Rising Foreclosures Prevent a Full Housing Recovery

Today, Bloomberg.com brought to light two signs that perhaps the housing market is beginning to show some stabilization. In one article, author Kathleen M. Howley points to new data from the Federal Housing Finance Agency (FHFA) stating that on a YoY basis home prices have only declined 6.5% through February, and the market is only down 9.5% from its peak in April of 2007. Furthermore, prices actually gained 0.7% in the month of February according to the report. The article points to the increased affordability of homes since mortgage rates are historically quite low.

“Mortgage rates have dropped 1.6 percentage points in six months, making houses and condominiums more affordable. The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 5.3 percent last week as Americans took advantage of interest rates near record lows. Home sales rose 5.1 percent in February from a month earlier, the National Association of Realtors said March 23.”

The lowered mortgage rates are enticing buyers off of the sidelines, which is a strategy that the Federal Reserve wants to continue to execute. A second article this morning by Ms. Howley and Brian Louis takes an in depth look at Fed Chairman Ben Bernanke and his extensive knowledge of the Great Depression, in this case as it relates to mortgage rates. Bernanke is careful not to make the same mistakes as the Fed did during the depression that in many cases perpetuated the crisis, most notably tightening the money supply, which kept rates and borrowing costs high. Bernanke and the Fed have already lowered average mortgage rates from about 6.2% during the housing boom of the early 2000’s to an average 4.78% for the week ended April 2. The 4.78% average is the lowest since Freddie Mac began tracking this data in 1971, and Bernanke would like to see them drop all the way down to 4%, if possible.

The home prices data seems to suggest that perhaps a floor is being set in many housing markets, with the possible exception of California, Florida, Arizona, Nevada and Illinois. However, there is still a significant hurdle facing the housing market, namely foreclosures. It is in those five states mentioned that an amazing 60% of all foreclosures occurred in the first quarter of 2009. In the two Bloomberg articles, only cursor mention was given to the problem of foreclosure, which reached a new record of 175,199 homes in March 2009 alone. That figure represents a 44% increase from February, according to foreclosures.com. Furthermore, pre-foreclosure filings were also at record levels in the first quarter of 2009, as unemployment weighs on homeowners and certain foreclosure moratoriums expire.

While we are pleased to report an unexpected rise in home prices in February, we are careful not to signal the bottom in housing. There is still a major foreclosure problem that only seems to be worsening. Until foreclosures are drastically reduced, we would expect housing to continue to struggle. Defaulted mortgages have a wide range of effects on the economy, not the least of which as everyone is well aware, is adverse to financial institutions and credit markets. With the financial sector starting to get somewhat of a foothold, it would be a real disaster if it all went up in smoke over worsening foreclosure rates and the resultant strain on credit markets.

Rising Foreclosures Prevent a Full Housing Recovery

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