Low-End Housing Sees Higher Losses
As I sit here, less than 24 hours from the next release of the much-followed monthly S&P/Case Shiller Home Price Index, I'm confronted with all kinds of varying data and hypotheses on the future track of home prices.
Particularly interesting to me is a new breakdown, by Capital Economics (which watches our market from Toronto, Canada), on how prices are falling faster at the low end than the high end.
At face value I thought this was a no-brainer. Of course the low end is falling faster because that's where the bulk of the foreclosures are, thanks to the subprime mortgage debacle, which of course targeted first-time and low-income buyers on the low end. I had no idea how large the discrepancy is:
"Since their 2007 peak, prices in the low tier have so far fallen by 45 percent compared with declines of 35 percent and 25 percent in the middle and high tiers respectively," notes the report.
Even though most of the subprime distress has worked itself through the market, the pressure on the low-end continues because it is the low-end borrowers now who have the toughest entry to the oh-so-tight mortgage market. As the report reminds, proposed risk retention rules will likely mean a 20 percent down payment, which will price many borrowers out of the low end of the market.
And this is not just in the markets we always talk about. The New York Fed put out some alarming numbers today showing that 10 percent of mortgages in New York City are in the "seriously delinquent" pool, as in more than 90 days past due (for Manhattan it's one in 50 loans, but for the Bronx and Brooklyn it's one in eight). Since New York is a judicial foreclosure state (requires foreclosure cases go before a judge), the backlog of foreclosure cases hit 80,000 after the so-called "robo-signing" paperwork scandal. Properties repossessed by banks in March spent an average 900 days in the foreclosure process! The shadow inventory in New York is therefore huge, and that gets me back to where I started.
Most of those borrowers in New York who lost their homes were on the low end of the market (note the discrepancy in pricey Manhattan versus the other boroughs).
You can extrapolate that scenario to any market and see that the low end will continue to fall victim to distressed pricing.
That can, of course, trickle up, as the move-up buyer is hamstrung by the inability to sell at a decent price.