Housing: The Good and Bad News

Home price declines are stabilizing, but delinquent mortgages and foreclosures are getting worse despite efforts to modify unaffordable loans

The rate of decline in home prices has slowed, but the foreclosure problem is getting worse despite strengthened efforts to modify unaffordable loans, so any recovery in the housing market is still a ways off. That's the upshot from a pair of reports released on June 30.

In April the seasonally adjusted S&P/Case-Shiller 20-City Composite Home Price Index fell by just 0.9% from the month before, making it the smallest monthly decline since August 2007. That's according to a BusinessWeek calculation using data from Standard & Poor's (MHP). The index in April fell 18.1% from a year earlier, down from an 18.7% year-over-year decline in March, as reported in the S&P press release. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Cos.) The monthly changes ranged widely from declines of 3.7% in Las Vegas, 2.8% in Phoenix, and 1.9% in Miami, to increases of 0.7% each in Dallas and Denver.

Meanwhile, a government report contained conflicting signals on the damage being done by foreclosures. The bad part is that foreclosures are eating upward into prime mortgages—the safest kind. Some 2.9% of prime loans were 60 or more days past due in the first quarter, nearly triple the rate of 1.1% in the year-earlier quarter, the Office of the Comptroller of the Currency and the Office of Thrift Supervision announced jointly. Comptroller John Dugan said in a statement that he was "very concerned about the rise in delinquent mortgages and foreclosure actions."

Loan Modifications Increase Sharply

On the other hand, Dugan said he is hopeful that the Obama Administration's efforts to stem foreclosures will be successful, pointing to evidence that loan servicers are working harder to modify unaffordable loans in a way that reduces payments. There was a 55% increase between the fourth quarter of last year and the first quarter of this year in the number of loan modifications. What's more, 29% of them reduced monthly payments by one-fifth or more, up from only 19% that did so in the fourth quarter. In an interview, National Community Reinvestment Coalition CEO John Taylor hailed the progress but said the government should buy troubled loans and order servicers to modify their terms in order to make a real dent in the foreclosure problem. "It can't be this light-touch modification," Taylor says.

The bottom line is that the fall in home prices to date has been big enough that the market is no longer significantly overvalued by many measures. However, prices are still under pressure because of the recession, tight bank lending standards, and the overhang of properties that are in foreclosure or likely to enter foreclosure in coming months.

Experts differed on what to make of the housing reports. Patrick Newport, an economist with IHS Global Insight, wrote: "House prices are no longer in a free fall, as they were late last year. They are still falling at a steady clip, however, and will fall further, since foreclosures are still rising. Indeed, all evidence indicates that the foreclosure problem is getting worse."

In a Bloomberg Television interview, Yale University's Robert Shiller, one of the fathers of the S&P/Case-Shiller index, said, "My guess would be that home prices are going to level off—they're not going to keep falling." But he added that it's hard to predict a speculative market, and said, "I am not optimistic that we're going to see any sharp rebound."

The big fall in prices has begun to attract investors, who figure they can rent houses for a profit even after a 20% or 25% down payment, says Brad Geisen, CEO of of Boca Raton, Fla., which supplies foreclosure data. These investors are playing a safer game than those earlier in the decade because they make money every month as long as rents stay where they are. In contrast, investors in the 2005-2007 period couldn't make enough money on rents to pay the mortgage, but were betting on price appreciation to make the investments worthwhile, Geisen says.

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