Property prices - what effect is the economic downturn having?

Although the amount of reassuring “news” being provided to us that the economic downturn is over and everything is back to normal keeps increasing, the simple fact of the matter is that this is not the case.

One of the most dramatic areas the downturn is having an effect on is the property markets. Property prices in the USA have already reverted to 2003/4 prices and show no real signs of stabilizing. There was a small up tick in housing sales last month, but I believe this is merely speculators picking up foreclosed or otherwise financially-distressed properties at knock down prices, and does not really help with reducing inventory because many of these will be tidied up, given a coat of paint and back on the market ASAP.

New home sales in the USA are down to an almost unsustainable level, and even the uptick in existing home sales will not put a dent in the massive, and I do mean massive, amount of housing stocks being held by the banks. The official figures are being manipulated to artificially reduce the “months of supply,” because they do not include all the bank owned properties. Nor do they include the equally massive amount of properties going to foreclosure but not yet in the process.

The delinquency rates continue to rise, and according to the Mortgage Bankers Association, “The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded.” And according to First American CoreLogic, More than 15.2 million U.S. mortgages or 32.2 percent of all mortgaged properties were in negative equity position as of June 30, 2009”

These figures are disturbing for a number of reasons, not least of which is the fact that the government has poured so much money into the financial system to prop up the stock markets without dealing with the core issue – over-borrowing. I am sick and tired of hearing that the bottom has been reached in housing prices, and my personal opinion is that we are nowhere near bottom yet. There may be pockets where we have, but these are likely to be the most boom fed areas and a recovery is questionable in my lifetime.

This graph top right shows the “distressing,” gap between new and existing home sales. It is distressing because we cannot have a recovery until such times as the inventory of REO properties is cleared, and I would hazard a guess that will be several years judging from the amount of mortgages in arrears.Until these are cleared, developers will be unable to compete on prices and no construction jobs will be created. Click on the graph to see a bigger version.

The other factor to consider is the amount of homeowners in negative equity or "upside down," or "underwater" mortgages. The “green shoots” of economic recovery I keep hearing about are looking like zombie fingers poking out of a grave from where I stand. Much of America’s consumer spending over the last 15 years or so was driven by home equity releases. People borrowing money against the increased value of their home to buy things they could not really afford, and would never have been able to afford if their home had increased in value at a sustainable level. This chart, from FACI, shows the amount of homeowners in negative equity.

Only 2% of the population with a mortgage has more than 20% equity in their home currently. And with lenders insisting on a Loan to value ratio of 80%, it doesn’t take a mathematical genius long to work out that  very few are  getting a home equity loan right now. Which will put more pressure on an economic recovery. We are going to have to come up with some other solution than borrowing more money.

Much the same story is unfolding in the UK, and the newspapers are full of fairy tales of an economic recovery. But – take a look at this chart – the slight uptick in average prices was enough to persuade the national newspapers that a recover was already under way. Silly boys – they must have forgotten to look at the sales volumes.

Peak sales volumes were around 135,000 homes a month, and we are currently at around 30-35,000 a month. You cannot compare the average price of 35,000 units against the average of 135,000. Prices in England and Wales do not yet reflect the equally large proportion of repossessed properties yet to come on the market. The simple truth is that house prices in the UK will continue to fall and the market will follow a similar pattern to that in the US. Where the bottom is is anyone's guess right now, but I am pretty sure we are not there yet.