The bad news, contrary to what others state, is that I believe that housing prices will continue to decline, in part because of no job growth in the near future and the problems that the FHA is having. This decline will not be as dramatic as in the past year, but a decline never-the-less. I say this because there is no job growth and will not be for a least another year; this combined with low consumer confidence means that the consumer will be hesitant to obligate themselves to large purchases, though I do recognize some pent up demand. Having said this, I believe that home prices will continue to slide slightly. Low interest rates and government money is having the positive effect of slowing the rate of decline.
We all know about what is happening on the job front. The government tells us that the good news is that job loss is slowing – but it is job loss none-the-less. The other item not spoken about until recently is the trouble at the Federal Housing Administration (FHA).
Last week, the FHA acknowledged that its cash reserves were at levels unacceptable and in violation of the Congressional mandate of 2%. According to reports the FHA reserves were at .53%. The FHA is the agency which guarantees loans for many first time home buyers as well as refinancers. If the FHA runs into financial difficulties then the market could be negatively impacted – and it will be. The FHA insures about 30% of first time buyer purchases and about 20% of refinances, both up from about 3% just a few years ago. If the FHA is in trouble then the market is in trouble. The FHA requires as little as 3.5% as a down-payment, if the market continues to slide it does not take a rocket scientist to see that in a very short time the minimal equity in a home is wiped out and with it a major incentive to work things out. Currently about 17% of FHA loans are at least one month delinquent.
What might the FHA do ? They will probably require better credit from their borrowers; they may require a larger down-payment and may increase transaction costs to replenish their reserves. All of which mean that fewer borrowers will qualify and will diminish demand. A diminished demand will mean lower prices.
The silver lining, the good news, is that both locally and nationally the cost of home ownership is far better than in prior years. The monthly mortgage payment costs of the median priced home represents the lowest percentage of median family income in more than a decade. The Home Affordability Index is an excellent window with which to view home affordability. For example, if a median home is priced at $175,000 and the median family income is $55,000 the affordability index is 3.2. From the ‘80’s through ’07 that index approached 4 and in some locales like the Boston area it was 5 or higher. Today the national average is 3.4 and locally is 3.8. For the Boston area, always lambasted because of its high cost of housing this means that we can better compete with the rest of the nation, at least on this metric. Now we need job growth.
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Tim Ryan 
I hear about pent-up demand, but I get the feeling there is a lot of pent-up supply. I mean, there are people who have pulled listing or just not even listed “until the market improves”. A lot of those are the people looking to downsize from expensive homes, like retirees and empty-nesters. I haven’t seen a good estimate of the pent-up supply or the pent-up demand. But I can see that the lower end, there might be more pent-up demand because loans are hard to get. At the high end many buyers don’t take loans so financing troubles are less of an impact, but people who were counting on their home value in the retirement planning are a big issue and they are waiting and hoping for a rebound (but they can’t wait forever) so they are pent-up supply. What do you think of this?
It’s somewhat ironic that before the Great Depression, there was no FHA, and therefore, a higher level of risk sat with lenders. Subsequently, for a number of reasons, the FHA was formed and said that they would back all loans and create a single standard for loan documents, which ultimately led to a secondary market and securitization of of mortgage products. In an unfortunate, but perhaps inevitable, twist to the story, it is the FHA that created their own problem.