FDIC chief economist view on U.S. housing market
I list below few key paragraphs from Richard Brown speech. The outlook seems to be for a long period of stagnation, uless special factors – such as the use of ARMs on unprecedented scale – will make things different this time. If you combined this testimony and Realtors Association testimony (below) the outcome is not too oncouraging. Heavy use of ARMs, particularly in 2004-2005 period would mean that effective borrwing cost will go up for many households and the “payment shock” may materialize.
Speech key paragraphs
…. there is evidence that a significant proportion of mortgage loans were made to real estate investors in 2004 and 2005. The National Association of Realtors found that 28 percent of all homes purchased in 2005 were for investment rather than occupancy by the buyers, up from 25 percent in 2004.This high share signals an increase in speculative purchases of residential properties, particularly condominiums. While speculative buying is a fairly common feature of housing booms, this activity deserves particular mention when home price increases have been so large and when use of nontraditional mortgages has increased as much as in the past two years.
The historical experience clearly implies that a widespread price bust remains an unlikely outcome for two reasons. One is that historically price busts are typically associated with severe local economic distress that arises from outside the housing sector itself. While recent macroeconomic performance has benefited a great deal from expansion in the housing sector, the prospects appear good that the solid growth in jobs and incomes that has occurred in recent quarters will continue to be supported by other sectors of the economy, including business investment, exports and nonresidential construction.
The second reason a home price bust remains an unlikely outcome is the anticipated response on the part of homeowners to weakness in their local real estate market. As was mentioned earlier in my testimony, home prices tend to be “sticky downward” in large part because homeowners are usually extremely reluctant to sell their homes at a loss unless forced to do so by the relocation or loss of their jobs. Under a wide range of adverse economic scenarios, homeowners have proven to go to extraordinary lengths to avoid selling their homes at a loss. Most commonly, they will simply choose to remain in them, or to rent them so as to cover at least part of their debt service costs. While the reluctance to sell has the effect of limiting the extent of the decline in home prices, the resulting period of stagnation can last for years.
What is yet to be determined is the effect that recent changes in the mortgage lending business may have on the ability of homeowners to meet their monthly obligations under adverse housing market conditions. While adjustable-rate mortgages are not new in the marketplace, many of the newly popular interest-only and payment option structures may lead to a significant increase in monthly payments due to higher short-term interest rates or simply the expiration of low introductory interest rates. It remains uncertain how much the “payment shock” associated with these structures may contribute to selling pressure in local housing markets on the part of distressed homeowners or lenders looking to sell foreclosed properties.
Although housing price booms have not necessarily been followed by housing price busts, there are two factors in today’s markets that are different from the historical experience. The number of boom markets is substantially higher currently than the historical experience. In addition, the use of ARMs and non-traditional mortgage products is unprecedented and could have an impact on future market performance.
The full speech is here