Jun 05, 2012 at 9:24 am
Those looking for something to feel at least a little better about in our economy should look to the housing market. It’s not that home prices are reliably rising again amidst robust sales. But prices do seem to have stabilized nationally, home sales and starts were up in the most recent reports, and according to some new research, the likelihood of underwater borrowers defaulting has gone down.
I’d call that evidence that the housing market is more bumping along the bottom than climbing, but if the big housing correction is really finally winding down, that’s a good thing. It means housing will be less of a drag on the economy going forward. It probably doesn’t mean that residential investment–home buying–adds a lot to near-term growth (though it’s been adding some), just that it stops subtracting.
CoreLogic price data are always particularly revealing because they break down price trends into distressed (bank-owned or foreclosed properties and short sales) and non-distressed sales. The overall price index was up 0.6% in March over February, and the non-distressed sales were up a strong 2% that month. The figure shows yr/yr changes for distressed/non-distressed, showing positive trends with non-distressed breaking zero for a few months.
Source: CoreLogic, via Moody’s.com
Obviously, we’re not out of the woods here. There are still markets with tons of distressed properties—while the national share is about 25%, it’s 43% in CA and 53% in NV. But there’s new evidence that suggests the relationship between negative home equity and defaults is lessening.
The figure below comes from research by economists at Goldman Sachs who examined the probability of default over different time periods based on loan-to-value ratios (LTV—simply the current value of the mortgage loan to the current home value; when it’s over 100%, you’re underwater). The numbers in the figure provide the odds of default at different LTVs compared to identical mortgages with LTV below 70% LTV.
The notable finding is that as time has progressed the likelihood of default, even among deeply underwater homeowners, has declined. Those with the highest LTVs used to be eight times as likely to default as those with <70% LTV; now they’re 2-3 times more likely. A corollary finding is that underwater homeowners have, over time, become more likely to remain current on their mortgage payments.
This probably has something to do with a) the least able to make a go of it have already defaulted, and b) the improving economy makes it a bit easier to stay current, even if you’re underwater.
But if this sticks, it’s good micro and macro news. Fewer people, even with higher LTVs, are losing their homes, and that’s going to help support home prices and the already too fragile recovery.
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