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Developments in the Housing Market: 2011

a couple in their new house

The housing market continued to weaken in 2011, albeit by and large the rate of weakening has declined. S&P/Case-Shiller's national index of housing prices showed an annual decline of 3.9 percent in the third quarter of 2011, which is an improvement over the 5.8 percent annual decline posted in the previous quarter. Nationally, home prices are back to their level in the first quarter of 2003, which is near the post-bubble low of 33 percent from the peak in 2006. Of the twenty cities in the S&P/Case-Shiller Composite-20 monthly index, eighteen of them saw annual depreciation, ranging from a one-year decline of 9.8 percent for Atlanta to a one-year decline of 0.8 percent for Dallas. The only two cities to post annual appreciation were Detroit (3.7 percent) and Washington, DC (1.0 percent).

This downward trend in prices stemmed from excess inventories of homes, which arose from a combination of previous over-building and lack of demand during a weak economy. These inventories have slowly declined in 2011, as housing construction throughout the year has remained historically low. Monthly single-family housing starts have been moving sideways at around 400,000 (on a seasonally adjusted annual basis) for the past year and a half, which is down considerably from the pre-recession peak of 1.8 million. (Multi-family starts have been increasing in 2011, as the rental market has strengthened.)

In addition to the "visible" inventory of homes, there is the "shadow" inventory of distressed homes, which are homes that have seriously delinquent mortgages or are in the foreclosure process and thus might come on market soon. CoreLogic estimates that the shadow inventory consists of approximately 1.6 million homes. According to LPS Applied Analytics, mortgage delinquencies have declined over this past year, from 8.83 percent of all active mortgages last December to 7.93 percent this October. The delinquency rate is 28 percent off its January 2010 peak. While delinquent loans have dropped, the number of loans in foreclosure has increased, reaching an all-time high at the end of October of 2.2 million loans, which is 4.29 percent of all active mortgages. The foreclosure inventory has grown due to the slow pace of moving loans through the foreclosure process - the average loan in foreclosure has not made a payment in 631 days, which is an all-time high. States that rely on the judicial process to handle foreclosures have a foreclosure inventory rate that is about four percentage points higher than non-judicial states.

The main driver of foreclosures has been the problem of underwater borrowers, meaning borrowers who owe more than their houses are worth. The number of households that are underwater declined slightly in 2011, although the numbers are still grim. According to CoreLogic, about 10.7 million, or 22.1 percent, of all residential properties with a mortgage were underwater at the end of the third quarter of 2011. This is down from 11.1 million (23.1 percent) in the last quarter of 2010. Nevada has the highest percentage of mortgage holders underwater (58 percent), followed by Arizona (47 percent), Florida (44 percent), Michigan (35 percent), and Georgia (30 percent). The average underwater borrow has about $65,000 of negative equity, which translates into a total debt overhang of approximately $700 billion nationwide. This debt burden is concentrated in a few states, with about 27 percent of it in California and 16 percent in Florida.

Housing was a key contributor to the financial crisis and the ensuing recession, and its continued weakness contributes to our anemic recovery. In the typical recession, residential investment drops about eight percent within about two quarters after the start of the recession and recovers to pre-recession levels within five quarters. This recession saw residential investment drop about 35 percent and fail to recover after 15 quarters. As we enter 2012, we can expect some improvement in the housing market, though this slow pace of recovery does not suggest a strong contribution to a broader economic recovery.

  • Ted Gayer is the vice president and director of the Economic Studies program and the Joseph A. Pechman Senior Fellow at the Brookings Institution. He conducts research on a variety of economic issues, focusing particularly on public finance, environmental and energy economics, housing, and regulatory policy.