The slowdown of the US housing market

The decade-long housing boom in the US is finally over. In 2006, a corrective process has started, which was triggered by a higher mortgage rate leading to a slowdown in house price growth and declines in house sales and house starts.

After skyrocketing in 2005, house prices have slowed down in 2006. The Office of Federal Housing Enterprise Oversight (OFHEO) reported a 5.9% (3.3% in real terms) house price appreciation in 2006, significantly lower than the 13.3% (9.5% in real terms) house price increase in 2005.

According to the National Association of Realtors (NAR), the median price of existing houses inched up to US$222,000, a mere 1.1% increase from US$ 219,600 in 2005; while the median price of new houses rose to 245,300 in 2006, a 1.8% increase from US$ 254,800 in 2005.

Utah outshined all the states in 2006, with 17.6% house price appreciation. Among the states with pronounced house price increases were Wyoming (14.3%), Idaho (14%), Washington (13.7%) and Oregon (13.5%). Michigan, on the other hand, experienced a house price drop of 0.4% in 2006. Michigan has been at the bottom since the second quarter of 2005. Massachusetts (0.5%), Ohio (1.1%), Indiana (2.3%) and Minnesota (2.5%) were among the states with low growth rates.

House prices have increased since the great depression and yields have been good over the years. The house price index for 2006 was at 407.9, a 98.1% increase from 1997, the year when the housing boom started.

The median price of existing houses rose by 76.2% between 1997 and 2006. Pronounced increases were seen from 2001 to 2004, when the median price grew by an average of 8% every year. The housing boom was in full swing in 2005 when the median price soared by as much as 12.4%.

The preliminary figures for March 2007 suggest a continued slowdown. House prices increased 4.3% in the first quarter of 2007, with Utah still leading. Two states experienced house price drops- Michigan (-0.7%) and Massachusetts (-0.6%).

The median price for existing houses dropped to $217,000 in March 2007 from $218,000 in 2006 (down by 0.4%), while the median price of new houses inched up to $252,200 from $247,700 in 2006 (up by 1.8%).

House sales plunged

A total of 6,480,000 existing home units (down by 8.4% from 2005) and 1,061,000 new housing units (down by 17% from 2005) were sold in 2006. House starts slumped by 12.9% in 2006- only 1,800,700 housing units were started in 2006 from 2,068,300 units in 2005. High mortgage rate, the withdrawal of many sub-prime loan products and the implementation of a stricter mortgage policy affected the housing market.

The preliminary house sales and house starts data for March 2007 showed continued drop. Existing home sales were down by 11.3% (from March 2006), new home sales shrank by 23.5% (from March 2006), and house starts dropped by 23% (from March 2006).

David Berson, chief economist for Fannie Mae, expects the housing market to recover fast. “The key thing is that the housing downturn is close to an end,” he says “Whether it ends now or three more months from now, it will not continue (throughout) 2007.”

Higher mortgage rate

“The slowdown is all because of higher rates,” says David Lereah, chief economist of National Association of Realtors.

The US Federal Reserve set a higher interest rate in 2006 at 5.2%, a significant increase from 3.5% in 2005. The 30-year fixed mortgage rate rose to 6.41% in 2006, coming from 5.87% in 2005. The US enjoyed low mortgage rates in 2003 when the 30-year mortgage rate dropped to as low as 5.83% from 7% to 10% prevailing in the 1990s. This low rate stirred individuals to purchase houses through loans, pushing home ownership to its highest level in 2004 at 69.2%. Demand was further boosted when sub-prime mortgages were made available to individuals with low credit ratings.

The recent mortgage rate acceleration alarmed sub-prime borrowers who were faced with higher payment obligations. Consequently, 12.6% of sub-prime borrowers were delayed with payments in 2006. Foreclosure filings rose 34.9% y-o-y in Dec 2006, according to RealtyTrac.

Not even the Sunbelt areas were exempted from foreclosures. Alabama recorded the highest increase in foreclosures, with filings up by 715% in Dec 2006. Louisiana (287.3%), Georgia (114.7%), Mississippi (131.5%) and California (64.5%) had huge foreclosure increases. Colorado had the highest number of foreclosures relative to the number of households, with one foreclosure in every 376 households. In some states like Vermont, Idaho, District of Columbia, New Mexico and Oklahoma, foreclosure rates declined by 80% to 50%.

Home ownership barely moved in 2006 at 68.8% from 69% in 2005.

Despite the 3.2% increase in the median family income, the NAR’s housing affordability index decreased by 5% due to higher mortgage rate and higher qualifying income.

The mortgage rate is expected to be tightly controlled to avoid abrupt housing slump in 2007. The NAR forecasted the 30-year fixed mortgage rate to be around 6.4% in 2007.

The rental market

The median rent rose by 10.3% in 2006, a dramatic increase from a drop of 3.48% in 2005. This is the highest growth since 1996.

The median rent increased sluggishly vis-Ã -vis the increase in the median price of existing houses. From 1997 to 2006, the median rent grew by only 43.5%, while house price rose by 76.2%. This growth disparity resulted to generally low rental yields in the US.

The latest yields data produced by the Global Property Guide revealed that condominiums and cooperative buildings in Upper East Side and Upper West Side Manhattan have yields ranging from 4.8% to 5.5% per annum, while condos and co-ops in Chelsea, Greenwich Village, SoHo and TriBeCa have yields ranging from 3.6% to 5.2% per annum.

Vacancies for rental houses slightly went down in 2006 to 9.7% from 10.1% in 2005.