What The Future Holds for Home Prices

U.S. home prices rose in June from a year earlier for the first time in nearly two years, according to data released Tuesday. Is this the start of a bounce back for housing, or is it just a cheerful blip in the numbers before prices resume their fall?

Bet on neither. Instead, assume for planning purposes that U.S. house prices will rise by an average of 2.3% a year over the next decade. Here's why: House pricestend to track the rate of inflation over long time periods (see chart). After all, inflation is the gradual rise in the cost of ordinary goods and services, and houses are boxes made from ordinary goods and services -- lumber, copper, carpentry and so on.

If house prices either outpaced or lagged behind the inflation rate over long time periods, houseswould become either infinitely unaffordable or cheap. Of course, that doesn't happen. Booms and busts tend to offset each other, leaving house prices in sync with other prices. That's what has happened over the past dozen years or so.

Predicting the inflation rate is difficult, but the work is already done. That's because of a special kind of bond called Treasury inflation-protected securities, or TIPS. These give investors both a stated interest rate and an ongoing principal adjustment based on the consumer price index, the main measure of inflation. Regular Treasurys give investors only the stated yield.

The difference between TIPS yields and regular Treasury yields, then, is equal to investors' collective bet on the rate of inflation. Right now, that spread is 2.3 percentage points on 10-year issues.

Investors should assume that rate for the next 10 years of annual inflation -- and house price gains.

Housing bears will point out that the recent year-over-year price gain is just 0.5%. All of it may be due to a recent drop in mortgage rates luring buyers, which isn't likely to repeat. And last year made for an easy price comparison, because prices dropped following the expiration of housing stimulus programs. Indeed, house prices may already be falling again. The latest Case-Shiller reading is for June, and really, it reflects purchases that were inked a few months prior.

Housing bulls counter that mortgage delinquencies are down, new home sales are up and affordability has been restored.

They each make good points -- and their views are already reflected in market prices for houses, which is why prospective buyers should ignore them. They should also ignore broker claims about a particular area being an up-and-coming one or a deep value. Those sentiments are priced in too.
Buyers should instead use their 2.3% house gain forecast in one of those renting-versus-buying calculators available. Good ones typically ask the user to plug in forecasts for their annual rent increases, annual house price increases and the rate of inflation. Use the same number for each (2.3% or whatever the current spread between TIPS and regular Treasury yields suggests).

Of course, house prices may not exactly track inflation over the next 10 years. They could rise more or less, and history suggests price gains will vary sharply by market. Even in the same market, some buyers will get better deals than others. But the point of the forecast is to base housing decisions on a sober look at likely outcomes rather than hope or hype.

Homeownership still looks like a good deal in most markets, but that has little to do with June's price rise or the possibility of timing the market.

"Second Crash" Fears Recede Our Bank's Shadow Inventory

For years, some real estate analysts feared that banks would suddenly release a wave of foreclosed houses, swamping the local housing market and sending house prices into a second collapse.

That second tsunami isn't happening, according to an analysis by the North County Times.

A house-price crash precipitated a series of foreclosure spikes in 2007 and 2008, leaving banks holding thousands of houses and struggling to hire staff to process them.

After 2009, real estate agents and some analysts became convinced that lenders were holding off on foreclosures, and sitting on foreclosed properties in order to prop up prices, creating a "shadow inventory."

They feared lenders would have to process and release all those houses ---- sending house prices, which have been bouncing along a price bottom for two years, into another downward spiral.

Instead, the number of homes in default has been steadily declining in the region, thanks to a host of programs from government and private banks and a turn toward short sales, in which borrowers sell their properties for less than they owe.

And once lenders have foreclosed on properties, they have moved quickly to sell them, so the stock of properties held by banks is declining, according to an analysis of foreclosure data by the North County Times.

No conspiracy

"The idea that the banks are intentionally doing anything is itself ridiculous," said Chris Thornberg, a principal and an economist with Beacon Economics near Los Angeles. "There's not some Illuminati of banks. They're not holding back units, they're selling them as fast as they can."

Thornberg has long argued against a second wave of foreclosures, but other analysts worried about the shadow inventory.

Tim Ellis, an analyst at national real estate brokerage Redfin, has been among the most concerned, writing onRedfin's blog in February: "The fact remains that the banks are currently sitting on tens of thousands of homes across the country that they have foreclosed and not yet listed, along with tens of thousands more homes somewhere in between the first missed payment and the actual foreclosure.

"... Any sign, however slight, that prices may be on the rebound will cause banks to release more of their inventory onto the market, along with a wave of pent-up supply from would-be sellers on the margin to rush to list their homes to take advantage of the 'recovery.'"

Locally, the sentiment was similar.

Seeing shadows

"There's a lot of shadow inventory," Jeff Jenkel, a Rancho Bernardo real estate agent, said in May. "And so at some point it's going to get a lot worse before it gets better."

Even Douglas Duncan, chief economist for government lending giant Fannie Mae said in December, "The shadow inventory has to be worked through."

Do lenders hold properties off the market? Chase Bank responded to the North County Times' question, speaking only for themselves:

"No," said Lisa Shepherd, vice president of Chase REO and property preservation. "The only time that you would see a property that's not available for sale that goes through foreclosure is if it's in some sort of legal action that prohibits me from selling it."

Lenders sold off the majority of homes they foreclosed, according to a North County Times analysis of foreclosure data from ForeclosureRadar and transactions from the San Diego and Riverside county assessor's offices.

Fire sale

Between Jan. 1, 2007, and June 30 this year, lenders foreclosed on 16,570 houses in North San Diego County. By the end of that period, lenders held 780 houses ---- they'd sold off 95 percent of the houses they'd taken back.

