Economic question need expert !?
No End in Sight for Housing Market Decline
Submitted By John L. Walker
The National Association of Realtors’ Pending Home Sales Index (PHSI) is one of the broadest gauges of sale activity in the housing sector. Unfortunately, this past week brought more bad news to those hoping the U.S. housing recession may be bottoming out as the PHSI continued its steep decline. The report indicated that signed contracts for purchasing previously owned homes experienced its sharpest drop in nine months, declining 4.7% through the month of May. In comparison to the same period a year ago, activity has fallen 14.6%. The South experienced the biggest contraction (at -7.1%) propelled by the plummeting Miami market, followed by the Midwest (-6.0%), the Northeast (-2.9%), and the West (-1.3).
For the broader housing market, the PHSI metric alone confirms many concerns that conditions will continue to deteriorate. However, when coupled with other indicators, the outlook becomes even bleaker. Yesterday, Wall Street sent another message that the worst is yet to come when the share prices of the nation’s main mortgage companies experienced significant decreases. After declining almost continuously over the past year from a high of $ 70.57, Fannie Mae fell another 16% to its lowest level since 1992, settling at $ 15.74 a share at the market’s close. Similarly, Freddie Mac tumbled another 18% to its lowest level since 1994, and settled at $ 11.91 a share. These declines reflect concerns over a new housing bill that would require the companies to raise billions of dollars of new capital.
Legislators are widely expected to approve a housing rescue bill by the end of this month. This sweeping rescue package will overhaul the regulatory structure of Freddie Mac and Fannie Mae, which are government-chartered enterprises. The bill would force the two companies to come up with hundreds of millions of dollars each year to refinance troubled home loans. However, many still insist this drastic measure is not nearly enough. Mark Zandi, chief economist of Moody’s Economy.com, states, “It’s not enough, even in the best of circumstances.” The proposed housing bill would help some home owners, but the Congressional Budget Office estimates it would only be used by 400,000 borrowers. The number of distressed and defaulting borrowers greatly outnumbers the number of borrowers that the bill would help, and therefore it is unlikely the bill would do much to bolster the failing housing market. Analysts are predicting that on top of the already 3,000,000+ borrowers that are currently in distress, a couple of million more borrowers will fall behind and default on their payments in the coming year as home prices fall further and the economy further weakens. The bill may be a step in the right direction, but do not count on it being the “silver bullet” for the housing mess.
It is impossible to know whether the housing market has reached the bottom or whether it will continue to decline. Hindsight is 20/20 and generally one knows the bottom has occurred when looking in the rear-view mirror. However, one indicator that is helpful in predicting future prices is in fact futures contracts. In 2006, the Chicago Mercantile Exchange began offering a housing spot market. This enables speculators to either buy or sell property values in a given region. Expected future prices are inherently priced into futures contracts, so this provides some indication as to where home prices may potentially be heading. The April spot prices for Miami were trading at $ 218.75. The Miami futures contracts for November 2009 are currently trading at $ 175. This may indicate that there will be a further 20% decline in property values in the Miami area. Using futures contracts as an indicator, one can predict that the housing decline is most likely not anywhere near over yet, especially in previously overbought areas like Miami.
Yet there is a silver lining to this bleak housing mess:
This may be an excellent time to find a bargain for buyers who can take their time in finding a house, such as buyers approaching their retirement years. Buyers with higher elasticity of demand between areas and longer purchasing time horizons can monitor prices and pick up houses when they drop to manageable and attractively priced levels. Home prices are down more than 25% in certain parts of the country, and there remains a glut of houses especially in areas such as Nevada, Arizona and Florida. According to the Standard & Poor’s Case-Shiller Home Price Indices, the average price for a home in these retirement areas is down significantly. Retirement communities such as Miami, Phoenix and Las Vegas are down 27%, 25%, and 27%, respectively, compared to a year ago. No one knows when the housing market is going to hit bottom — it likely will not hit rock bottom anytime soon — but if one is approaching retirement years with a sizeable bank account and i