High Inventory and Price Declines: Housing Market Roundup

Housing Roundup, June 20, 2011: The roundup is when we take a look back at the week’s housing market trends and analysis. Here are some stories of interest for mid-June, 2011.

Housing Starts Rose 3.3 Percent

In May 2011, housing starts in the United States rose by 3.3 percent over the month prior. Work began on approximately 560,000 new homes in May. This does not make up for the huge decline in building activity we saw in April. But it’s still a positive blip on the market’s EKG.

Definition: A housing start is the point when construction begins on a new home. It’s a key piece of data that gives us insight into the home-building sector of the economy. Housing starts are different from permit filings (another economic indicator from the building industry). A permit filing is a paper shuffle that indicates the intent to build a new house. A housing start is when construction has actually begun, so it’s a better indicator of activity in the building industry.

30-Year Mortgage Rates Inch Upward

Mortgage rates had been on a downward slide since mid-April. Over the last couple of months, the average rate for a 30-year fixed mortgage fell steadily from 4.91 – 4.49 percent. Last Thursday, the two-month decline came to an end. The average rate for the benchmark 30-year FRM inched upward to 4.5 percent. At the same time, the 15-year FRM and the 5/1 ARM loan dropped slightly.

Unfortunately, mortgage rates alone are not enough to kick-start the sluggish housing market. Many would-be home buyers are still concerned about declining home prices. And rightfully so. According to the Case-Shiller / S&P index, home prices in the U.S. have dropped 33 percent from their 2006 peak. The downward trend continues in most parts of the country. Low mortgage rates are enticing. But they’re being offset by the fear of price erosion.

Phrase of the Month: “Backlog of Foreclosures”

Everyone is talking about the backlog of home foreclosures. There’s a good reason for this. With the current glut of foreclosure homes on the market (and another 2.2 million in the works), housing recovery is a dim light on the distant horizon.

It’s taking a toll on home prices, too. Robert Shiller, the Yale economist and co-creator of the Case-Shiller home price index, said he wouldn’t be surprised if home prices fell another 10 – 25 percent over the next few years.

The backlog is taking longer to work through, as well. In 2007, it took banks an average of 151 days to foreclose on a home and get it back onto the market as a bank-owned (REO) property. Today it takes an average of 400 days. This will perpetuate the glut of distressed homes on the market while delaying recovery in the broader housing market.

Popular Story: Confessions of a Mortgage Reject

We have received emails from many readers in response to a story we published on June 4. The story (Confessions of a Mortgage Reject) struck a chord with a lot of frustrated home buyers who’ve been turned down by lenders. It seems that cash reserves are playing a larger role in the mortgage market today than they have in the past. More lenders are requiring additional cash for closing, and the standard amount has increased as well.

Definition: Within the context of mortgage loans, cash reserves are extra funds the borrower has in the bank. This is additional money that goes above and beyond the amount needed for closing costs and/or down payments. Some lenders require borrowers to have the cash equivalent of one to six months worth of mortgage payments.