October 5, 2009

Ken Fears, Manager of Regional Economics

Falling prices have been one of the biggest problems for the housing market over the last three years. Without price stability, it can be difficult to get a loan or mortgage insurance to buy a home, regardless of the strength of a buyer's credit or the quality of the property. The newly-finished second quarter Metro Price Reports have been released. These reports include data on metro area prices, which suggest that price stability and even modest growth is emerging. Prices on a quarter to quarter basis have increased in 109 of the 151 markets (72.2%), a trend that could help more buyers attain financing.

Although prices may be down relative to a year ago in most of these 109 markets, the year-over-year decline in the second quarter is smaller than the same measure taken in the first quarter. This pattern of improved year-over-year performance suggests that prices, corrected for seasonal fluctuations, are on the rise. For example, the median price for the Providence, Rhode Island metro area was down 19.9% from a year earlier as of the second quarter. However, this decline is an improvement over the 4-quarter drop of 23.0% measured in the first quarter. Graphically, one can see the year-over-year price change trend improving as the red line moves up on the far right of the graph pictured below.

 

 

But Rhode Island is not the only place that is experiencing a pattern of strengthening. All five of the markets that showed the largest improvement in price trends were in the Midwest. Prices are also stable or strengthening in those markets that have seen the sharpest declines since their peaks during the boom. A total of seven markets in California and eight in Florida are following this pattern in addition to Phoenix. 

 

Year-Over-Year Price Change
	2009 Q1	2009 Q2	Difference
Saginaw-Saginaw Township North	-53.7%	-30.6%	23.0%
Canton-Massillon	-25.2%	-1.3%	23.9%
Youngstown-Warren-Boardman	-24.4%	-0.3%	24.1%
Akron	-48.0%	-17.4%	30.6%
Sioux Falls	-29.8%	1.1%	30.9%

 

This broad based price improvement is following a similar strengthening of sales. Thirty nine states and the District of Columbia showed an improvement in the year-over-year sales pattern. NAR tracks a total of 50 states and the District of Columbia. Of the six states that reported year-over-year declines in sales growth, four of these states were coming off of substantial gains. For instance, California showed an increase in sales of 20.8% between the second quarter of 2008 and the second quarter of 2009. This gain is substantial, but below the 66.2% jump in sales that occurred over the 4-quarter period ending in the first quarter of 2009. This pattern means that the sales level in this market is still robust, but it is leveling off at a more stable long-term growth path after explosive growth brought on by sharp price declines.

 

Year-Over-Year Price Change
	2009 Q1	2009 Q2	Difference
Nebraska	-16%	6%	22%
D.C.	-16%	6%	21%
Hawaii	-40%	-20%	20%
New York	-23%	-5%	18%
Maryland	-12%	4%	16%

 

At the other end of the spectrum are Utah and Texas, both of which were late to join the national housing craze and equally late to enter the slowdown. However, these markets are showing signs of reaching bottom. Utah is down 10.1% over the four quarters ending in June compared to a decline of 17.7% as of March. Texas' 4-quarter decline through June is 16.7% compared to a decrease of 21.1% three months earlier. The widespread improvement in sales is suggestive of a broader mechanism than regional improvements alone: likely the $8,000 tax credit, more readily available credit and improved consumer confidence deserve kudos.

The foreclosure scene is another area that has changed dramatically. Problems linger from the sub-prime mess with high foreclosure rates in this loan category nearly everywhere around the country. But foreclosure rates for these areas appear to be stabilizing at high levels for the most part. Many markets in Florida and California are following this pattern such as Riverside-San Bernardino-Ontario, California. The subprime foreclosure rate in Riverside fell from 31.5% in December to 28.0% in June of this year. This decline is significant, but the level of foreclosures remains high. Of the 151 markets covered by NAR's Market Price Reports, 80 have seen a decline in the subprime foreclosure rate. However, markets in Louisiana, Florida, New York, Washington, Oregon and Virginia continue to see strong increases in their subprime foreclosure rates.

While subprime foreclosure rates are on the decline, prime mortgage foreclosure rates are on the rise. Only three markets, Danville (Ill.), Springfield (Ill.), and Amarillo (TX) avoided an increase in their prime foreclosure rate, but none showed a decline…they showed no change. The vast majority of markets, 148, showed an increase in the prime foreclosure rate over the last six months. Furthermore, of those markets that showed an increase in their prime rate, 97 markets witnessed a decline in their subprime foreclosure rate. In every market, the prime foreclosure rate remains well below the subprime rate, but the bulk of mortgages are prime (87.5% market share for the U.S. as a whole), so the rise in prime foreclosure rates has a bigger impact on the total number of homes in foreclosure.

Not surprisingly, rising unemployment is driving the increase in prime foreclosures. Employment levels fell in all but 7 of the 151 markets covered in these reports. What's more, 112 of the markets covered in the Local Market Reports saw employment levels fall by 2.0% or more over the 12-month period in July. The worst hit markets, those with declines of 5.5% or more, were broadly distributed geographically, but areas with concentrations in the manufacturing (Toledo, Milwaukee, and Greensboro-Highpoint), tourism-vacation (Reno, Las Vegas and Orlando) and the large financial centers (Norwich-New London (CT), San Francisco and Charlotte) were all represented. However, the sharpest 12-month declines in job volume where in Detroit (139,600) and Phoenix (143,100), both of which are already wracked with large inventories of foreclosure from the subprime mess. Unemployment is expected to continue to rise through the middle of 2010. This trend will cause foreclosure rates among prime borrower to increase, likely in areas with large pools of unemployed workers.

The majority of markets around the country appear to be feeling the effects of renewed demand- a modest improvement in sales and price stabilization. These two factors should help to stimulate confidence and to relax the tight lending environment easing the way for improved sales in the future. Rising layoffs and foreclosures will add to bloated inventories mitigating price gains in the short-term, but sales should continue to improve. NAR estimates that the $8,000 first time home buyer tax will generate 350,000 extra home sales this year. With this stimulant set to expire in November, the winter market could experience a sharper than normal decline as first-time buyers retreat to the sidelines and trade-up buyers/sellers lose a major source of demand for their properties.

 

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

 

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