If arresting the decline in residential housing prices is a precondition to a broader economic recovery, then the prospects of a double-dip recessions are more likely. Over the next year home prices will decline 5% to 7%, according to Laurie Goodman, the senior managing director of Amherst Securities, a broker, advisor and asset manager focused on the residential real estate market. At the CFA Institute Fixed Income Conference in Boston on October 13, she identified two key policy initiatives that would break what she termed an ongoing “death spiral” in the housing market.
Goodman, who correctly predicted a decline in home prices in a similar talk last December, said the government can help package distressed properties into rental units to satisfy a rental market that has not kept pace with demand. A principle reduction program with a shared appreciation feature that would aid homeowners and lenders could also address the problem. I’ll review Goodman’s assessment of the state of the housing market today, and then return to those two proposed solutions.
The US mortgage market consists of nearly 55 million loans of approximately $10.4 trillion in principal, financing properties with a total value of approximately $16.6 trillion. Goodman provided a detailed breakdown of the characteristics of the outstanding loans, including those that are non-performing, re-performing (i.e., were previously in default), and have been always performing:
|
Status |
3-Month D/TV |
Reasonable estimate |
NPL |
- |
90% |
RPL |
94.7% |
65% |
APL > 120 MTM LTV |
73.6% |
40% |
APL 100-120 MTM LTV |
49.9% |
15% |
APL <= 100 MTM LTV |
15.4% |
5% |
Legend:
NPL = Non-performing loans
RPL = Re-performing loans
APL = Always performing loans
MTM =Mark-to-market
LTV = Loan-to-value ratio
D/TV = cTr/(cTr = vPr)
cTr = Annualized monthly new default transition rate
vPr = Annualized voluntary prepay rate
The table above shows the D/TV ratio, which is an indicator of the probability of future default, for each of five categories of loans. If the three-month historical rates continue, then approximately 10.3 million homes will be in jeopardy of default over the next six years, Goodman said. She provided her own reasonable estimates, shown in the third column, which are more conservative than what we have been experiencing, which would result in 8.3 million homes in jeopardy over that period.
Her analysis assumes there will be no change in overall housing prices, interest rates or new home construction.