The same trend holds for Southwest Riverside County over the same period: Lenders foreclosed on 36,037 houses, and by the end of June possessed 1,625, which is to say, they sold 95.5 percent of all the houses they'd foreclosed.

At a peak in fall of 2008, lenders held 1,315 houses in North County and 3,173 houses in Southwest Riverside.

If the lenders had the capacity to drop all those houses on the market right away, they probably could have affected prices: All those houses would have represented one-third of North County listings in the period, and half of Southwest County listings. Even this year, if lenders put all their houses on the market, it would change pricing.

But lenders can't flip a house instantly, said Shepherd from Chase.

"If the property is vacant and there are no issues, it should be anywhere from 30 to 45 days to get it on the market," she said. To sell the property, "on average, and especially in the state of California, anywhere from 60 to 90 days."

Inventory turns over

In 2007, lenders needed a median of 10 months to sell a house they'd just foreclosed on. By 2008, they needed a median of six months. At the end of 2011, they'd reduced that median to four months, in North San Diego and Southwest Riverside counties.

"What that means is rather than mismanaging things and holding things back, they (lenders) are reducing their inventory." said G.U. Krueger, a housing economist with Krueger Economics in Los Angeles.

Even as lenders have become more efficient at selling the houses they foreclose on, they're also foreclosing on fewer of them, largely thanks to government refinance and loan modification programs, private loan modification programs, and a new focus on short sales.

Those programs have helped lower the number of people in default. In San Diego County, as of June 30, there were 6,539 people in default on their loans but not yet foreclosed, down 35 percent from three years earlier, according to ForeclosureRadar. The number of people in default in Riverside County fell 34 percent over the same period to 8,821.

Those programs also have sharply reduced the number of foreclosures in the region: In July, lenders foreclosed on 223 houses in Southwest Riverside and on 126 houses in North County.

The result has been a steep decline in the number of houses available for prospective buyers ---- listings in both regions are down one-third from a year ago, according to the North San Diego County Association of Realtors and Redfin.

The tight inventory of homes for sale has led to bidding wars among buyers for the first time since the boom ended in 2006, and a stabilization of home prices in the region.

"People are starting to come out and buy homes," said Nathan Moeder, an economist and principal with London Group in San Diego. "There's going to be demand to suck up those homes."

Deliquent Mortgages Reported at 3 Year Low

U.S. homeowners are getting better about keeping up with mortgage payments, driving the percentage of borrowers who have fallen behind to a three-year low, according to a new report.


Still, the rate of decline remains slow, credit reporting agency TransUnion said Wednesday. The percentage of mortgages going unpaid is unlikely to return anytime soon to where it was before the housing market crashed.

Some 5.49 percent of the nation's mortgage holders were behind on their payments by 60 days or more in the April-to-June period, the agency said. That's the lowest level since the first quarter of 2009.

The second-quarter delinquency rate is down from 5.82 percent in the same period last year, and below the 5.78 percent rate for the first three months of 2012. The positive second-quarter trend coincided with an improving outlook for the U.S. housing market.

A measure of national home prices rose 2.2 percent from April to May, the second increase after seven months of flat or declining readings. Sales of new homes fell in June after reaching a two-year high in May. Sales of previously occupied homes also declined in June, but were higher than a year earlier.

Home refinancing surged in the second quarter, as interest rates sank to historic lows. And more borrowers with underwater mortgages -- or home loans that exceed the value of the home -- refinanced through the government's Home Affordable Refinance Program than ever before.

"More people are making their payments, and that's great," said Tim Martin, group vice president of U.S. housing for TransUnion. "I expected a little bit better, but maybe we'll see some more of that pick up in [the third quarter]."

Even as housing trends turned positive earlier this year, the U.S. economy began to show signs of faltering. The national unemployment rate remained stuck at 8.2 percent, and the pace of job growth slowed sharply, with employers adding an average of only 75,000 jobs in the April-June quarter. Hiring appeared to pick up in July, however, with employers adding 163,000 jobs.

TransUnion anticipates the mortgage delinquency rate will continue to decline. But it doesn't see it falling below 5 percent this year.

The national delinquency rate remains well above its historical range, an indication many homeowners are still struggling five years after the housing downturn.

Before the housing bust, mortgage delinquencies were running at less than 2 percent nationally. It took about three years after the housing market crashed for the delinquency rate on mortgages to climb to a peak of nearly 7 percent in the fourth quarter of 2009. The rate has been trending down since then. Home prices need to recover further for the delinquency rate to decline.

At the state level, Florida led the nation with the highest mortgage delinquency rate of any state at 13.48 percent, down from 13.91 percent a year earlier. It was followed by Nevada at 10.85 percent; New Jersey at 8.15 percent; and, Maryland at 6.79 percent.

The states with the lowest delinquency rate were North Dakota at 1.32 percent; South Dakota at 1.94 percent; Nebraska at 2.24 percent; and, Wyoming at 2.41 percent.

Foreclosure hotbeds Arizona and California each saw marked improvement during the second quarter.
California's mortgage delinquency rate fell nearly 22 percent to 6.13 percent from a year earlier, while Arizona's declined 21 percent to 6.14.

One reason for the sharp declines in mortgage delinquency rates in those states is that homes tend to move faster through the foreclosure process than in Florida, New York and other states where the courts play a role in the process. That leads to logjams of cases involving home loans that may have gone unpaid for two years or more.

"You have states that are taking a long time to work through the delinquencies that they have, which is keeping their numbers up," Martin said.

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