NATIONAL NEWS

Fannie, Freddie and the Bail Out

I found an interesting article from the New York Times dated September 30, 1999 predicting our current crisis.  It stated that Fannie Mae, under pressure from the Clinton Administration to expand mortgage loans among low and moderate income people, began a program involving 24 banks in 15 markets to encourage banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.  In doing so, Fannie Mae would be taking on significantly more risk and may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.  And here we are…..

In September, many feared financial devastation as the DOW experienced extreme volatility.  However, if we look at the time period of 9/15-9/26/08, we find that the prices began and ended at about the same level.  See Intraday Graph.  This extreme volatility has continued with the Dow up 936 points on October 13^th, down 733 points on October 15^th and up 899 points on October 28^th.  However, this latest rise was overshadowed by the reality that it could turn in an instant as before.

With the U.S. government focused on fixing the housing market, the world's trust in the housing market will begin to return.  By purchasing mortgages from banks and other lenders, the U.S. Treasury will have more power to stop the cascade of foreclosures and help more Americans keep their homes, which will act as a brake on falling prices.

Source:  Associated Press 9/22/08

The news of the bail out brought a drop in 30 year fixed mortgage rates followed by another decrease upon the buy out of Fannie & Freddie.  See Mortgage Rate graph.

For those of you who would enjoy learning more about the causes and implications of our current credit crisis, I highly recommend The World is Curved – Hidden Dangers to the Global Economy by David Smick.

Pending Sales & Inventory

The sales of homes have remained fairly steady in 2008 after the large decline in 2007, indicating the market may be at or near the bottom.  Pending home sales (homes under contract) surged in August, jumping 7.4% from July and 8.8% higher than the previous August.

Pending Home Sales Change:

July –Aug, 2008            from August 2007

West                18.4%                          37.8%

Northeast           8.4%                             2%

Midwest             3.6%                             6.6%

South                  2.3%                           -2.1%

Source:  Daily Real Estate News 10/8/08

The inventory of homes is beginning to decrease.  See Existing Home Sales & Inventory Graph.  Total housing inventory at the end of August fell 7%, representing a 10.4 month supply.  See Inventory.

Home Values

Thirty states have actually seen an increase in price by comparing Fourth Quarter 2007 with Fourth Quarter 2008.  See Four-Quarter Price Change by State map.  North Carolina averaged 3.6% appreciation.

Most states are considered under or fairly valued.  See House Price Valuation.  The majority of North Carolina is considered fairly valued, with the mountain and beach areas being overvalued.  The number of over-valued housing markets has decreased considerably from 2005 to 2008.  See Over-Valued Housing Markets. 

If you compare the Four-Quarter Price Change map with the Inventory (Housing Stock) graph, you can see that sales are recovering in areas where prices have declined.  Listings that are overpriced result in the continuation of a stagnant market.

Foreclosures

A second wave of mortgage defaults is expected to flood the market through 2010, with the subprime defaults diminishing greatly by 2009.  These will be the mortgage resets predominantly from option adjustable rate mortgages.  Many are expected to be recast early due to negative amortization.  See Mortgage Resets graph.  The 90-day plus delinquencies are expected to more than double after recast for 2004-2007 vintage loans.  It is also estimated that the potential average payment increase on the recast loans will be 63%, representing an additional $1,053 due each month.

Source:  www.fitchratings.com 9/22/08

About 6 million U.S. mortgages, including almost all subprime loans and 41% of ARMs, are linked to LIBOR, the London Interbank Offered Rate.  The biggest jump in the LIBOR rate in at least seven years occurred in September, which could cause further havoc on the U.S. housing market.  Many LIBOR-linked mortgages don't limit the size of a loan's first adjustment, meaning a monthly mortgage bill could double or triple when it resets.

Source:  Bloomberg News 9/16/08  WSJ 9/27/08

Forecast

If we look at the percent appreciation in 5 year increments, we can see that 2000-2006 was an anomaly and, thus, prices must come down.  See % Appreciation.  The following are predictions of the decline and stabilization.

JP Morgan said it expects home prices nationwide to fall another 8% from current levels.  Source:  Housing Wire 9/26/08

U.S. home prices probably will tumble through 2010, Freddie Mac forecasted.  The S & P/Case Shiller Home Price Index likely will drop 13% this year, 4.3% next year and 2% in 2010.

Source:  Bloomberg News 9/16/08

Based on a forward curve produced from futures trading in the Residential Property Index, Radar Logic predicts weakness through 2009, stability in 2010, and a recovery in 2011.

Source:  www.radarlogic.com/productsservices-research.html 9/27/08

Mr. Zandi states that, while the takeover of the mortgage giants won't immediately stop the home-price slide, it should limit price declines to 5-10% over the next year, rather than the doomsday scenario of additional declines of 15-20% that some were predicting if Fannie and Freddie failed or pulled back dramatically.

Source:  WSJ 9/8/08 

WILMINGTON

It continues to be a buyer's market with around 2 ½ times the normal inventory.  With the list to sold ratio at 95.4% and seller concessions at 22.5%, we need further pricing declines to move the inventory to normal levels.

The rolling 12 month average sales price represents a 3% decline.  The monthly average sold price is down 13.5% from last month and down 14% from September, 2007.

In inventory, we are showing a 15.7 month supply of homes.

The average list price has remained stable for the last 5 months...in the $420,000s range.

The number of sellers paying concessions is 22.5%.

The average days on the market is 114 days.

The list to sold price ratio is 95.4%.

The number of sold units for September, 2008, is down 15.5% from September, 2007.  The number of sold homes in September is down 12.7% from August.  Looking at a rolling 12 month average, the number of sold units has decreased 27.1%.

CAROLINA & KURE BEACH

As of October 12^th, there were 628 single-family homes for sale in inventory, a 12 unit decrease over September.

The average list price of $540,393 is a $3,888 decrease over September, 2008.

There is a 28.5 month supply of homes.

The average sold price increased 7.7% over September, but is down 8.6% comparing the first 9 months of 2008 to the first 9 months of 2007.

Source:  September 2008 MLS Report David Flory (10/12/08).

To view past issues of the Keeping Current Newsletter, go to www.DianeLMoore.com.  I have added a live news video to the site, which is updated daily.