foreclosure help

From the Associated Press:

One in 10 American households with a mortgage was at risk of foreclosure this summer as the government’s efforts to help have had little impact stemming the housing crisis.

About 9.9 percent of homeowners had missed at least one mortgage payment as of June 30, the Mortgage Bankers Association said Thursday.

That number, which is adjusted for seasonal factors, was down slightly from a record-high of more than 10 percent as of April 30.

In a worrisome sign, the number of homeowners starting to have problems with their mortgages rose after trending downward last year. The number of homes in the foreclosure process fell slightly, the first drop in four years.

More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.

The number of Americans missing payments and falling into foreclosure has followed the upward trend in unemployment, which has been near double digits all year and has shown no sign of dropping soon.

“Ultimately the housing story, whether it is delinquencies, homes sales or housing starts, is an employment story,” Jay Brinkmann, the trade group’s top economist, said in a statement. “Only when we see a consistent increase in employment will we see an increase in sales and starts, and a sustained improvement in the delinquency numbers.”

Read the whole thing here.

Demand: fewer new households

Household creation depends on the state of the economy. The combination of high unemployment, weak wage and salary growth, and tight credit has led to a decline in household growth over the past few years. The two main surveys of household formation from the Census Bureau – the Housing Vacancy Survey and Current Population Survey – show that about 500,000 households were created annually over the past three years compared to an annual average of about 1.2 million during the first half of the decade (Figure 6). How can we explain such a notable drop in household formation?

Moving in with the folks

The obvious answer is to look at homeownership rates, which have tumbled to 66.9% from a peak of 69.2% in 4Q04. This translates to a loss of nearly 2.5 mn homeowners. Most of these homeowners became renters, which means they remain a household, but not all. As can be seen by the surge in the rental vacancy rate to 10.6%, it seems that there was not a perfect shift from homeowners to renters (Figure 7). This begs the question: what happened to these former households? There was doubling up among economically stressed households; in other words people moved in with friends or family. Many of these former homeowners were probably foreclosure victims (Figure 8).

As Figure 8 shows, household formation can also decline if there are fewer young households created to replace the aging homeowners. Given the nearly 10 point surge in the unemployment rate among 16 to 24 year olds from the trough to peak during this cycle, it seems like this was a considerable factor. A recent paper sponsored by the Research Institute for Housing America estimates that the probability of a young adult forming a household declines by 4% during a recession, and up to 10% if unemployed. In addition to the slowdown in “headship rates” domestically, there was a drop in household formation from immigration. According to the Office of Immigration Statistics at the Department of Homeland Security, the number of unauthorized immigrants decline by 1.0 million from 2007 to 2009 compared to a net gain of 1.3 million from 2005 to 2007.

Household growth to improve, but with a lag

Household formation will naturally pick up as the economy improves, but if our forecast for a sluggish recovery is realized, household growth will also be lackluster. The main factor influencing household growth will be the state of the labor market. The above-referenced paper finds that the unemployment rate must fall by 2pp from current levels to return to normal rates of household formation of about 1.2-1.4 million a year. We do not expect the unemployment rate to reach the mid-7% range until 2013, implying another two and a half years of sluggish household formation of about 800,000 a year. This is also when we expect the pace of foreclosures to slow notably, which means that fewer households will have to double-up.

Looking ahead to 2013 and beyond, we use forecasts from the Joint Center for Housing Studies at Harvard University. They present two possible trajectories for household growth: 1) an average of 1.48 million annually through 2020 assuming net immigration returns to the 2000-05 pace and headship rates at 2008 levels; and 2) an average of 1.25 million annually through 2020 assuming the same 2008 headship rates but slower immigration. We believe the latter is more likely and use this as our baseline forecast (Figure 9).

Renters will take market share

Although we expect household formation to start to improve in 2013, the homeownership rate should still fall further, suggesting that most of the gain in households will be due to an increase in renters. This is because there is still a considerable number of homeowners with mortgages in some stage of delinquency that are likely to end in foreclosure. Based on data from the Mortgage Bankers Association, there are about 5.5 mn seriously delinquent mortgages currently outstanding.

A recent paper by economists at the NY Federal Reserve (Haughwout, Andrew, Richard Peach, Joseph Tracy. “The Homeownership Gap”, Federal Reserve Bank of New York Current Issues in Economics and Finance, Volume 16, Number 5, May 2010) attempts to quantify the effective lower bound for the homeownership rate. They make the assumption that underwater borrowers (negative equity), who currently account for about a quarter of mortgage holders, will transition to renters over time. Subtracting these underwater borrowers yields an “effective homeownership rate” of 61.6% (Figure 10). This would be a record low in the data which goes back to 1965. We do not expect such a precipitous drop because not all underwater homeowners will become renters. Indeed, a recent study by Trulia.com and RealtyTrac found that 59% of respondents would not go into foreclosure simply because of negative equity. We believe it is more likely that the homeownership rate will bottom at 65%, returning to mid-1990s levels.

It is plainly obvious why the demand-side is so often ignored in polite conversation: it is the consumer-driven aspect of the house price variable, over which neither the Fed, nor the Treasury, nor the FHA has any authority, and which is a function purely of expectations of the future. Alas, those right now are lously and getting worse. We expect that Demand-side housing economics will take on progressively more importance in the future, as it becomes obvious that no amount of Supply-side tinkering will prevent another 20% drop in prices.

And speaking of Supply, this is also a critical factor, if much more prevalent in the daily media. Alas, that in itself does not make the problem any easier to resolve.

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