICES
Clearly, the inventory numbers signal things are getting worse. We can see the damage in prices.
According to estimates from Moody’s Economy.com based on the Fiserv Case Shiller data, home prices peaked in early 2006. Moody’s Economy.com estimates prices will fall a total of 23% from the top to the bottom of the market sometime in spring 2009.
So far, we’ve fallen 15%. 8 percentage points to go!
[Moody’s economy.com’s estimates are proprietary, so you’ll have to contact them here or keep a close eye on news reports for an update.]
Since the housing outlook depends so much on what happens to inventories, let’s look at the factors that affect the inventory numbers.
Overall economic conditions plays a key role here, so keep an eye on job growth. If you lose your job, you probably are not in the market to buy a home. Sluggish home sales lead to larger inventories of homes for sale.
A huge source of new inventory will come from foreclosures.
Moody’seconomy.com figures there will be 2.2 million defaults this year on first mortgages. That’s more than half a million more defaults than 2005! It takes about a year for a default to end up in a foreclosure sale or for the homeowner to otherwise lose his or her home. And not every default ends in a foreclosure. Moody’s economy.com figures 1.45 million lost homes are going to hit the market this year. That’s another three-and-a-half months supply of inventory at current sales rates.
HOW MANY HOMES ARE AT RISK OF DEFAULT?
First American Core Logic tracks residential mortgage risk here.
They estimate delinquency risk is 47% above 2002 levels. The riskiest markets are in California and Florida with Nevada, Ohio and other states feeling the pain. Click on this cool pop-up for a map that details mortgage risk across the country.
One other indicator that Moody’s Economy.com tracks: 11 million homes have zero or negative equity. Call that the shadow inventory: people who might be forced out of their homes if conditions get much worse, but who haven’t been forced out yet.
Bottom line: 2008 will be a terrible year for housing. Epic bad. 2009 will just be horrible – another million people losing their homes. Don’t expect the sun to come out until 2010.
