FYI | Apr 24 2009
By Chris Shaw
Increasingly investors and market commentators alike are taking the view the US housing market has fallen about as far as it is going to, meaning a recovery may not be far off. But in the view of TD Bank Financial Group senior economist Richard Kelly the current weakness in US house prices could yet be sustained for some time and any recovery, when it comes, is likely to be far from vigorous.
Kelly notes the fall in US property prices has seen some key measures of demand increase, while at the same time there has been a drastic cut in the supply of new homes being built. While this is encouraging for the health of the market overall, it has not been enough to bring demand and supply into balance as there has been an unexpected second source of supply as the fall in prices has brought onto the market additional properties through an increase in foreclosure rates.
On Kelly’s estimates the falls in property values have likely resulted in as many as 6-11 million mortgages now being underwater, which means the value of the mortgage outstanding is greater than the value of the property. This is equal to something between one-fifth and one-third of all new mortgages taken out over the last five years.
The problem is the price falls have not been enough to improve affordability by the amount necessary to offset the additional supply coming onto the market via foreclosures, meaning further price falls are necessary to fully address the issue.
Unemployment is also playing a role as Kelly estimates US job losses could hit 8.3 million next year, this pressure on employment likely being enough to keep the foreclosure rate elevated into 2011. As an example of how significant this trend has been it is estimated since September of last year the number of mortgages going underwater each month has been greater than the number of newly originated mortgages by a factor of two or three times.
Given such an environment Kelly suggests further price falls of as much as 10% are needed to bring the market into balance and if such an outcome eventuates he estimates it could easily see the number of mortgages going underwater jumping to between 12-16 million properties by next year.
The South and Midwest regions of the US appear particularly vulnerable to such an outcome in Kelly’s view as both face affordability and other economic issues. In contrast, the issue for the Northeast region is excessive supply in the construction pipeline, while conditions in the West are showing signs some sort of recovery may not be too far away.
Some incentives and policy actions have been taken to address the health of the market such as tax incentives and refinancing programs, but as Kelly points out the key remains generating market conditions where there are less homes remaining vacant and better price stability.
This requires a reduction in housing stock on the market, but even if the current inventory issues are worked through Kelly sees little in the way of upside momentum in the mainstream US housing market for several years to come.
